Plenty of investors have been calling for General Motors Corporation (NYSE: GM) to be removed from the Dow Jones Industrial Average (DJIA) as the automaker hovers on the brink of bankruptcy. But, like it or not, GM's rock-bottom share price isn't justification enough to oust the stock. GM still represents a major chunk of our industrial economy.

However, GM's nationalization would more than justify its removal from the Dow. After all, that's why American International Group (NYSE: AIG) got the boot last fall -- once the government took a controlling stake in the insurance giant, Dow Jones wasted no time adjusting its blue-chip lineup.

Earlier this week, something a bit odd happened. With beleaguered General Electric shares (NYSE: GE) retreating sharply, the company's market cap has declined. As of Thursday morning, it's at $70.7 billion, placing it, for example, below Apple Inc. (NASDAQ: AAPL), with a market cap of $81.19 billion. That's right ... the venerable conglomerate, maker of aircraft engines, locomotives, and a host of other products, has been outsized by a personal computer company.

While this development may just be a blip on the radar of a very tumultuous time in the stock market, it signals a changing tide that began decades ago. GE is the last member standing of the original 12 members of the Dow. Founded in 1896, the average represented 12 of the most significant American companies. Here's what has happened to the rest of them:

The Dow Jones Industrial Average is in the headlines everyday, but few people actually understand how it's calculated. The DJIA is the sum of the value of one share of each of the 30 Dow components divided by the DJIA divisor, which is currently 0.1255527090. It's adjusted every now and then for spin-offs, dividends and splits. For geeks, the image at right shows the formula: p equals the price of the shares and d equals the DJIA divisor.

So what exactly is wrong with this formula? A ton. Critics have been pointing out forever that weighting the average based on stock price makes no sense because different companies have different numbers of shares outstanding. For example, if Berkshire Hathaway (NYSE: BRK.A) were part of the DJIA, its $70,000+ share price would dwarf the influence of all the other components combined. It would make much more sense to use a more holistic measure like market cap or enterprise value.

This post is part of a series featuring bargain stocks that are worth a look now. See more Cheap Stocks.

From a contrarian perspective, International Business Machines (NYSE: IBM) might seem like an odd choice. Large-cap tech stocks are heavily populated by hedge-fund investors, and securities with this dubious distinction have been absolutely hammered this year. However, there's a certain something about IBM that distinguishes it from the pack.

For starters, there's no cult following for IBM -- and cult favorites, such as Apple (NASDAQ: AAPL) and Research In Motion Limited (NASDAQ: RIMM), have performed significantly worse than IBM this year. The market's expectations for these beloved gadget-makers are perpetually running at peak levels, which makes them more vulnerable to a shift in investor sentiment. Conversely, when was the last time you heard someone really getting excited about IBM? In this market, "boring" can be a good thing.

In its mid-October earnings report, IBM edged past analysts' consensus third-quarter profit estimates by 3 cents per share. While sales of computer hardware slipped during the quarter, that weakness was more than offset by strength in software and services revenues. Big Blue also reassured the Street that its liquidity position was "very strong," a comment that carries more weight than ever before in the current environment.

Yesterday, the market had a swing of over 900 points as indexes hit new lows for the year and then pushed upward to close 6% or so higher. Overnight, markets in Asia and Europe staged rallies of their own.

The stock market may march up for a while, but that can't be sustained and the odds are likely that it will crash and make new lows again before year's end.

The fiction is that the markets trade based on what they see six months into the future. Perhaps they see GDP recovering by then. Not a chance.

George Soros said yesterday that there is some chance that the world economy will enter a depression next year. That may be extreme, but a majority of business leaders and economists who want to be heard on the subject say that this is the most significant downturn of their lifetimes.

There is a view that falling housing prices are at the core of the disaster that has overwhelmed the financial structure of the country and is now hurting everything from retail sales to tech company revenue. Housing may be helped by government programs, but if unemployment hits 8% or better next year, the number of people who have to give up their homes could rise sharply. Lower interest rates do not help people out of work.

Another misconception about the future is that oil prices will continue to fall. With some OPEC nation's facing budget deficits due to crude dropping from over $140 to $55, the cartel will have to cut production to meet demand. That may mean a huge cut, but OPEC can match the drop in the global need for oil with a paltry supply.

The stock market has not stopped going down.

Douglas A. McIntyre is an editor at 247wallst.com.

The epic battle between the stock market's bulls and bears continues. The Dow Thursday registered yet another difficult day, down 443 points to 8,695.79. It seems like just a couple days ago the Dow was above 9,600. No, wait, that was just a couple of days ago!

Don't be swayed by a mild market rally today: the Dow has declined about 10% in two days, and a mild rise could be merely short covering ahead of the weekend.

From a technical analysis standpoint the view is not pleasant as the Dow is well below its 50-day and 200-day moving averages. There's not enough buy side pressure to propel the Dow higher, but the Dow is still not oversold, with a relative strength index (rsi) of 42.

