Nine days in a row.
If you’ve turned on, logged on or listened to any of the financial news channels over the last 24 hours this is all you’ve hear…
The Dow Jones Industrial Average just had its worst losing streak since 1978 after nine losing days in a row.
Sure, that’s a true statement, but do you have any idea what is wrong with that statement? Furthermore, di you know whether this is something that will impact the market?
The answers, along with what you really need to be watching follow.
The Dow Jones Industrial Index is flawed compared to others that we watch.
The index is made up of 30 stocks meant to capture a representation of the American industrial market. It’s a great idea, but there’s a huge flaw, the way its calculated.
Unlike more effective indexes, the Dow’s weighting calculations are based on stock price, not market capitalization. That makes companies like Goldman Sachs (GS), Unitedhealth (UNH), and Microsoft Corp (MSFT) the driving forces of the Dow’s movement.
It’s not that these companies aren’t more important to the market, it’s just that they don’t represent the market well.
Here are a couple of extra data points for the last nine trading days for the index.
Here’s an extra thought. During none of the severe bear market declines since 1990 did the Dow Jones Industrial Average post more than 5 consecutive down days.
I hope that you see where I’m going with this, but here’s the bottom line.
The fact that the Dow Jones Industrial Average is trading down is as significant as the roulette wheel landing in 17. You don’t bet on that trend continuing or ending like much of the media appears to be suggesting.
I’ll show you what to watch instead in just a minute.
Last week I wrote about the potential for a large correction as we enter the historically weak month of January.
Over the last 20 years, January and February have been among the worst performing months of the year with regularity.
The reasons are relatively simple.
Investors often bid prices higher in the waning months of December as portfolio managers “window dress” their holdings and investors have time over the holidays to review their portfolios.
That last push that we often refer to as the “Santa Claus Rally” stretches valuations of some of the more widely traded stocks as the market heads into the new year.
Then, just on the other side of January 1, the first earnings season of the year starts. Investors are immediately hit with the volatility and valuations of the earnings season, often resulting in more selling than buying since everyone did their buying in late December.
It sounds simple because it is.
When you combine that simple calendar math with the current market environment, investors start to hedge their bets and sell.
That’s why investors are feeling nervous about buying stocks right now.
There really are three things to watch right now, but two are dependent on each other so we’ll combine them.
“In NVIDIA We Trust” should be the market’s motto.
The stock has turned into the single most important stock in the market for obvious reasons. Chances are that if you own a mutual fund or exchange traded fund that holds stocks you own NVIDIA.
For that reason, NVIDIA is the one stock that can crush investor sentiment and trigger widespread panic.
NVIDIA’s performance has been lacking over the last few weeks. The stock has dropped 15% since hitting its all-time highs in November.
Shares are currently sitting on critical support at $130. A drop below that price would trigger another 10% decline for the shares but there’s something more important that would happen.
NVIDIA’s price action is more significant and important than the movements of the Dow Jones Industrial Average.
A sudden rush of selling pressure on NVIDIA has the potential to cause a sharp spike in uncertainty and fear. Such a spike would turn into a snowball effect in the market sending the major indices 10-20% lower.
Which brings us to the second "indicator" to watch...
The “VIX”, also known as the “Fear Index” gauges investors sentiment. Sentiment drives markets higher and lower, period.
Recent readings of the VIX have hit near 52-week lows signaling a dangerous situation where investors are fearless about where the market is heading.
Warren Buffet – among others - taught us that the best time to sell stocks is when everyone is bullish. The VIX is telling us that everyone is bullish right now.
Though the VIX is in a danger zone, it’s not yet given us a sell signal.
The time to start worrying about a 10-20% decline in the S&P 500 is when the VIX moves above 22.5. Until then, the market is just experiencing pockets of volatility that are part of its random walk higher.
