The Real Reason Why the Dow's Plunging

Halloween may still be a week away, but the stock market's looking plenty scary already. For the second time this week, stocks dropped sharply from the opening bell, and by 10:45 a.m. EDT, the Dow Jones Industrials (INDEX: ^DJI  ) had fallen 240 points.

It's easy to blame the drop on short-term effects from bad earnings reports. Even just among Dow stocks, there's no shortage of those today, with DuPont (NYSE: DD  ) leading the way down with an 8% drop after its report this morning. Not only did DuPont miss earnings-per-share estimates by nearly a third, but it also slashed its full-year EPS forecast from $4.20 to a range of $3.25 to $3.30. The sale of its auto-paint division accounts for less than half of the decline. Meanwhile, 3M (NYSE: MMM  ) matched earnings estimates but fell short on sales and reined in future guidance as well, sending shares skidding more than 3%.

But the real reason for the market's plunge today goes beyond just the latest round of quarterly reports. U.S. investors need to understand that between earnings season, the election, and the fiscal cliff, it's easy to have tunnel vision and ignore the rest of the world. As much as the global economy relies on the U.S., however, there are plenty of other trouble spots internationally that only occasionally rear their ugly heads on domestic news sources.

Most importantly, investors have largely ignored those concerns throughout much of the past several months. The S&P Volatility Index (INDEX: ^VIX  ) , which traded during the summer at lows not seen since before the financial crisis, soared 13% today, and the iPath S&P 500 VIX Futures ETN (NYSEMKT: VXX  ) , which gives investors direct exposure to volatility, has already seen as many shares change hands before 11 a.m. as it typically sees during entire daily trading sessions. With the market overdue for a correction, it looks like that's exactly what the stock market is getting today.

Batten down the hatches
Whether this correction turns into a full-fledged bear market will take a while to figure out. But for investors seeking to protect themselves, the key is to pick top long-term prospects that can survive whatever the global economy throws at them. For some promising candidates, let me invite you to read the Fool's popular special report: The 3 Dow Stocks Dividend Investors Need. It's absolutely free, so just click here and get your copy today.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 24, 2012, at 1:17 AM, thogshead wrote:

    About "With the market overdue for a correction, it looks like that's exactly what the stock market is getting today," if anyone is interested knowing how and when VIX volatility will change, Volatility Research has come up with a pretty good way to predict VIX “fear guage” volatility using NYSE VXX:

    http://www.sites.google.com/site/VolatilityResearch/

    The klinker in this rally-woodpile is VIX volatility, and this rally may be a house-of-cards.

    We’re in the lull before the Perfect Storm.

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