Further, the fundamentals picture does not look any better. Declining earnings and zero job growth -- the U.S. economy lost another 240,000 jobs in October after losing a revised 289,000 in September - are the main reasons yours truly has taken pains to underscore that if the Dow can hold 8,000 by the time 'normal' credit flows resume, that will be a moral victory.

Investors have become accustomed to bull markets -- long periods of stock price appreciation, i.e. a rising stock market. That's been the norm since the start of publicly-traded stocks in the United States, and certainly a feature of markets in the post-1980 period.

Provided that the U.S. economy is growing in a sustainable way and increasing its productive capacity, bear markets have been the exception, the momentary pull-back, when one takes a long view of the investment horizon.

The current bear market can be seen in that light, again, provided the nation's economy is on a sustainable growth track with an increasing productive capacity.

Still, the key in the above has been the U.S. economy (obviously). Absent a healthy economy, different Dow case studies pop up.

For example, what if the Dow didn't fall -- and didn't rise -- for seven years? In other words, a sideways Dow where no progress is made? It seems like a remote possibility, but that's exactly what occurred from early 1966, when the Dow fell below 1,000, until late 1972, when the Dow reclaimed the psychologically-significant 1,000 level.

Is it time to rein-in expectations regarding the Dow?

Indeed it is, if technical analysis and historical p/e ratios mean anything.

Those with visions of a Dow of 11,000 dancing inside their heads need to take a step back, for context and perspective, on the likelihood of a Dow push to that level in the near future.

The U.S. economy is in recession, it's shedding jobs, downward corporate earnings revisions are likely, and the world's major economic regions are attempting to re-liquefy credit markets and prevent a global financial crisis from further damaging economies, worldwide.

The above, as CNN Talk Show Host Larry King would say, 'ain't exactly signs of prosperity.'

And the Dow has responded: down more than 30% since hitting its all-time high above 14,000 a year ago.

Keep your eye on 8,500 / 8,200 / 8,000

Earlier in this space yours truly noted that the Dow had technical support at the 8,500 to 8,200 levels, and of course psychological support at 8,000.

With the nationalization of banks seemingly exceeding IPOs these days, to say that both developed and developing nations economic performance expectations are more-modest today than they were a year ago would be an understatement.

Still, investors would be wise to take a page from that playbook, as it relates to the Dow, and more broadly, to the U.S. stock market, so says economist Richard Felson.

Concentrating on the problem, not the inconvenience

Felson, who took pains to point out that he is not a market analyst or stock guru, nevertheless highlighted the importance of reining-in stock expectations: people who are 'looking for the market to rally,' or who look for a relatively quick turnaround in stocks in a quarter are missing the point.

"The purpose of the monetary and fiscal actions being taken is to maintain the financial system, so that there are stock markets, not to get the Dow to rise, or to create the next bull market," Felson said. "Investors need to keep sight of that fact." Today the Dow closed down 678 points to 8,579 and the S&P 500 was down 75 points to 909.

Political science empirical research teaches us that when U.S. unemployment is rising and job losses occur over many months, the political party in charge of the White House will have a difficult presidential election. (See: The American Voter, by Campbell, Converse, Miller, and Stokes.)

Federal statisticians will release one more jobs report, the September jobs report in October, but to-date the trend is not one of U.S. economic health.

The U.S. Labor Department announced Friday that the U.S. economy lost another 84,000 jobs in August, with the unemployment rising to 6.1% - - a five-year high.

The U.S. economy has now lost 605,000 jobs in 2008 after creating just 1.1 million in 2007. Economist David H. Wang told BloggingStocks Friday the U.S. economy is not growing.

'U.S. economy headed in wrong direction'

"The U.S. economy is in recession. We don't have to wait for two-quarter date to confirm it. These are very bad numbers and the economy is headed in the wrong direction," Wang said. "Electioneering attempts aside, the U.S. economy is, objectively, in bad shape and anyone who fails to see this fails to recognize reality."

Oil declines by $30 from record highs. Other commodity prices moderate. The dollar rallies. The nation records better-than-expected GDP growth in Q2.

All are positive data points that suggest that the U.S. economy, while it's certainly not in the midst of robust growth, has not run totally into a ditch, either.

What do the latest economic data points mean for the Dow Jones Industrial Average, and U.S. stocks, in general, for the next six to nine months? Here's the bullish and bearish cases:

Bullish case: Technical analysts would cite the Dow's close above the 50-day moving average for three consecutive days, the fact that the Dow held support at the 11,000 level, and a series of higher closing highs and higher closing lows in the past two months.

Further, technical analysts would also cite the fact that the Dow has completed the volume-light June-July-August summer season (typically bearish for stocks) during a period of anemic growth (if the U.S. economy isn't already in a recession), without plunging to nerve-wracking lows. True, the Dow fell from about 12,400 in June to 11,000 in July, but technicians would cite the aforementioned positive technicals as an argument that a bottom is in place.

Bearish case: Technical analysts would cite the fact that the Dow, although above the 50-day moving average, nevertheless remains below the 200-day moving average -- the toughest moving average line to break in trading. Also, market 'up days' have lacked sustained buying strength as measured by the MACD Histogram.

