Dependable Dow hits bumps

Beware of the Dow!

Until recently, it’s been a refuge for harried investors in these troubled times. While the NASDAQ crumbled and the S&P 500 slumped into bear market territory, the Dow remained as solid as the Rock of Gibraltar, a beacon of hope amidst the storm.

The other day I was reviewing the performance of various index funds over the 12 months to the end of February. In almost every case, they were in negative territory, with the NASDAQ funds of course being the most badly battered.

The only exceptions were index funds based on the Dow Jones Industrial Average. The healthy gains they showed over the period stood out in sharp contrast to the results of the funds based on NASDAQ, the S&P 500, the Wilshire 5000, the TSE 300, and the S&P/TSE 60.

Investor pessimism
But now even the Dow has succumbed to investor pessimism. In the fourth week in March, the DJIA was off 18.9 per cent from its high of last year. Technically, that means it is not yet officially in bear market territory – that requires a drop of 20 per cent or more. But only a rally and a good Friday performance kept it from slipping below the lin

&t;>During RRSP season, I gave a number of seminars across the country. My message was the same at all of them:

  • Don’t expect a quick rebound in the NASDAQ.
  • Beware of weakness in the broader markets.

Bear country
We’ve now seen these forecasts become reality, and I don’t believe the process is over. The Dow is not in bear country as this is written, but I expect it will be soon.

Remember that NASDAQ rallied back strongly after its initial slump in the early spring of 2000, leading many investors to believe that the worst was over. As it turned out, that was not the case.

Historically, bear markets have three down legs. The NASDAQ is now in stage three. The Dow, however, is only in stage one. If you are a short-term investor, you may want to take advantage of the current rebound to lighten your positions. Then watch for the buying opportunities that will materialize in the coming weeks.
Adapted from the March 26 edition of the Internet Wealth Builder, a weekly e-mail financial newsletter edited and published by Gordon Pape.