The New Dynamics of the Dow Industrials

One sure path to success in the stock market, difficult as it is to accomplish, is to see something that other market participants don't. If you follow the crowd and get comfortable with consensus thinking, then you've written yourself a certain prescription for mediocrity. The crowd always has been -- and always will be -- nothing more or less than average.

I recently heard from a hedge fund manager who has been negative on stocks and had all sorts of quantitative data to back it up. He said that the market is selling at a high price-to-sales ratio, a high price-to-book and low dividend yield, among other things. Stock market bears relentlessly recite this litany of quantitative data to justify their negative position.

Are they right? In a word, no.

When it comes to the market's short-term direction, I'm going to plant my feet firmly in the agnostic category, because I won't (and can't) predict that. But when it comes to the long range, the market is different this time, at least for those who insist on comparing current market data points with historical precedent. I know, "The market is different this time" is supposed to be among the most dangerous statements for an investor to hear, but suspend your judgment for now and hear me out.

Digging Into the Dow

Take a look at the components of the Dow Jones Industrial Average and compare them with those of a generation ago. It is different this time, very different. In the space of a generation, we've morphed from an industrial economy to a service economy.

Our manufacturing industries have been exported, and it's fair to say that we've traded up. We now have a Dow Jones average made up of brains and brands, not manufacturers and metal producers.

Many of the Dow components from a generation ago are long gone, no longer part of the index -- such as Anaconda Copper, Bethlehem Steel, International Nickel and Westinghouse Electric.

The Dow Jones is now dominated by companies such as Microsoft (MSFT - commentary - Cramer's Take), Intel (INTC - commentary - Cramer's Take), Coca-Cola (KO - commentary - Cramer's Take), Citigroup (C - commentary - Cramer's Take), Johnson & Johnson (JNJ - commentary - Cramer's Take), McDonald's (MCD - commentary - Cramer's Take) and Merck (MRK - commentary - Cramer's Take).

Even General Electric (GE - commentary - Cramer's Take), a member of the Dow Jones Industrial Average for 107 years, has morphed in just a generation from a heavy industrial company to a quasi-finance company.

And the operating metrics of the retailers in the Dow Jones Industrial Average from a generation ago, Sears (S - commentary - Cramer's Take) and Woolworth, are embarrassments when compared with the operating performance of today's powerhouse retailers in the Dow: Wal-Mart (WMT - commentary - Cramer's Take) and Home Depot (HD - commentary - Cramer's Take).

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At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.