Further, and equally important, Dow bears would say that although the Dow has risen from its 11,000 low, the roughly 600-point increase is still well within the range of a correction -- or in this case short-covering -- in a long-term bearish trend. In other words, the Dow's recent rise could be Pyrrhic or false -- a classic example of a 'dead cat bounce.'

Market Analysis: With all due respect to technical analysts and their indicators, the view here argues that investors/ traders should take their cue from the U.S. economy's fundamentals: specifically, corporate profits and job growth. Absent substantial, sustained gains in each, any Dow rally is viewed with skepticism.


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What's your view of the Dow? Is this stock market rally real? Or is it temporary? Let us know what you think.

That things aren't going well for the economy, the informed investor / reader does not have to be reminded about.

You don't need to be a financial editor with a Ph.D. in international economics to detect that.

Or, as CNN's Larry King would say, "For this, he went to school?...To tell me that things aren't going too well for the United States, these days, economically?"

Further, you can cite a dozen or more statistics that can give you a pretty good evaluation or thumb nail sketch of the U.S. economy's health - - gross domestic product, or GDP, being one of the best - - and prudent investors / traders monitor them.

But if you want a quick, summary indicator - - a snapshot of the health of the U.S. economy in-an-instant, if you will, check one index: the Dow Jones Industrial Average - - the most cited and widely recognized stock market index in the world. It's also still the most important stock market index in the world.

The industrials set the tone

During faddish or frenzied times or during the financial world's latest fascination with a new sector or sector index, Wall Street veteran Michael Metz, chief investment strategist at Oppenheimer & Co., undoubtedly will be seen saying something like this, "Friends, it is called the Dow Jones INDUS-TRI-AL Average, not the biotech average."

Metz's point is obvious enough, but somehow regularly forgotten by typical investors and professional market participants, alike: to gauge the health of the economy, monitor the industrials, and for a snapshot of the above, monitor the Dow.

In the decades since its inception, many indexes and indicators, all relevant and illuminating, have followed - - the S & P 500, Nasdaq, Russell 2000, and countless sector indexes - - but if you want to take the pulse of the U.S. economy, and more broadly, and by extension, the health of United States / the state of the union, keep your eye on the Dow.

If you believe the Dow Jones Industrial Average is a leading indicator of economic conditions six to nine months ahead, Tuesday's Dow activity is not good news.

The Dow officially entered bear market territory when a Tuesday morning decline drove the world's most followed stock market average beyond the level indicating a bear market -- down 20% from the October 9, 2007 high of 14,165.

What exactly is a 'bear market'?

Technical analysts, economists, and others argue that a 10% decline -- called a correction -- is a normal pull-back or pause in a bull market, a market where most stocks are likely to rise.

However, a 20% or greater decline is not healthy. Technical analysts say it indicates investors and traders are not simply taking short-term profits, but are concerned about the prospect for stocks in the quarters ahead -- three to nine months out -- and are exiting the market, in favor (historically) of bonds and cash.

For the above reason, 20% declines are usually interpreted by market advisors and participants as a sign that stocks are likely to be under pressure in the months ahead.

That the U.S. economy has recorded a series of rather negative statistics lately, would not be a revelation to the informed investor / trader.

That the U.S. economy is set to record a new data point of ignominious distinction, perhaps would be.

Assuming a modest 50-point close higher or lower Monday, the Dow Jones Industrial Average will have declined about 9% in June 2008, its biggest drop in June since June 1930 in the Great Depression, when the Dow fell 18%.

At mid-day Monday, the Dow was up about 45 points to 11,390.95. The Dow is down about 3,000 points since trading above the 14,200 level in October 2007.

Stock analyst C. Leonard Bauer said "the Dow reflects the underlying economic reality."

Many negative fundamentals

'We have a smorgasbord of negative fundamentals. Housing is in a deep slump. Oil and gas prices are at 20-year highs. Corporate costs are rising. Disposable income is falling. Credit requirements are way up. Inflation is rising. And job growth doesn't look too good right now," Bauer said. "Other than that, as Groucho Marx would say, everything is fine economically."

Another factor weighing on stocks, at least for the near-term: 'sell in May and go away' - - the seasonal closing out of positions, particularly winning positions, Bauer said, as key decision makers at institutional banks and investment / hedge funds head for the Hamptons (Long Island, N.Y. ), the south of France, and other destinations, for the summer.

Consumer confidence in the economy dropped even lower in February 2008, on concerns that job growth will slow and that the U.S. economy may fall into a recession, RBC Bank announced Friday, in its monthly survey.

The RBC Cash Index dropped to 48.5 in February 2008 from 56.3 in January 2008. The February 2008 stat was the index's lowest reading since the bank started the index in 2002, the bank said.

RBC (NYSE: RY) said the February 2008 reading continues a downward trend that has persisted through the last year, with consumer sentiment fell across the board - - with concerns about the U.S. economies health and worries about job security and investing weighing on Americans.

Economist Glen Langan told BloggingStocks Friday this month's RBC survey is consistent with other polled data on the current economic mood of Americans.