"What can get this market going again?" asks Chuck Carlson. In The DRIP Investor he says, "It's helpful to understand what stocks within the Dow need to do well for the index to do well."
"Not surprisingly, IBM (NYSE: IBM), the highest-priced stock in the Dow, carries the greatest weighting at more than 9% of the index. Obviously, with such a heavy weighting in the index, IBM will need to be a decent performer for the Dow to do well going forward.
"And when you total up the exposure of IBM with the other tech stocks in the Dow - Microsoft (NASDAQ: MSFT), Intel (NASDAQ: INTC), and Hewlett-Packard (NYSE: HPQ) - the total tech weighting in the Dow is 16%. Thus, tech stocks matter to the Dow, so it is diffcult to see the Dow sustaining a move upward without a nice rebound in the tech sector.
"Another important sector to the Dow is energy. Indeed, after IBM, the Dow stocks carrying the greatest weight in the index are oil giants Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).
"Together, the two account for nearly 15% of the Dow. Obviously, a firming in oil prices and oil stocks would provide a nice boost to the Industrials.
"Interestingly, financials - the one sector receiving the most attention these days - have minimal influence in the Dow.
"When you tally up financial-related stocks in the Industrial Average - American Express (NYSE: AXP), Bank of America (NYSE: BAC), Citigroup (NYSE: C), General Electric (NYSE: GE), and J.P. Morgan Chase (NYSE: JPM) - the total weighting of these five stocks accounts for less than 6% of the Dow.
"Said differently, IBM's performance has a greater impact on the Dow than the performance of these five financial-related stocks combined.
"The minuscule exposure to financials has been a plus for the Dow's performance relative to market-cap weighted indexes. Indeed, the Dow has outperformed the S&P 500 Index over the last year, partly as a result of its modest exposure to the financials.
"Of course, that weighting in financials does present a double-edged sword of sorts for the Industrials. If you are an index investor and want to play a market rebound by owning either the S&P 500 Index or the Dow Industrials, understand that the Dow will probably lag if financials lead the next upward move.
"Conversely, if you think financials will remain in the doldrums this year, the Dow is a much better 'market' index to own.
"The last point worth mentioning is that while a lot of fuss has been made about whether to bail out the auto industry, the fate of the industry is irrelevant to the Dow. Yes, GM (NYSE: GM) is a Dow component (for now, at least).
"But its weighting in the index is only 0.2%. The bottom line is that GM could quadruple or go to zero, and that gain or loss would have virtually no impact on the Dow average."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
3-09-2009 @ 5:50PM
Marty Love said...
People never spend money when it is cold or raining. But as soon as the sun comes out, they feel more hopeful and spend money and sometimes, after a few weeks of sun, lots of it. Obama came into office in January, dead cold winter — of course trade and commerce is still not happening. When the sun comes out in May, it will start to get better. So just feel hopeful that it will get better late spring and summer. The oceans don't really warm up even in warm climates until August and September actually has the warmest ocean waters. So look to early Fall for the real increase and change to happen in this country for the best. Yep, until then, times will be tough. Obama inherited this horrible economic problem and it will just take a little time for his policies to start working and he needs us to support him, have respect for him as our leader, and "envision" the "sun coming out"!