The keepers of the Dow Jones Industrial Average (DJIA) may have to make big changes in 2020, with the weakest components acting more like penny stocks than multinational icons. Of the 30 members, 29 are now trading below their 200-day exponential moving averages (EMAs), potentially entering bear markets that could persist for several years. Only Walmart Inc. (WMT) is bucking the downward tide, holding within 10 points of an all-time high.
This venerable instrument had to undergo big changes during and after the 2008 economic collapse, with Altria Group, Inc. (MO), Honeywell International Inc. (HON), General Motors Company (GM), American International Group, Inc. (AIG), and Citigroup Inc. (C) losing their membership status. At the current rate of descent, the new list could be even longer because a few components may not survive the pandemic.
Let's look at Dow components most likely to get booted in coming months. Several of these issues should have been removed months or years before the pandemic broke out in January, but there are no guarantees that their replacements would have performed better in the past two months. Even so, a few more members in the win column right now might have had a positive psychological effect on the investment community.
The Boeing Company (BA) has become the odds-on candidate for Dow removal following a historic decline that started with self-inflicted wounds and crashed airplanes. It seems ironic that Seattle added to that burden as ground zero in the U.S. epidemic while the rest of the world has been cancelling orders at a paid pace. There's no assurance that the company will ever return to its past glory, especially if it takes a massive bailout from the government like General Motors did years ago.
Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) have failed to post new highs since 2014, despite the roaring bull market into 2020, making them prime removal candidates. Both stocks have been crushed in recent weeks, victims of a shareholder panic generated by Saudi Arabia's odd decision to start a price war at the same time as the pandemic. This perfect storm of headwinds has now dropped both issues to their lowest lows since 2002.
It probably seemed like a fun idea to add Dow Inc. (DOW) to the DJIA in 2019, if only for the identical company name and ticker, but the decision has blown up in the keepers' faces. The commodity chemical manufacturer posted an all-time high at $60.52 just two sessions after coming public and entered a downtrend that broke 2019 support last month. The stock is now trading at half the value of its IPO, acting as a dead weight.
International Business Machine Corporation (IBM) should have been removed from the Dow years ago, but it's one of the older members, added as a component in 1979. The stock has been a non-performer for the past seven years, topping out in 2013 and entering a downtrend that should be viewed as permanent at this point. Worse yet, it just broke the December 2018 low on heavy volume, dropping to the lowest low since April 2009.
Finally, defense contractor United Technologies Corporation (UTX) posted an all-time high at $158.44 just six weeks ago and turned lower, entering a brutal decline that relinquished a stomach-churning 56% while dropping the stock to an eight-year low. No, it doesn't seem like the right time to remove this issue, given the Raytheon Company (RTN) merger and the continued cash flow of a U.S. defense budget that is likely to survive intact, despite the pandemic. Even so, red flags abound for this former winner, which could post even lower lows in coming months.
The Bottom Line
The keepers of the Dow Jones Industrial Average will need to remove components in the coming months, eliminating companies that may have entered permanent declines.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.