DJIA: The Most Useless, Overused Tool on the Planet

by: Philip Davis

Phil Davis submits: I finally found something I've been meaning to look up for some time: The current weighting of the DJIA! This became imperative today when I was shocked that the press blamed $18B General Motors Corp. (NYSE:GM) for hurting the $3T index with its 6% drop.

Well, I checked it out and I am now more convinced than ever that the Dow is the most useless, overused tool on the planet!

Aside from the fact that it contains just 30 out of 8,500 stocks traded on the major exchanges, and aside from the fact that it contains some of the world's dullest companies, I now see that there is absolutely no logic to the weighting!!!

The Dow is "price weighted," meaning that weightings are determined based on the selling price of each stock, not the value of the company. This leads to some totally ridiculous outcomes:

General Motors Corp. (GM), which makes up .6% of the Dow's market cap, has a 2.1% weighting. That means that GM disproportionately affects the Dow by a factor of 350%.

General Electric Co. (NYSE:GE), my favorite market indicator, with a $373B market cap, makes up just 2.4% of the Dow's daily move.

ExxonMobil Corp. (NYSE:XOM) ($400B) at 4.5% could lose $12B in value (-$2) and that loss would not be reflected if General Motors Corp. (GM) gains just $2 (+$1B). How does this accurately reflect the economy? I've said on numerous occasions that GE should be replaced by Toyota Motor Corp. (NYSE:TM), but this whole weighting system is insane!

Pfizer Inc. (NYSE:PFE) ($203B) counts for just 1.9% of the index, while Boeing Co. (NYSE:BA) ($66B) counts for 5.6%.

Wal-Mart Stores Inc. (NYSE:WMT) ($201B), who sells $360B worth of stuff annually, is given a 3.2% spot, not even double Alcoa Inc.'s (NYSE:AA) ($24B) 1.9%, who might hit $28B in sales if things go well.

Sharing top weighting with BA is another blast from the past -- International Business Machines Corp. (NYSE:IBM) ($126B), with a 5.6% spot. I love IBM, and I think they're a great value, but they were at $83 in January and $90 in Jan '05 and $90 in Jan '04 and $80 in Jan '03... what exactly are we trying to measure here?

Number three in the weightings is 3M Company (NYSE:MMM) ($57B), with 5.1%, 150% more than AT&T Inc. (NYSE:T) ($123B) at just 2.1%. AT&T made $1.8B last quarter, more then 3M made in its best 2 years...

Another insult to the tech sector is Intel Corp.'s (NASDAQ:INTC) ($118B) 1.4% weighting, as well as the unbelievable 1.8% (less than GM) given to Microsoft Corp. (NASDAQ:MSFT) ($277B). Microsoft would have to add $22B, more than GM's entire market cap, to make up for GM's 6% loss today.

In addition to all this misleading data, you can't even trust the number you see in the morning!

According to Wikipedia:

"Another issue with the Dow is that not all 30 components open at the same time in the morning. Only a few components open at the start, and the posted opening price of the Dow is determined by the price of those few components that open first and the previous day's closing price of the remaining components that haven't opened yet; therefore, the posted opening price on the Dow will always be close to the previous day's closing price (which can be observed by looking at Dow price history), and will never accurately reflect the true opening prices of all its components."

So stop watching the Dow!!! I know, it's impossible because the press treats it like it's the entire market, but it is a flawed and nearly meaningless indicator of what is really going on in our economy.

Read all of Phil Davis's articles on Seeking Alpha.