GM’s Bankruptcy Good for Dow

by The Investment U Research Team

It’s a sad, sad day for many who are watching the historic bankruptcy of General Motors (NYSE: GM). It’s a bitter medicine that has been a long time in coming. We’ve been waiting a long time to get to this point.

And the markets have rallied on the news – up almost 3% before noon. GM is up over 14%.

Granted, you could say today’s movement is more about optimism, but we’d like to think its on certainty. The market craves certainty and it hates uncertainty. It doesn’t care if it knows a stock is headed to zero – as long as it knows about it.

Knowledge truly is power in this environment. So knowing what they have to deal with, the traders and institutions are going to be more confident in their movements – and that translates to purchases.

The Dow Industrials Average (.DJI) used this opportunity to kick out GM and Citigroup (NYSE: C) from the 113-year-old average – replaced by Cisco (Nasdaq: CSCO) and The Travelers Companies (NYSE: TRV). The changes will go into effect on June 8.

Now an interesting takeaway here is that as these two companies are rotated in, there should be a substantial amount of institutional and index purchasing as funds look to rebalance and maintain DJIA holdings.

When Kraft Foods (NYSE: KFT) was added to the DJIA last year, its stock price climbed 5% in the weeks before and another 5% in the weeks that followed.

Symbols mentioned in this article: GM, .DJI, C, CSCO, TRV and KFT.

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