Unit 3: Indicators for Investors

Mr. ElsesserWall Street I

What are Stock Market Indicators?

Help predict events within the stock market. Dow Jones Industrial Average (DJIA) Standard and Poor’s 500 (S&P 500) Wilshire 5000 Russell 1000, 2000, 3000 NASDAQ

Indicator: Dow Jones Industrial Average (DJIA)

An index of 30 blue chip corporate stocks. Most companies are listed on the

NYSE Created in 1884 by Dow & Jones DJIA is the oldest and most popular

stock indicator

Charles H. Dow Edward D. Jones

The Original 12 of the DJIA American Cotton Oil American Sugar American Tobacco Chicago Gas Distilling and Cattle Feeding General Electric Laclede Gas National Lead Tennessee Coal & Iron North American U.S. Leather U.S. Rubber

CURRENT COMPANIES OF THE DOW 30:

http://money.cnn.com/data/dow30

DJIA Historical ChartDJIA Historical Chart

The Dow Performance at the onset The Dow Performance at the onset of Major National Security Eventsof Major National Security Events

Event Date Day

The Next Trading Day

6 Months Later

1 year Later

USS Main Explodes

2/15/1898

Tuesday -2.14% 14.91% 24.90%

Lusitania Sinks 5/17/15 Friday -4.54% 36.01% 32.65%

Pearl Harbor 12/07/41 Sunday -3.50% -9.48% -1.37%

Korean War 6/25/50 Sunday -4.65% 2.36% 9.34%

Sputnik Launched

10/04/57 Friday -2.01% -4.59% 15.60%

Cuban Missile Crisis

10/22/62 Monday -1.85% 25.05% 31.41%

Kennedy Assassination

11/22/63 Friday -2.89% 12.04% 21.58%

Vietnam Conflict 2/26/65 Friday -0.41% -0.81% 5.48%

Watergate 8/1974 August -1.59% -10.74% 2.53%

Iran Crisis 11/04/79 Sunday -0.77% -0.32% 14.44%

The Dow Performance at the The Dow Performance at the onset of Major National onset of Major National

Security EventsSecurity EventsEvent Date Day

The Next

Trading Day

6 Months Later

1 year Later

Reagan Shot 3/30/81 Monday 0.26% -14.56% -17.12%

Hostage in Grenada

10/25/83 Tuesday -0.69% -7.10% -3.31%

Panama & Noriega

12/15/89 Friday -1.53% 7.17% -5.32%

Kuwait Invasion 8/2/90 Thursday -6.31% -5.81% 3.69%

Somali Crisis 12/4/92 Friday 0.57% 7.80% 12.63%

WTC Bombing 2/26/93 Friday 0.17% 8.41% 14.07%

Oklahoma Bombing

4/19/95 Wednesday

0.68% 14.92% 32.46%

Terrorist Attacks 9/11/01 Tuesday -7.12% -12.56% -8.32%

America Strikes Back

10/7/01 Sunday -0.57% -1.53% -5.53%

OTHER INDICATORS:

More Stock Indexes

2. Standard and Poor’s 500 (S&P 500)Index of 500 key stocksMuch broader base of

companies3. Wilshire 5000

4. Russell 1000, 2000, 3000

Index of 5,000 common stockBroadest market indexStocks are traded on the NYSE,

AMEX and OTC

2. Standard and Poor’s 500 (S&P 500)Index of 500 key stocksMuch broader base of

companies3. Wilshire 5000

2. Standard and Poor’s 500 (S&P 500)Index of 500 key stocksMuch broader base of

companies

Index of 5,000 common stockBroadest market indexStocks are traded on the NYSE,

AMEX and OTC

3. Wilshire 5000

Index of 500 key stocksMuch broader base of

companies

4. Russell 1000, 2000, 3000

Index of 5,000 common stockBroadest market indexStocks are traded on the NYSE,

AMEX and OTC

Index of 5,000 common stockBroadest market indexStocks are traded on the NYSE,

AMEX and OTC

Index of 500 key stocksMuch broader base of

companies

Index of 5,000 common stockBroadest market indexStocks are traded on the NYSE,

AMEX and OTC

30 Stocks in the S&P 500Abbot LaboratoriesAdvanced Micro DevicesAetna Life & CasualityAirTouch CommunicationsBall EntertainmentBausch & LombBlack & Decker Corp.Campbell SoupCaterpillar Inc.Chrystler Corp.Delta AirlinesDigital EquipmentExxon Mobil Corp.Federal ExpressFirst Data Corp.

Green Tree FinancialGTE Corp.Lockheed MartinMicrosoft Corp.Micron TechnologyNike Inc.PepsiCo Inc.Reebok InternationalSears, Roebuck & Co.3Com Corp.Unisys Corp.ViacomWal-Mart StoresXerox Corp.Yellow Corp.

5. NASDAQ Composite Index

Comprised of 3078 stocks Mostly technology stocks Highly volatile

Current Companies on the NASDAQ http://dynamic.nasdaq.com/dynamic/

composite_1.stm

Indicator: Bull Market

A period of time that the stock market is going up.

Investors are more likely to keep investing in the market

Buying on margin can increase gains in a bull market.

Indicator: Bear Market

A period of time that the stock market is going down.

Investors tend to sell their securities. Investors do not put money into the

market. Selling short can increase gains in a

bear market.

Indicator: Pigs of the Market

A greedy investor who will try to make every last cent of a gain on an investment.

May end up with losses. Timing is everything.

INDICATOR:The Federal Reserve Bank(THE FED)

Created in 1913 by an act of Congress

Nations central bank

Regulates banks throughout the country

Controls currency & money supply

How does The FED regulate the money supply for the country?

Raises of lowers the discount rate (to banks). Raises or lowers reserve requirements (at banks). Buys government securities in the open market,

putting new money into the system. Sells government securities in the open market,

which pulls money out of the system.

Decisions of the Federal Reserve

May directly affect the economy

May directly affect the stock market

High interest rates = tendency to put off major purchases

Where is the Federal Reserve?

Economic Indicators

Check the health of the economy Consumer Price Index (CPI) Gross National Product (GNP) Index of Leading Economic Indicators

1. Consumer Price Index (CPI)

An economic indicator calculated by the bureau of labor statistics that is used to monitor the rate of inflation.

How much is your money

worth today vs. last year?

Economy Prices *change*

1975 Milk-$1.57 Eggs-$.77 Gallon of Gas-$.57

2009 Milk-$3.29 Eggs-$2.99 Gallon of Gas-$2.85 and going up?

2. Gross National Product (GNP)

Total value of all goods and services produced by U.S. companies at home and abroad. Example: Coca-Cola overseas products would

be included

3. Gross Domestic Product (GDP)

The total value of all goods and services produced by companies in the United States.

Effect of GDP on Economy

GDP

GDP

DomesticEconomy

DomesticEconomy

3. Index of Leading Economic Indicators

12 indicators: figures on unemployment, new factory orders,

consumer spending, and housing starts, to forecast economic activity 6-9 months in advance.

Used to predict the likely end or length of an economic recession Recession:

Demand for goods and services falls and production slows within business. Unemployment increases, consumers slow spending.

Market Risk

A risk that affects prices of all stocks simultaneously. Examples:

Change in interest rates Changes in investor attitudes Sudden or unexpected event An economist on MSNBC predicts a recession

in the morning, investors may panic and sell stocks

Stock market drops throughout the day

Company Risk

A risk that affects the stock price of one company. Industry risk affects the industry Demand Up = Stock Price Up Demand Low = Stock Price Falls

What impact doesthe media have???

Impact of an Interest Rate Cut

More Borrowing

More Spending

More Demand

More JobsLow Interest Rates

Indicator: Mergers

Two or more corporations combining into one

News of possible mergers can affect stock prices

3 Types of Megers: Horizontal Vertical Conglomerate

1. HORIZONTAL MERGER Two or more companies with the same

type of business are combined Example:

Exxon & Mobil Oil combine = Exxon Mobil Sirius XM Radio

2. VERTICAL MERGERS

Merging with companies at different levels of the same business

Example:Sauce Corp. merges

with Cheese Corp. to form Pizza Corp.

CONGLOMERATE MERGER Merger between two companies with

unrelated product lines Ex.

Takeovers

Occurs when a corporation, an investor or a group of stockholders gains controlling interest in another corporation TENDER OFFER:

Tender Offer can be made to take control. Tender Offer is usually higher to stockholders than market price.

Corporate Raider

Tries to gain control of a corporation to change management.

Usually occurs when corporation is unprofitable.