3 Signs the Dow's Drop Is Just a Dip

Everyone's worried about a full-scale crash, but there are reasons to think this is just a normal correction.

Apr 7, 2014 at 9:03PM
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The Dow Jones Industrials (DJINDICES:^DJI) fell 166 points Monday, following up on Friday's similar losses and getting many investors fearful about the future of stocks. With the popular "sell in May" indicator just a few weeks away from triggering its seasonal signal to get out of the stock market, the mood on Wall Street has gotten a lot scarier in just the past week. But there are a few reasons not to lose hope about the survival of the five-year-old bull market for the Dow Jones Industrials. Let's take a look at them.

1. Volatility isn't making investors panicky.
Ordinarily, measures of volatility soar as the Dow Jones Industrials enter a correction. So far, we haven't seen a huge ramp-up in fear among market participants, as the S&P Volatility Index (VOLATILITYINDICES:^VIX) remains at subdued levels well below its peaks in January and March.

Bull

Some will look at today's 11% jump in the so-called Fear Index as evidence that the Dow Jones Industrials are headed back downward toward the year's lows. But when you look at the iPath S&P 500 VIX ST Futures ETN (NYSEMKT:VXX), you see a much different picture, as that volatility-tracking ETN gained only 2% today. The iPath ETN tracks futures rather than spot volatility, and the much-smaller move in volatility projections just a month or so into the future shows just how confident traders are that this downward move will be short-lived. Of course, that's no guarantee that complacent investors won't end up being wrong, but for now, it's providing some underpinning for the Dow Jones Industrials.

2. Investors still trust defensive names.
Even amid the Dow's drop today, Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG) fulfilled their typical defensive roles, rising about 1% each. In a full-blown panic, that doesn't typically happen, as even defensive names get carried out to the woodshed along with the rest of the market.

Coca-Cola's and Procter & Gamble's gains are especially noteworthy given their struggles to produce growth. Between industry-specific issues and global macroeconomic factors holding back their sales gains, both Procter & Gamble and Coca-Cola aren't at their strongest right now from a fundamental standpoint. Yet despite fairly hefty valuations, investors have the confidence to buy their shares even at a potential inflection point for the Dow Jones Industrials. That's a positive from a sentiment standpoint.

3. There still aren't great alternatives.
Beyond the Dow Jones Industrials, there are relatively few investments that look terribly attractive right now. International stock markets fell even more than the Dow did, as geopolitical fears weigh more heavily on Europe due to its proximity to Ukraine and Russia. Bond prices rose as yields fell, but few expect that trend to stay intact much longer as the Fed keeps reducing its bond purchases. Even gold failed to deliver gains today, and with low interest rates failing to give income investors much reason to look elsewhere, stocks -- especially those that pay dividends -- are giving investors what they want the most.

Be careful
It's smart not to panic, but it's also smart to put yourself in a position where you're least likely to panic later. That means assessing your risk tolerance and potentially rebalancing your portfolio before the next correction in the Dow Jones Industrials happens. That way, you'll be emotionally ready to survive an extended downturn for the Dow and even get yourself prepared to buy bargain stocks if the opportunity arises.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Procter & Gamble, owns shares of Coca-Cola, and has options on Coca-Cola. 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.

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