Sweeping Changes Hit the Dow on a Day of Triple-Digit Gains

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Big changes are coming to the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , but that hasn't kept the blue-chip index from sustaining its big weekly run. As of 2:15 p.m. EDT, the Dow is up more than 100 points, with most of its component stocks in the green. The Dow is ejecting some its most under-fire stocks, and three new members are set to replace them. Who's in, and who's out? Let's catch up on what you need to know.

Blue chips trading places
Say goodbye to Alcoa, Hewlett-Packard (NYSE: HPQ  ) , and Bank of America (NYSE: BAC  ) , Dow watchers. The Dow's parent company is set to kick those three firms, each struggling with its own troubles, out of the index as of Sept. 23. Nike, Goldman Sachs (NYSE: GS  ) , and credit card giant Visa will step in, representing a broad mix of America's industries that will shake up the Dow's price-weighted rankings. While HP, Alcoa, and B of A are three of the cheaper stocks on the Dow by price, Goldman and Visa each trade at well more than $100 per share and will therefore have a big impact on the Dow's movements.

It's a quick out for Bank of America, which only joined the Dow back in 2008. The financial crisis quickly sideswiped the financial giant, which has dealt with today's news in good fashion: Its stock is up 1% to rank among the Dow's leaders.

Recently, Bank of America's numerous legal troubles have stalled the firm's attempts to move past the recession. Worse, the company's mortgage business hasn't been performing up to snuff, with the company's CFO expecting 30% fewer home loans to be made in the third quarter as compared to the second quarter due to a weak refinancing market. That has pushed B of A to slash more than 2,000 jobs in its mortgage business as part of its ongoing cost-cutting measures. Slashing costs has helped B of A stay ahead of earnings expectations, but the company will have to show serious growth outside of its investment arms in order to continue to please investors.

It will be replaced by Goldman Sachs, which doubled earnings in its most recent quarter, while revenue jumped 30%. Goldman's investments performed exceptionally in that quarter, and the stock has gained nearly 30% year to date -- something Dow investors will appreciate when it joins the index.

HP is not in a much better place than B of A, thanks to its long-running turnaround. While the computer maker has shown signs of progress, it has also engaged in its own round of serious cost-cutting as it tries to stem falling sales. HP has cut more than 22,000 jobs through July as a consequence of its turnaround plan, and like B of A, the firm will need to show more momentum in its sales in the long term. Cost-cutting can only take HP -- and its investors -- so far.

For a company on the Dow, that's just not enough. HP has lost its luster as the PC market changes, and the company's inability to evolve in the face of the mobile revolution and the decline of the traditional PC sector has cost the company its spot on the blue-chip index.

Still, HP's turnaround plan, designed for the long term, is what shareholders need to watch -- not the ins and outs of its action on the Dow. After all, it's investing for the long term that counts. The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


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