The Bull

Monday 01

September, 201411:34 PM

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

Money or happiness?

The problem with money is that it can only buy... More

Global 'roadmap' shows where to put roads without costing the earth

The International Energy Agency (IEA) predicts... More

Nine and Fairfax Media streaming towards a full tango?

Until the media ownership laws can be repealed,... More

Top 10 shorted stocks

Each week we feature the top 10 shorted stocks... More



WHAT’S ON THIS WEEK

week 5 September 2014
    • 01
    • RP Data RP Data Rismark Home Value Index for August | 1:01 AM
    • TD Securities TD Securities-Melbourne Institute inflation gauge for August | 6:08 AM
    • PMI Australian Industry Group performance of manufacturing (PMI) index for August | 6:10 AM
    • ABS Australian Bureau of Statistics (ABS) business indicators for June quarter | 6:11 AM
    • RBA Reserve Bank of Australia (RBA) index of commodity prices for August | 6:11 AM
    • 02
    • ABS ABS Building approvals for July | 2:17 AM
    • Dun and Bradstreet Dun and Bradstreet business expectations survey | 4:59 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 5:41 AM
    • ABS ABS Balance of Payments and International Investment Position for the June quarter | 6:08 AM
    • RBA Reserve Bank of Australia monthly board meeting and interest rate decision | 6:08 AM
    • ANZ ANZ chairman David Gonski to address an Australian British Chamber of Commerce lunch | 6:09 AM
    • ABS ABS government finance statistics for June quarter | 6:09 AM
    • 03
    • Employee Fraud and Theft seminar Employee Fraud and Theft seminar: Jeff Smith and Stuart Snaith from Regents Risk Advisory talking about how companies can prevent, investigate and recover losses from fraud | 2:18 AM
    • RBA RBA governor Glenn Stevens delivers keynote address at CEDA event | 2:18 AM
    • Paydirt Africa Down Under conference Paydirt Africa Down Under conference, day one of three | 2:19 AM
    • AOFM AOFM to issue $600 million of April 21, 2026 Treasury bonds | 2:23 AM
    • ABS ABS national accounts, including gross domestic product for June quarter | 4:58 AM
    • PSI Australian Industry Group Australian Performance of Services Index (PSI) for August | 5:41 AM
    • Kim Williams Book launch by former New Corp Australia CEO Kim Williams | 6:46 AM
    • 04
    • ABS ABS overseas arrivals and departures for July | 5:35 AM
    • ABS ABS retail trade for July | 5:40 AM
    • AOFM AOFM to issue $500 million of Treasury notes, maturing on January 23, 2015 | 5:42 AM
    • ABS ABS international trade in goods and services for July | 5:42 AM
    • Paydirt Africa Down Under conference Paydirt Africa Down Under conference, day two of three | 6:05 AM
    • CEDA CEDA Economic Prosperity event, speakers include Flinders University vice chancellor Michael Barber and UK Parliamentary Office of Science and Technology director Chris Tyler | 6:05 AM
    • 05
    • PCI Australian Industry Group/Housing Industry Association performance of construction index (PCI) for August | 6:06 AM
    • Paydirt Africa Down Under conference Paydirt Africa Down Under conference, day three of three | 6:07 AM
    • AOFM AOFM to issue $1.5 billion of October 21, 2019 Treasury bonds | 6:10 AM

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search

STOCK QUOTE

Don't know the company code? Click here



Featured Comment

The housing sector has cooled slightly this year from a strong base. But the outlook remains positive, with interest rates expected to remain on hold this year and probably well into 2015. The risks are on the upside, with housing potentially doing better

Time to take profits in this bank?

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.