Last week marked the worst start to a year that the Dow Jones Industrial has ever seen. Now that the second week of the trading year is over, the Dow has officially seen its worst two-week start to a calendar year ever. This begs a huge question: what is going on? And the follow up: how long will it last?
The Dow has dropped by over 1,400 points over the last two weeks. For traders that were intent on taking advantage of the January Effect and find some quickly rising stocks across the board, this is now out of the question. Stocks of all sorts have tanked, many of them establishing new 52 week lows in the process. This goes even for stocks that people didn’t expect to suffer at all, given the current conditions.
There are the obvious places that fingers are being pointed at: crude oil and China’s nosediving economy. But are these really the culprits? History shows that when fuel prices are low, most companies thrive because it lowers the cost of doing business. Sure, many companies need high fuel costs to drive profits, but this shouldn’t affect an index as a whole. If you look at the S&P 500, only 6 percent of it relates to energy. There are materials and other companies that rely on energy for success, but this is a weak argument.
The main culprit here is consumer confidence. Traders and investors are worried about the stability of their choices, and instead of pumping money into a weak economy and reap the benefits of the inevitable price rise in the near future, they are choosing to stay out of the market completely. The direct consequence of this is what you’ve seen happening in the stock market over the last two weeks. There are some correlations between the price of crude oil and the U.S. stock market thanks to a series of connections, and when one drops, people expect the other to drop, too. In this case, the people that believe this—and there are a lot of them—are the ones causing it to happen through their actions. It is a very indirect connection, but because it has been there in the past, it is being forced to happen again as people act to compensate for it.
Yes, there are connections, and as indirect as they might be, there is a sort of snowball effect as it progresses, but that doesn’t mean that it should happen. The falling price of crude should really only affect the riskiest of stocks in the U.S. market, and this is not what we see happening. Again, this points back to the fact that confidence in the market is very low. The upside that we are seeing should be bigger than the downside, but this will not be seen until the masses realize it and the economy turns around. Until then, market psychology seems to be ruling the day, and as such, your trades should reflect this. For short term traders, like 60 second and even five minute binary options traders, this can be a hard thing to comprehend and apply in your trades. These trades rely so heavily on technical indicators, yet the technical lose all reliability when something bigger—like psychology, or panic—takes over. But as long as these trends are dominant more often than not on the given timeframes of your trades, you should be able to turn out a profit, even if it is not as mechanical and predictable as it once was. Taking out longer term trades, or going to a more predictable market, such as the Forex market (which can also be accessed with binaries), seems like a safer choice for the moment.