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From: mre@laidbak.UUCP (Mike Eisler)
Newsgroups: net.invest
Subject: Re: Is new Dow Jones High Phoney?
Message-ID: <715@laidbak.UUCP>
Date: Sun, 9-Feb-86 16:19:36 EST
Article-I.D.: laidbak.715
Posted: Sun Feb  9 16:19:36 1986
Date-Received: Tue, 11-Feb-86 02:37:35 EST
References: <743@cylixd.UUCP> <2813@sunybcs.UUCP> <378@ccivax.UUCP>
Reply-To: mre@laidbak.UUCP (Mike Eisler)
Distribution: na
Organization: LAI Chicago
Lines: 33
Summary: 

The companies on the Dow Jones I.A. are supposedly selected to produce
a group of stocks that represent all the major industries, and also a
large, if not the majority, of the revenue in the major industries.
Since companies sometimes are removed from the N.Y. Exchange (for
reasons of bankruptcy, going private or absorption by another company),
lose their market share in an industry, or become too involved in other
markets (Eg: If oil company A is on the Dow, and buys semi-conductor
company B -- which is not on the Dow, but has say 5% of the IC market,
then perhaps semi-conductor's will become too well represented in the
average, so company A may be dropped for another oil firm.), they may
have to be replaced.  A replacement does NOT inflate the average,
though if a lack luster stock gets replaced by a high flier, the
average could move up a little faster AFTER the replacement.

Note that it is possible for an entire INDUSTRY to get removed, eg.
there must have been an industry that got replaced by the computer
industry.

I don't know if stocks get replaced due to lousy performance, even if
their revenue share is still solid.  But even if they do, as long as the
resulting make up of the Dow is still a good representation of
industry, the average is still a true measure of industry and stock
market performance.

Caveat, I didn't read up on this recently; these comments represent
only what I recall of what I have read or been taught years ago.
I also don't know which stocks were substituted recently, or with
what.  But considering that the Dow stocks have been going through
substitutions ever since the birth of the Dow, I would say that the
current Dow represents what it claims to represent.

	-Mike Eisler
	ihnp4!laidbak!mre