For the first time in over a year, the Dow is actually challenging the 200-day moving average. Adding two new components to the Dow may provide the boost needed to break above this significant trend line. Would such a break, however, mean that the worst is over, or is another collapse still possible? It doesn’t happen often, but when it does; it’s kind of a big deal – changes to the Dow Jones (NYSEArca: DIA).
Those changes, however, are becoming more frequent. On September 22, 2009, Kraft Foods (NYSE: KFT) replaced American International Group (NYSE: AIG).
Ever since then, the Dow has been underweighted in financials. The reduced financial exposure explains why the Dow has performaned better than the S&P 500 (NYSEArca: SPY), over the past year or so. The Financial Select Sector SPDRs (NYSEArca: XLF) were the worst performing sector, up until the rally from the March lows.
On March 2nd, the ETF Profit Strategy Newsletter recommended to sell the previously acquired short ETFs and buy long ETFs, in particular financial related ETFs such as the Ultra Financial ProShares (NYSEArca: UYG).
As financials have seemingly recovered (more about that later), General Motors was forced to file for bankruptcy. This did not fase investors, as the Dow rallied over 220 points on economic news which was perceived to be positive.
Effective as of June 8th, Travelers (NYSE: TRV) will replace Citigroup (NYSE: C), while Cisco (Nasdaq: CSCO) will replace General Motors.
How new components are selected:
Composition changes are rare and generally occur following corporate acquisitions, or other dramatic shifts in a company’s core business. When such an event necessitates that one component be replaced, the entire average is reviewed. The increased frequency of recent changes reflects the shift in economic momentum. Even blue chip stocks are far from recession resistant.
Constituents, or replacements, are selected by the editors of The Wall Street Journal. A stock typically is added only if the company is widely known, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents a market sector covered by the average.
Even though new to the Dow Jones, Cisco has been part of many other indexes/ETFs for years. The Nasdaq (NYSEArca: QQQQ), Technology Select Sector SPDRs (NYSEArca: XLK), and Russell 1000 Growth (NYSEArca: IWF) are just a few examples.
Travelers is actually a former unit of Citigroup. We are all familiar with Citigroup’s recent history.