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Greetings, fellow Pro-fundity team members -
2-12-99 Page Background music:
Market indexes give us a quick view of the general condition of the market.
We can also take a look at specific sectors to see how they are performing. This is easy
and helpful as we navigate through the complex world of high finance. It is not necessary
to consider thousands of stocks to get a temperature reading of market health.
Why is this important? As we mentioned in the Technical Analysis tutorial, most market
observers agree that about 70% of a stock price movement is tied to the total market.
That is why life is so great during a bull market, when everything seems to be so right.
However, if a market sector is going through the dumpers with a nasty negative trend, we
perhaps shouldn't hope for a specific stock to perform to our expectations.
This week, lets take a look at what this means and how we can benefit. We will examine
four major market indexes with charts (pictures that talk! :) :(
- Dow Industrial 30
- Standard & Poors 500
- Nasdaq Composite Index
- Russells 2000
These major indexes gives us a good indication of the heartbeat of the market activity. If plotted together they would all look to be about the same. However, this is not always true and offers important insights when differences do occur.
The Dow is the most popular and most reported on during the market day. It is considered THE measure of market activity. But fails to measure up in terms of an "average" market indicator. It is anything but average, made up of 30 industrial giants, all leaders in their fields. These are the cream of the crop. What this means is that if we don't "beat the Dow," we are still in pretty good company.
Look at the price chart of the Dow for the past three years (the price bars on this chart are monthly averages):
We see the dramatic bull market through this period with the correction last year. What a great period to be in the stock market.
Now look at a more recent snapshot (price bars here are daily figures):
In this case, we see a slow-down the past month with no noticeable trend in place. Last Friday an important market observer said there is no doubt that we are in a correction with the potential of being serious.
Check the next chart, Standard & Poors 500 for the past three years. This index is a measure of 500 stocks from a broad range of industries. This is a more reasonable indicator of a market "average."
This has about the same pattern as the Dow. In the next chart, we see the more recent sound-bite with the characteristic sideways trend the last month. Nothing much new here.
Now consider the NASDAQ Composite Index, which measures all common stocks listed on the NASDAQ Stock Market. This includes over 5,000 companies, the largest number of a standard market index. This is a very broad-based index, heavily weighted in technology companies and is widely followed and quoted.
Here is the three-year chart for comparison:
Again, the pattern seems about the same on this three year scale. However, we now see some differences between the more recent NASDAQ chart and that of both the recent Dow and S&P. The recent month activity is not sideways, but has a noticeable trend down. This causes some of the concern voiced above by last Friday's market commentator.
Lastly, consider similar charts for the Russell 2000 index.
This is an index of stocks traded on the three major exchanges, NYSE, AMEX and NASDAQ. This tracks the performance of 2,000 smaller company stocks in the U.S. in varying industries. This index is considered a fair measure of smaller cap stocks and the one most representative of the stocks we select on this page.
The downtrend is evident the past month on this indicator. This is the reality of the market we are dealing with.
Knowing the impact the market has on price performance, we need to add the ability to quickly scan these market indexes to support our preparation routine of:
- · solid business fundamentals,
- · an understanding of technical indicators,
- · the mercurial impact news has on the market,
All of this will all help hone our instincts for greater market success. In next week's editorial, we will take a look at sector indexes for a better understanding of today's volatile market-place.
Point: We have had several subscribers request the page be updated on Saturday instead of Sunday. We got it up last week early Saturday afternoon and the same this week. We will try to keep that routine going forward. We like to hear from our subscribers.
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