Don't Panic Over the Dow's First-Day Jitters

The Dow Jones Industrials got off to a bad start in 2014, but you shouldn't automatically conclude that the whole year will go poorly for the Dow.

Jan 4, 2014 at 11:01AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After a stellar 2013, the Dow Jones Industrials (DJINDICES:^DJI) opened 2014 on a sour note, falling 135 points in its first day of trading in the New Year. Immediately, many investors started worrying about whether the downward move was an ill omen for 2014. But before you panic about a possible correction, let's take a look at the hard numbers to see whether there's a statistically sound reason for concern.

All eyes on January
January is an especially fertile source of seasonal factors for the stock market. Many point to the outperformance of small-cap stocks over their large-cap rivals in what's known as the January effect, as relatively illiquid stocks that were victims of tax-loss selling late in the previous year often climb as investors rush in to take advantage of lower valuations.

Others look at January as a barometer for market sentiment for the remainder of the year. According to figures that S&P index analyst Howard Silverblatt gave USA Today recently, a winning January for the S&P 500 has led to a winning year almost 73% of the time. The article also cited the Stock Trader's Almanac and its finding that if you look just at the first five days that the market is open in January, positive results lead to a winning year almost 85% of the time since the mid-1970s.

The other side of the coin
Those results sound compelling. But to assess the true value of the indicators, you also have to look at what happens when the market falls over their respective time periods. The Stock Trader's Almanac argues that every time the S&P 500 has fallen in January over the past 63 years, poor results have followed, with average losses for the remainder of the year of almost 14%. Yet when you look only at the first five days of January, the market has actually risen for the full year more often than it has dropped after an early year decline.

It's easy to understand why investors are skittish about Thursday's declines. The last time that stocks fell on the first trading day of the year was 2008, marking the beginning of the huge market meltdown that accompanied the financial crisis later that year.

But you also have to remember other considerations that can lead people to sell. Those who wanted to take profits on their winning stocks had a big tax incentive to wait until 2014 began before making sales, and that likely played at least a role in the declines we saw in many of 2013's big winners. Netflix (NASDAQ:NFLX) fell about 1.5% despite seeing every sign of continuing its growth trajectory, with initiatives designed to capture as much money from streaming video as possible. Among high-flying tech stocks, Google (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) also nudged downward. Yet Google still has its commanding presence in online search and continues to reap new profit opportunities from it, and although Microsoft has struggled to keep up with its rivals, it has moved forward with efforts designed to help it catch up in 2014 and beyond.

In all, paying too much attention to a single day's performance simply shows the dangers of short-term thinking. Looking at short-term indicators can be interesting, but in the long run, it's essential to look past short-term effects and focus on the factors that will boost your stocks for years and decades to come.

Get smart about your investing
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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Google and Netflix and owns shares of Google, Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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