The
Dow Jones Industrial Average is getting another makeover this week. On Sept. 20, the Dow 30 stock industrial
index will replace three of its older components – Alcoa, Bank of America, and
Hewlett Packard – and will replace them with Goldman Sachs, Visa, and
Nike. This makes the 52nd
time since its inception in 1885 that the index has changed components.
The
change was prompted by the underperforming stock prices of the outgoing
components, according to a spokesman for S&P Dow Jones Indices. The index committee also cited a desire to
diversify as a reason for the change.
According to Bloomberg’s Nick Taborek, it’s the Dow’s “biggest
reshuffling since April 2004.” The Dow’s
proportions are determined by the dollar value of its constituent stocks, and
the addition of the three high-priced stocks will reduce the relative weight of
other stocks in the index, significantly boosting the share of financial firms
in the index. Visa will carry 7.7% of
the Dow’s value while Goldman will have 6.9%.
Visa and Goldman will also become the second- and third-most important
stocks in the index, according to Bloomberg.
Timing
is always an issue whenever the Dow 30 index is recast. In seven of the eight previous instances
since 1999 when the Dow’s components were changed the index was lower within a
month. The only exception to this was in
Nov. 1, 1999 when the Dow’s components were changed and the Dow was higher for
the next two-and-a-half months before peaking.
In the last 10 years the Dow has always slumped – in varying degrees –
in the weeks following realignment.
Could
the latest Dow 30 shuffle result in yet another short-term top? Considering the month of September often
witnesses a top, and considering that two of the high-profile Dow replacement
stocks are hefty financial firms (at a time when pundits are cheering the
resurgence of the financial sector), the contrarian play would seem to favor an
October pullback for the indices.
