Skating On Thin Ice

Strain to catch this strained metaphor:

Which would you rather have coming straight at you on a crowded sidewalk in Boston?

Me, on in-line skates, at 20 m.p.h. - 180 pounds (if I haven't had pizza for lunch, suck in my gut, and ignore the numbers on the scales) - out of control.

Or my wife, also on wheels, 5'4", 100 pounds, really cute, same speed?

If I hit you and you are somewhat more diminutive than a fire truck, you'll probably get a speeding ticket on your way south through Connecticut.

If you get clocked by the missus, she's the one looking like a Chinese acrobat.

The moral to this story, other than an explanation of why Boston radio stations now broadcast a warning when I strap on the skates, is an explanation for the stock market chart above.

The key word is "momentum."

The red line on the chart shows the weekly close of the Dow Jones Industrial Average, the one that fell 512 points last Monday.

The important line, though, is the blue one. It shows the market's longer-term momentum, and it's key to understanding the red line - which is more a measure of the market's mood than its direction.

That blue line has pointed up through the year. Despite ups and downs on the Dow, the longer-term momentum and direction of the market have been up.

And it's a little hard to tell from this chart, but the week before last, the week before the 512-point belly-flop, the blue line started to point downward.

The Dow, since July, has fallen from around 9300 to 8050, and that was enough to turn it around.

Here's the part where we connect with the McCormick version of roller derby.

For seven years, now, individual investors have been told to "buy on the dips." When the market drops, you should buy more stocks or mutual fund shares, because the market will eventually head higher. And it did. Momentum was up.

In other words, it was OK to put yourself on a collision course with a falling Dow, because, since it lacked downward momentum, it was unlikely to keep falling.

It was like getting crossways with the missus on blades. You're the one left standing.

But things have changed, suggesting that you might hold off before buying on the dip this time around.

Last week's nifty bounce looks mighty seductive, but here's the problem.

This marks the second time in five years that this momentum measure has started to roll over. And if it keeps rolling, momentum will have shifted to the downside.

So buying on this dip could be more like getting in front of me on wheels. With my "heft," I've got enough momentum to wobble the world on its axis.

The dynamics behind this momentum jargon are fairly simple. They stem from the fact that the Dow does not paint a complete picture of the stock market.

While the Dow is down around 17 percent for the year, the damage in the stock market itself is much worse. More than half the stocks on the New York Stock Exchange have lost more than 35 percent of their value this year. That's huge.

That's momentum, and it makes a certain amount of sense that, eventually, the Dow will have to respond.

So, where does this leave long-term investors?

Looking at a big, red flag.

This is a good time to wait and see whether the market reestablishes that upward momentum, and the Dow would probably need to hold its ground above 8300 to do that.

Otherwise, the market may still have some weakness.

Money market funds look especially appealing right now for new money. You can always buy back into the market later.

Next Monday, Guy Halverson will have more to say on making your portfolio more conservative.

Think of it this way: If you're on the sidewalk in Boston, and you see a skater hurtling toward you, rather than try to calculate their weight, momentum, and potential damage to your physical well-being, it's easier just to step out of the way.

You've read  of  free articles. Subscribe to continue.
QR Code to Skating On Thin Ice
Read this article in
QR Code to Subscription page
Start your subscription today