The Bull

Friday 22

August, 2014 7:58 AM

Industry Chart

TheBull PREMIUM

  • Trading
  • &
  • Technical
  • Analysis

Dow Jones Index to 68 points?

Dow Jones Index to 68 points?

By Expert Panel 12.08.2013


By Wim Grommen

After intensive consultation with his advisors, President Obama has decided to modify the formula used for calculating the Dow Jones Index. On January 1, 2014 the Dow Divisor will be changed to 30. The result of this change will be that the Dow Jones Index drops from the current 15,658 points to about 68 points. The underlying value of the 30 component stocks of course remains unchanged. With this modification to the formula Obama aims to make the large Dow fluctuations of recent decennia a thing of the past, and hopes that this will bring stability to the stock market. Banks, major investors and pension funds welcome this change in the Dow Jones Index formula.

To understand Obama’s proposal we must go back in Dow Jones history. The Dow was first published in 1896. The Dow was calculated by dividing the sum of the 12 component company stocks by 12:

Dow-index_1896 = (x1 + x2+ ..........+x12) / 1

In 1916 the Dow was enlarged to 20 companies; 4 were removed and 12 added:

Dow-index_1916 = (x1 + x2+ ..........+x20) / 20

The shares of a number of companies were split in 1927, and for those shares a weighting factor was introduced in the calculation. The formula is now as follows

 (x1 = American Can is multiplied by 6, x2 = General Electric by 4 etc. )

Dow-index_1927 = (6.x1 + 4.x2+ ..........+x20) / 20

On 1 October 1928 the Dow was further enlarged to 30 stocks. Because everything had to be calculated by hand, the index calculation was simplified. The Dow Divisor was introduced. The index was calculated by dividing the sum of the share values by the Dow Divisor. In order to give the index an uninterrupted graph the Dow Divisor was given the value 16.67.

Dow-index_Oct_1928 = (x1 + x2+ ..........+x30) / Dow Divisor

Dow-index_Oct_1928 = (x1 + x2+ ..........+x30) / 16.67

Since then the Dow Divisor has acquired a new value every time there has been a change in the component stocks, with a consequent change in the formula used to calculate the index. This is because at the moment of change the results of two formulas based on two different share baskets must give the same result. When stocks are split the Dow Divisor is changed for the same reason.

In autumn 1928 and spring 1929 there were 8 stock splits, causing the Dow Divisor to drop to 10.47.

Dow-index_Sep_1929 = (x1 + x2+ ..........+x30) / 10.47

After the stock market crash of 1929, 18 companies were replaced in the Dow and the Dow Divisor got the value 15.1.

Period

Basket changes

Stock splits

Dow Divisor

end period

1930-1940

18

0

15,100

1940-1950

0

12

 9,060

1950-1960

5

27

 3,824

1960-1970

0

26

 1,894

1970-1980

3

12

 1,465

1980-1990

5

32

 0,586

1990-2000

11

40

 0,201

2000-2010

7

13

 0,132

 

Table: Changes in the Dow, stock splits and Dow Divisor

The table above makes it clear that the Dow Jones formula has been changed many times and that the Dow Divisor in the period 1980-2010 has actually become a Dow Multiplier, due to the large number of stock splits in that period. Where in the past the sum of the share values was divided by the number of shares, nowadays the sum of the share values multiplied by 7.5. Dividing by 0.132 is after all the same as multiplying by 7.5. (1 / 0,132 = 7,5). This partly explains the behaviour of the Dow graph since 1980. 

Figure: the Dow Jones since 1896

The proposed change on 1 January 2014 restores the formula to what it originally was: the sum of the share values divided by the number of component shares.

Dow-index_Jan_2014 = (x1 + x2+ ..........+x30) / 30

The aggregate current value of the 30 component stocks is 2039 dollars. By changing the Dow Divisor from 0.130216081 to 30 (a factor 230 larger) the index will, at current values, change from 15658 to 68 points (a factor 230 smaller).

The emotional factor in the current formula,  the nervousness or euphoria of investors resulting from large fluctuations in the Dow, will be greatly reduced by this change (230 times) and so rationality should gain the upper hand in investors' decisions.

