Investors’ Behavior at Market BottomsNobody wants to date the prom queen or anyone else at the bottom of the market. Prom queens stay home with the rest of the crowd because of mass depression. A clear sign that investors are overly bearish is that all
30 of the Dow industrial stocks decline on the same day. Because these 30 stocks represent diversified industries, some of them should move in opposition to each other. For example, defensive drug stocks should move differently than aggressive technology stocks; Pfizer and Microsoft should behave differently from each other. When all 30 Dow stocks decline on the same day, the market is close to its absolute bottom.
Examples of Dow as Indicator: Terrorist AttacksThe Dow indicated that the terrorist attacks were not the bottom of the market. We did not see all 30 of the Dow stocks decline after the 2001 terrorist attacks. Defensive stocks such as Coca-Cola, Merck, and Procter &Gamble posted gains when the market reopened on September 17. Communications stocks also did well that day: SBC Communications and Motorola. Five of the Dow Jones Industrial Average companies were up that day and suggested that it was not the bottom of the market. The Dow closed at 8920 and the S&P at 1038; these markets would lose another 15 to 25 percent over the next year.
Market Bottoms in 2002The S&P hit bottom on October 9, 2002, at 773, and you would think that all 30 of the Dow stocks would have declined on that day as part of the general malaise. That was almost the case; Philip Morris was the only
Dow stock that posted a gain that day. It is so rare for all 30 stocks to go down at once that we did not see it happen even at the very lowest point. Did it ever happen? Yes, on July 19, 2002, each of the Dow industrials posted a loss on the same day. There was a clear signal to astute investors to buy the Dow at 8019 or the S&P at 847. Bloomberg radio announced the news after the market closed because it is so unusual to see this event. Dow Jones & Company, the owner of this index, has daily closing prices of all 30 stocks on its web site at
www.djindexes.com, and Appendix 9.1 lists the two days in question. Abacus Analytics in Norwalk, Connecticut, examined the data and confirmed that July 19, 2002, was the only day between 2000 and 2004
on which all 30 Dow industrials fell together.