If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.
The more I think about this article about the DJIA from The Big Picture, the more it bothers me.
The Dow Jones Industrial Average (DJIA) has always been my least-favorite of the broadly-quoted marked indices, despite being the one that the mainstream media follows most closely. First of all, it's price-weighted -- a relic of the days when the index was calculated by hand rather than computers. If one of the components splits its stock (which should be an entirely inconsequential even from an equity value and market cap perspective), it suddenly has half the weight in the index it did before, simply because it now has half the stock price and twice the shares. Second, the index only has 30 "representative" stocks, and it's not transparent why some companies are included and others are not -- it's not the top 30 largest companies, as some might think.
Now there are number of financial and industrial giants whose stocks have fallen below the $10 minimum that DJIA gives as its guideline for when a component will be replaced. (A $3.50 price for Citigroup means that it has 1/25th the weight of IBM, trading at over $90.) With the financials underweighted in the DJIA but in reality continuing to drag down the markets, the DJIA is now going to increasingly outperform the broad market... and the press will likely continue to report the "Dow" as the gospel for the state of the market until they either focus on this situation, or the index is corrected and fallen angels like Citigroup and GM are kicked out to the curb.
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