The Week in Review: 7/15/07 to 7/21/07
Was it something I said?!
The markets were sent reeling yesterday as the Dow have back all that it had gained during the entire week and then some! The Dow finished the week at 13,851 after falling 149 points (1.07%) on Friday, well off Thursday’s record and lower than it started the week.
The other major indices followed suit… the NASDAQ was down 1.19% on Friday and the S&P 500 was down 1.22%.
Disappointing earnings were much to blame but perhaps there was some profit-taking in there, too. Everytime the market breaks a “pyschological barrier” as it did when the Dow broke 14,000 there are people out there who are locking in some profits… for instance, if someone had been investing in a mutual fund or Exchange Traded Fund (ETF) that tracks one of the market indices, if the investor had dumped a bunch of money in around 13,000 they would be happy to sell at the 14,000 level that it reached on Thursday. It would not have taken long to lock in these kind of returns either. If you purchased a fund that tracks the Dow on April 30th when the Dow closed at 13,062.91 you would have locked in a return of around 7% in just under 4 months. Do that kind of return in a quarter and if you’re able to do it a few quarters in a row and you’re on your way to a healthy 21-28% return for the year… but most investors can’t consistently do it every quarter. Hence, when we do see those profits, we like to lock them in.
Think I’m full of it? Think I’m crazy?! There’s actually a lot of research and studies that have been predicated on this notion that most people will lock in when the see profits and likewise will hold on to a stock too long when they’re losing money because they’re hoping to regain it. It’s the same pyschological factors at play in compulsive gamblers; they think they can win it back. Of course, compulsive gamblers don’t typically cash out when they’re up… I guess that’s the difference. A smart gambler will take some off the table, for instance the amount they started with, and just play with the winnings. Alas, I digress. I didn’t mean for this to become a poker or gambling discussion. My point being I could see where a lot of people used this past week as an opportunity to cash in a nice gain.
And a lot of people get caught up in their daily lives and don’t pay attention (at least not too closely) to the daily changes in their investments. With the Dow setting a record and that being news worthy, even the investors that normally don’t pay close attention to their investments would be thinking about them when they opened the morning newspaper on Friday or when they listened to the news on the radio or in the car. When a major index breaks a milestone, it gets media attention. In turn it gets more attention from the general public, and that can either send it screaming to even further heights as we saw in the Dot Com Era or it can bring it down like it did yesterday.
Here’s looking forward to The Week Ahead. As always, I welcome your comments and feedback…