Obama’s proposed change must still be approved by House and Senate. Both Republicans and Democrats have told Obama they support his proposal. Politicians, irrespective of political colour, desire stability in the stock markets. For the investor however it will take some getting used to: the Dow Jones at 68 points.

Wim Grommen was a teacher in mathematics and physics for ten years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 17 years as trainer for Transfer Solutions in the Netherlands. The last 15 years he has studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines and sites in The Netherlands and Belgium.

Click on the links below to read other articles from this week's newsletter

1. Take Profit - Why A Global Sell Off is Likely: Medium-term outlook still good, but global...

2. 5 Defensive Stocks For Nervous Nellies: A federal election result can't come quick...

3. 18 Share Tips - 12 August 2013: 18 Share Tips to BUY, SELL & HOLD from...

4. 5 Mining Services Stocks To Watch This Earnings Season: This earnings season there are three key trends...

5. Property bubble? That's the theory, anyway: As Australian housing prices have boomed over...

6. Silver shorts hit record extremes, short squeeze looms: Silver has suffered a miserable year so far...

7. Dow Jones Index to 68 points?: President Obama has decided to modify the...

8. Top 10 shorted stocks: Each day we feature the top 10 shorted stocks...

9. Stocks on a roll: ASX rolling 52-week highs for the previous...

10. Stocks on the slide: ASX rolling 52-week lows for the previous...

 



FROM THE NEWSLETTER

Renewed interest in gold

Gold's strong season is just getting underway,... More

Numbers tell it all: Fairfax is still a digital wannabe

The numbers suggests Fairfax is still far from... More

Stocks on a roll: ASX rolling 52-week highs

ASX rolling 52-week highs for the previous... More



WHAT’S ON THIS WEEK

week 22 August 2014
    • 18
    • AAD Ardent Leisure full year results | 4:57 AM
    • AZJ Aurizon full year results | 4:57 AM
    • NAB NAB third quarter trading update | 4:57 AM
    • ANN Ansell full year results | 4:58 AM
    • SGP Stockland full year results | 4:59 AM
    • NCM Newcrest Mining full year results | 5:00 AM
    • ABS Australian Bureau of Statistics sales of new motor vehicles for July | 6:07 AM
    • Australian National Retailers Association Australian National Retailers Association's Retail Nation conference, featuring Peter Costello | 6:07 AM
    • 19
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 1:00 AM
    • MND Monadelphous full year results | 1:00 AM
    • AMC Amcor full year results | 1:01 AM
    • ARI Arrium full year results | 1:02 AM
    • TGR Tassal Group full year results | 1:02 AM
    • CDD Cardno full year results | 1:02 AM
    • IVC Invocare half year results | 1:03 AM
    • IOF Investa Office Fund annual results | 1:54 AM
    • Northern Territory Resources Week conferences Northern Territory Resources Week conferences, including Building The Territory, Mining The Territory, and South East Asia Australia Offshore & Onshore conference | 2:17 AM
    • RBA Minutes of Reserve Bank of Australia (RBA) monthly board meeting released | 4:58 AM
    • ABS ABS International merchandise imports for July | 4:59 AM
    • OSH Oil Search half year results | 6:08 AM
    • BHP BHP Billiton full year results | 6:08 AM
    • QBE QBE half year results | 6:08 AM
    • DSH Dick Smith Holdings full year results | 6:09 AM
    • TOL Toll Holdings full year results | 6:09 AM
    • SHL Sonic Healthcare full year results | 6:10 AM
    • IAG IAG full year results | 6:11 AM
    • HIL Hills full year results | 6:46 AM
    • 20
    • BXB Brambles full year results | 1:01 AM
    • TRS Reject Shop full year results | 2:17 AM
    • Westpac/Melbourne Institute Westpac-Melbourne Institute Leading Indexes of Economic Activity | 2:18 AM
    • RBA Reserve Bank Governor to appear before House Economics Committee | 2:18 AM
    • SEK SEEK full year results | 2:19 AM
    • WES Wesfarmers full year results | 2:23 AM
    • WPL Woodside half year results | 3:18 AM
    • APA APA Group full year results | 4:56 AM
    • WEB Webjet full year results | 4:56 AM
    • CBA Commonwealth Bank business sales indicator for July | 5:34 AM
    • AOFM AOFM to issue $700 million of April 21, 2024 Treasury bonds | 5:35 AM
    • AGL AGL full year results | 6:05 AM
    • CCL Coca-Cola Amatil half year results | 6:05 AM
    • FMG Fortescue Metals Group full year results | 6:05 AM
    • APN APN News & Media half year results | 6:06 AM
    • SXL Southern Cross Media full year results | 6:07 AM
    • CGF Challenger full year results | 6:10 AM
    • CWP Cedar Woods full year results | 6:10 AM
    • SQR Charter Hall Retail REIT full year results | 6:11 AM
    • 21
    • ORG Origin Energy full year results | 5:35 AM
    • AMP AMP half year results | 5:36 AM
    • TTS Tatts full year results | 5:36 AM
    • TWE Treasury Wine Estates full year results | 5:37 AM
    • AIO Asciano full year results | 5:37 AM
    • SUL Super Retail Group full year results | 5:38 AM
    • ASX ASX full year results | 5:38 AM
    • MGR Mirvac full year results | 5:38 AM
    • IIN iiNet full year results | 5:39 AM
    • MOC Mortgage Choice full year results | 5:39 AM
    • SYD Sydney Airport half year results | 5:39 AM
    • PNA PanAust half year results | 5:40 AM
    • AWC Alumina half year results | 5:40 AM
    • PMC Platinum Asset Management full year results | 5:41 AM
    • AOFM AOFM to issue $500 million of Treasury notes, maturing on January 23, 2015 | 5:41 AM
    • 22
    • STO Santos half year results | 5:42 AM
    • ILU Iluka half year results | 5:42 AM
    • SGM Sims Metal Management full year results | 5:43 AM
    • DUE Duet Group full year results | 5:43 AM
    • RBA RBA Payments System board meeting | 5:43 AM
    • AOFM AOFM to issue $500 million of July 21, 2017 Treasury bonds | 5:44 AM

