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FutureStarrStock Markets Slide - What the Price Charts Reveal Now
Stock markets have seen an uptick in volatility recently, which has many people on edge. But there are steps you can take to protect yourself from getting burned.
One way to predict future market direction is by studying price charts. These are often the best indicators of price movement in an upward direction.
The Standard & Poor's 500 Index, commonly referred to as S&P 500 for short, is a stock market index that tracks the performance of large-cap stocks in America. It's an established benchmark that serves as an indication of the health of the U.S. stock market.
The S&P 500 index comprises around 500 companies, each of which must meet certain criteria to be included in the index. These entities must be publicly traded and possess sufficient liquidity for investors to trade their shares on a regular basis. The list is regularly reviewed and updated quarterly.
The S&P 500 index is primarily calculated based on market capitalization, a measure of how much value each stock represents compared to others in the market. Furthermore, it uses price weighting, which involves multiplying each stock's share price by its outstanding share count.
Therefore, larger stocks are given greater weight than smaller ones. As a result, Apple, Microsoft and Amazon -- the first three companies to reach $1 trillion in market cap -- can exert greater influence over the S&P 500 than less valuable firms can.
However, the S&P 500 can be a useful asset for long-term investors as it typically provides steady returns over time. Furthermore, the S&P 500 often provides the best risk-adjusted return of all major indices.
In addition to its broad market capitalization, the S&P 500 also accurately reflects the economic makeup of America, including companies from all 11 industry sectors. At present, technology companies account for 28% of total index value.
The S&P 500 index has an impressive track record over time, but it can also be highly volatile. For instance, during the 2008-2009 financial crisis, it plunged by over 46%.
Therefore, it's essential to comprehend the S&P 500 index and its history before deciding if or not it's suitable for your portfolio. For instance, the S&P 500 serves as a benchmark for mutual funds and exchange-traded funds (ETFs).
The Dow Jones Industrial Average, commonly referred to as the DJIA, is one of the world's most watched stock market indexes. It tracks 30 stocks from large publicly owned companies in America and is managed by S&P Dow Jones Indices, a McGraw-Hill Financial company.
The DJIA is a price-weighted index, meaning it gives greater weight to stocks with higher share prices. This aligns with Charles Dow's original vision; however, some stocks may have greater influence on the index than others.
At first, the DJIA only included 12 companies - mostly industrial ones connected with railroads, cotton, gas, sugar, tobacco and oil. But over time the index has grown to include 30 names.
Companies selected for the index tend to be large and have a strong reputation, history of growth and widespread investor interest. They must demonstrate an ability to withstand market forces and remain relevant in their industry over the long haul.
Another important consideration in selecting companies to represent an industry on the DJIA is how long they have been around. The editors of The Wall Street Journal look for long-term stability in a company's shares.
Some of the newest members may have smaller market capitalizations than other components. For instance, Walgreens (WBA) has a lower cap than GE but is an established brand whose investors have followed for many years.
The DJIA is an important barometer of the U.S. economy, but it also reacts to political and social events. For example, when COVID-19 pandemic struck in March 2020, the DJIA experienced a record decline of over 3,000 points - an indicator of its vulnerability to infection.
The index may not be an exact reflection of the entire market, but it can provide investors with a useful overview of key influences on stock prices. Unfortunately, it has some detractors who claim it does not accurately reflect all publicly traded companies in America.
The Nasdaq Composite Index, commonly referred to as the NASDAQ 100, is one of the world's most-watched stock market indices. It includes roughly 500 companies listed on Nasdaq Stock Exchange that have market capitalization weighting.
The index is an excellent way to gauge the performance of the stock market as a whole, particularly if you're interested in technology stocks. It is a market-cap weighted indicator which measures overall stock performance with larger companies having greater influence on it than smaller ones.
Tech companies are the most prominent sector on the Nasdaq Composite, comprising nearly half its weight. Other key sectors include consumer services, health care and industrials.
Many investors use the Nasdaq Composite index as a gauge for how well their portfolio is performing. They can invest in either mutual fund or exchange-traded fund that tracks this index, offering a more passive way of investing with lower fees than actively managed funds.
In order to be included in the index, a company must have an active listing on the Nasdaq stock market. American depositary receipts (ADRs), common stocks, shares of beneficial interest or limited partnership interests and tracking stocks are all eligible securities for inclusion.
In recent years, the Nasdaq Composite has outperformed other indexes with total returns of more than 550% over 10 years. Furthermore, it has experienced strong growth in dividend payouts from members as well as share buybacks.
Over the past 15 years, average annual revenues for companies in the Nasdaq Composite have grown by more than $5.3 trillion - more than twice as much as S&P 500 companies and nearly triple that of Dow Jones Industrial Average companies.
The Nasdaq Composite has always been heavily weighted towards technology stocks, but it now includes large-cap stocks in other industries as well. This makes it a great place to invest in businesses that are not directly related to technology but have an innovative business model.
The companies comprising the Nasdaq Composite have undergone tremendous change over time, becoming multi-product companies with global customer bases. This has resulted in an influx of shareholder capital back to shareholders - companies now seeing more than $100 billion in share repurchases since 2013.
The Russell 2000 is one of the most well-known indices and often serves as a barometer for US economic health. It tracks 2,000 small companies with market capitalizations of less than $1 billion, in contrast to larger indexes like S&P 500 or Dow which track larger companies with larger stakes.
Rebalancing the Russell 2000 annually takes place by eliminating companies that have outgrown their respective indexes, a process known as reconstitution. This step ensures the true small-cap nature of the index remains intact.
Companies that just made it into the Russell 2000 tend to experience an uptick in share price, indicating a positive signal. Conversely, when companies that just missed making it out experience a decline in value, it can be seen as a negative indication.
Furthermore, the Russell 2000 is highly correlated with GDP growth. When GDP expands, it often outperforms large-cap stocks; conversely, during times of recession it tends to underperform them.
Investors can purchase Russell 2000 stocks through mutual funds and exchange-traded funds (ETFs) designed to passively track the index. They may also trade futures contracts.
According to a Cboe webinar about small-cap volatility, the Russell 2000 Index typically exhibits strong performance during November and December due to what's been dubbed "January Effect," when small caps tend to outperform large caps during January as investors begin their new year's planning.
Recent decades, however, this hasn't always been the case. In fact, since December 2008, the Russell 2000 has had more strength than November and experienced some of its largest monthly gains during the first two months of 2019.
The Russell 2000 index is an ideal option for investors seeking to invest in the smallest companies on the US stock market. However, identifying the best small-cap stocks can be challenging. Many investors use both fundamental and technical analysis to find suitable small-cap companies for their portfolios. They might look for businesses with high levels of profitability and low debt levels; as well as whether a firm has sufficient financial resources to weather any crisis or its business model is sustainable.