Wall Street Lingo Translated
For most people trying to get a handle on the
world of Wall Street, the task of working one’s way through the mass of
available information is difficult enough, but when most of it comes with
terminology that’s anything but obvious, the task can be overwhelming. With that said, here are a few plain English
explanations to help you understand.
Bubbles
When the market averages appear to be rising well above
historical valuation ranges, this is referred to as a bubble. The best-known bubble of recent decades was
that of the dot.com era at the turn of the millennium. That was a time when concepts were viewed as
more important than underlying progress in sales and earnings. Not surprisingly, the follow-up to the
dot.com bubble was a decade in which the market averages gained little ground,
allowing increasing corporate profits to climb sufficiently to return
valuations to normal.
Bull Market and Bear Market
The acknowledged definition of these phrases is a 20% gain or
loss, respectively, from the latest inflection point (major change in
direction) of the market. A drop in the
Dow Jones average from 35,000 to 28,000 would signal a bear market. If the Dow then rose from 28,000 to 33,600,
that would signal a new bull market. In
both cases, however, much of the rise or fall would have taken place before
reaching the signal point. Declaration
of a new bull or bear market is not a worthwhile basis for buying in or bailing
out.
Dead Cat Bounce
During periods of extended market weakness, there are occasional
days of apparent market strength. They
take place now and then until the market regains its footing and resumes its
long upward course. They usually do not
signal a change in the market’s direction.
Dogs of the Dow
This is a strategy that focuses on the 10 highest-yielding
stocks in the Dow Jones Industrial Average.
Every year, the portfolio is rearranged to maintain that focus. It is, essentially, a concentration on the
best values since high dividend yields go hand in hand with low
valuations. Over extended periods of
time, the results of this approach have tended to be better than average, but
there have been multiyear spans when the Dogs approach has underperformed.
I did a 20-year study of the high dividend approach using the
highest dividend yielding stocks (10% of the total = 50 stocks) in the Standard
& Poor’s 500 Index. The result: Over
the whole period, the highest returns were from the highest yielders, but as
was the case with the Dogs strategy, there were shorter times when the approach
was less successful.
Flight To Safety
Periodically, especially during periods of market weakness,
investors will bail out of equities and redeploy to the highest quality
investments, e.g., Treasury securities.
Market Correction
A correction takes place when the market average drops more than
10% from its latest high. Over time,
corrections have taken place in at least two out of every three years. Most of the time, a market correction does
not lead to a bear market.
Priced For Perfection
See “Bubbles”
Questions? Please contact me at nrwayne@soundasset.com
N. Russell Wayne, CFP
Sound Asset Management Inc.
Weston, CT 06883
203-222-9370
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