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search

STOCK QUOTE

Don't know the company code? Click here



Featured Comment

The well-performing NAOS Emerging Companies Fund has been buying Lindsay for its exposure to the emerging foodbowl in North Queensland, and leverage to the coming dining boom as more food is exported to Asia.

Small-cap Transport Stocks to Watch

Broker buys

  • ASX Code
  • Company
  • Broker
  • IREIressWilson HTM
  • RIORio TintoWilson HTM
  • CCPCredit CorpPhilip Capital
  • COECooper EnergyPhilip Capital
  • TLSTelstraMorgans CIMB
  • NABNAB LtdMorgans CIMB

Broker sells

  • ASX Code
  • Company
  • Broker
  • CGFChallengerWilson HTM
  • DLXDuluxWilson HTM
  • SMXSMS TechPhilip Capital
  • OKNOaktonPhilip Capital
  • SAISAI GlobalMorgans CIMB
  • EGPEchoMorgans CIMB

Central Banks Rates

  • RBA2.50%
  • FED0.25%
  • BOE0.50%
  • BOC1.00%
  • RBNZ3.25%
  • ECB0.15%
  • SNB0.00%
  • BOJ0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.
  • IBCIronbark Capital Ltd, 2c, 100%15/12/14
  • CYACentury Aus Inv Ltd, 2c, 100%10/09/14
  • MHIMerchant House Intl Ltd, 0.5c, 0%20/08/14
  • WICWestoz Inv Co Ltd, 4.5c, 100%07/08/14
  • OZGOzgrowth Limited , 0.75c, 100%07/08/14
  • SGTSingapore Telecom Ltd, 8.6c, 0%01/08/14
  • CUPCountplus Limited, 3c, 100%28/07/14

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target
  • DOWDowner EDI Limited$5.78
  • FMGFortescue Metals Grp Ltd$6.89
  • ORAOrora Limited$1.51
  • RIORio Tinto Limited$81.22
  • CSLCSL Limited$73.30

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date
  • GVFGlobal Value Fund Ltd14/07/14
  • TPN3P Learning Ltd16/07/14
  • DXBDimerix Bioscience Ltd28/07/14
  • BALBellamys Aus Ltd30/07/14
  • ECO8Common Ltd22/08/14

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright The Compare Group Pty Ltd. All rights reserved.