The first week of 2016 was one of the worst weeks in history for the stock market. The Dow Jones Industrial Average fell by more than 1,000 points, effectively going against the January Effect that everyone had expected after such a rough end to 2015. For those that looked to binary options as their trading source, the general theme was unpredictability. Even those that focused on the tiny technical indicators had a tough time of moving forward. This were far too shaky for these usually reliable methods of trading to gain any sort of foothold. Many people found that it was just easier to sit out for the week rather than trying to guess something that showed no signs of predictability. Others tried to hop on the downward trend and profit off of sentiment.
Short term traders that had been trying to find an easy boost to their profits were hit especially hard by this. It’s very easy to say that because January always starts out with stocks and indices moving upward that this year would do the same. This is a dangerous way to try and trade, as many have learned. The so-called January effect only works because of trader psychology. There is nothing innate within the assets that says that in January prices will go up. This is a reaction to what happens in December after uncalled for selloffs occur. 2016 was different because there are other extenuating circumstances controlling the markets right now. Something minor like the January Effect will get pushed aside or eliminated altogether when more important fundamental trends come to the front of the stage. Even those riding trends will find that their profits were made by luck and nothing else. This is impossible to replicate consistently.
There is absolutely no question in people’s minds that a drop of 1,000 points was completely unwarranted for the Dow. The U.S. economy is actually in strong shape, and the fundamental information that is released each month reflects this. The job rate is up, wages are up, companies are turning in good profit numbers, even many that were not expected to. However, with what’s going on in China, investors are nervous and pulling their cash out. A problem that does not have a hugely direct influence on the U.S. economy is hitting stocks hard. Just because this shouldn’t happen doesn’t mean that it’s not happening. It would be foolish to ignore this fact, and that means that the only good course of action is to be cautious.
For some people, this means beginning to take out long term long positions. Even if you are not an investor, this is a good way to hedge future losses for your portfolio. Traders can still look several months into the future, and the odds are very good that in three months, the Dow will be up higher than it is now. Unless something catastrophic happens to push prices down even further, there’s no reason to believe that prices should stay at this level. Looking at the companies within the Dow and their fundamental indicators is more than enough proof of this. Yes, there are some problems that might be emerging from companies like GE, Apple, and Exxon Mobil, but these are all problems that can and will be overcome. Slowing production, falling oil prices, and so on can all harm a company, but for well established businesses, these are bumps in the road. They can last months or years at a time, but this is unlikely to be the case here. Oil is the one exception, but only Exxon and Chevron will be hit hard and directly by crude’s free fall from this list of companies. Long term traders should realize this when establishing positions on an index level and act accordingly.