Why the Major Markets matter

Stock trader or crab fisherman?

If you are a fan of Deadliest Catch, imagine a trader is the captain of a 100-foot shipping vessel in the middle of the artic Bering Sea. The ship is your trading account, the crab are the public companies to invest in, and the Major Markets are the Bering Sea. That would mean a trader will send the cages down hoping to land a stock/ticker that will become a homerun. When the weather is calm, it is easier to catch a lot of crabs. However, when the winter storms get intense and the Bering Sea starts pounding the boat with wave after wave, it’s much harder to just survive, let alone catch any crab. Similarly, if the Major Markets are doing well, most of the stocks should follow the up-tread. However, if the Major Markets were ever to take a downturn, it can get real ugly, real quick.

Not being aware of the Major Market conditions can be as dangerous as heading out into a storm without the proper gear.

What are the Major Markets:

Generally speaking, though there are a number of Major Markets indices, the 3 Major Markets are: Dow Jones, S&P 500, and NASDAQ. These 3 Major Markets are composed of a number of publicly traded companies that spread across most of the key sectors/industries.

The Dow Jones, found using the ticker “DJI,” tracks the top 30 performing companies, adding and dropping different tickers as that top 30 ranking moves. The S&P 500, found using the ticker “INX,” tracks the top 500 companies, adding and dropping different tickers similar to the Dow Jones. Lastly, the NASDAQ, found using the ticker “IXIC,” tends to be technology heavy when choosing the 100 companies it contains.

Imagine the boost a ticker will get if added, or the devastation that could come for the ticker that gets removed, from the DJI, INX, or IXIC!

One thing to note is the 3 Major Markets tend to correlate regularly. If one of the 3 Major Markets is down a couple percent, it would be plausible that the other two are near the same range. A simple reason for this is the fact that the S&P 500 is so large it actually contains many of the companies in both the Dow Jones and the NASDAQ.

However, if there is ever a break in the correlation - say two of the Major Markets are up while one is down - it may be a sign that something bigger may be happening.

Do only the 3 Major Markets matter:

By no means are the Dow Jones, S&P 500, and NASDAQ the only markets that matter. From the Russell 2000 to the Wilshire 5000, there are a number of other Major Market indices that can be used to enhance a trader’s decision making. Just like the 3 Majors, any stock getting added or dropped from any market can make or break a trader’s day.

How to utilize the 3 Major Markets

As mentioned above, when the major markets are not doing well, most individual stocks will follow. Understanding the movements and correlations of all three should enhance your decision making. Ride upstream with the Markets, jump off before it plunges down the waterfall (or as close to the top as possible), and be very cautious in between. An undecisive market is generally a losing battle for even skilled traders.

TheChartReaders has made it easier with our Major Market Breakdowns and free email services.