There are several indicators that investors can use to check the health
of the stock market. Investors use
these market indicators to help them decide when, where, and how much
to invest in any given time
period. Two of the most popular indicators include the Dow Jones Industrial
Average (DJIA) and
Standard and Poor's 500 Stock Index (S & P 500).
When the DJIA is going up
over a period of time (Bull Market), investors are more than likely to
keep investing.
When the DJIA is going down
over a period of time (Bear Market), investors tend to sell their
securities in the market
causing stock prices to drop further.
How can this help the investor? You can use the DJIA to decide when to buy and sell stocks.
Stock prices tend to move up and
down as a group. For example, if the DJIA is going up, then
most other stocks are also going
up.
The stock market reflects the national
economy. The DJIA tends to go up during prosperity and
down during recessionary periods.
As an investor, knowing which phase the business cycle is in
can help you to determine whether
to buy, sell, or hold a particular stock.
The DJIA moves in three types of trends:
1) Major trends which last several years and reflect the business cycle. For example, from February 1995 to February 1999, the economy has been in the prosperity phase of the business cycle, and the DJIA has doubled in value,2) Secondary trends which last several months and tend to move opposite of the major trend. For example, even though the major market trend has moved upward from February 1996 to February 1997, prices fell from May 1, 1996 through July 1, 1996. (see chart below),
3) Minor trends which last for several days and can be in the same direction or opposite direction of the major trend. These can be caused by rumors, changes in interest rates, major events. (see Oct. 1, 1996 in the chart below).
Questions about the Dow?
Standard and Poor's 500 Stock Index (S & P 500) is an index
of 500 key stocks of
corporations listed on the New York Stock Exchange. This index gives
the investor a much broader
view of the market than the DJIA because it measures a greater number
of stocks. Both the S & P 500
and the DJIA usually move together during major market swings.
Last updated July 21, 1999
by Megan McCarthy