Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Yi Yue Effect: Looking to DJIA and China


Which is more telling: 6% of the Dow, or 6% of the world?

When casual investors ask where the market is, they're usually referring to the Dow Jones Industrial Average. Yet all of the last 10 professional investors I've talked to (including myself) had trouble explaining precisely how members are added or subtracted to the DJIA.

So I finally had to ask my favorite reporter in the world. Like Shawshank's Red, he's "a guy who knows how to get stuff." His answer: "A committee that meets with no particular regularity under no strict principles."

Ladies and gentlemen, your most trusted calculation in the world of investing.

Often overlooked is the mercurial math inside that thermometer - the one investors read every day to determine stocks' health. For example, if 3M were to increase in value by 5% today, adding $1.8 billion to its market cap, that move would be worth about 20 Dow points. Each $1 move in stock price is worth about 7.9 Dow points.

On that same day, if Microsoft were to decline by the same 5%, it would cost shareholders $8.5 billion - but cost the Dow less than 8 points. Forget for a second the possibility that the maker of the sticky note I jotted those numbers on -- 3M -- has a smaller footprint than the maker of the software -- Microsoft -- on which I'm scribbling this longer note on. If all else is unchanged in the Dow, your headline would read, "The market ekes out a gain for the day; the Dow closes 12 points higher." Meanwhile, $6.7 billion was erased from it.

Needless to say, I'm less convinced than most about gaming the "January Effect," when I'm not even sure we're keeping the score correctly. But I respect history enough to acknowledge that bulls can't be happy with the worst January on record.

For context, I'm not pointing this out as a bull or bear. My firm has written an internal book of trading rules learned the hard way, with dog-eared pages of bloodstained lessons. Trading Rule #32: Remain Permanently Flexible.

In 2000, US stocks represented about 50% of the global equity-market capitalization, or roughly the equivalent of the other 110 stock exchanges around the world combined at that time. I believed we would never again see so unbalanced an allocation again in my lifetime.

I was wrong about how quickly the iceberg would melt. In a few short years, the US is down to about one-third of the world's share value.

With that in mind, I share the following possibility. Is there another market whose January effect might be important to consider as well?

That's the Chinese symbol for January; it sounds like "Yi Yue."

While a record 98.7 million viewers watched the Steelers play the Cardinals last Sunday, I was digging up a different number. To wit: When a meaningless NBA game between my hometown Rockets and the Bucks included 2 tall guys name Yi and Yao, more than twice as many people watched that game than did the most-watched Super Bowl of all time.

While much of the investing world was focused on the Dow's 9% decline in January, setting the tone for the rest of the year, China's Shanghai Composite closed the month 9% higher instead. If the shot clock didn't run out on them (the market was closed from January 23 till the end of the month), the difference would have been even more pronounced, judging by the additional 9% it's advanced since then (at least as of this writing).

Click to enlarge

The most recent data I have shows Chinese stocks made up around 6% of the world's equity-market capitalization. By comparison, about the same percentage of the Dow is made up of Alcoa, General Motors, Pfizer, General Electric, Bank of America, Citigroup, and Intel. Each of their Januarys cost the Dow a combined 188 points.

Which is more telling - 6% of the Dow, or 6% of the world?
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos