How to Survive a "Split Personality" Stock Market

Once again, the stock market has gone Jekyll and Hyde on investors.

Even the biggest, most visible stocks on the market are dealing with split personalities. Just dig into the Dow Jones Industrial Average and you’ll see exactly what I’m talking about. For most of the year, half of the Dow stocks were blasting higher—while the other half sunk deep into the red.

Now that the smoke has cleared from the summer correction, we’re starting to see that same pattern emerging. The Dow’s split personality is back. And the big board’s winners are separating from the pack once again…

On the surface, the Dow is soaring. Ever since the major averages found their 2015 lows in late August, the Dow has ripped higher. After an especially strong October, the Dow is even beating out its large cap cousins over at the S&P 500…

The Dow is up nearly 13% since late August, while the S&P 500 has jumped a little less than 11%. But as you’re about to see, not all gains are created equal…

Throughout 2015’s choppy trading sessions, we’ve kept a close eye on the Dow Jones Industrial Average. And from the beginning of the year, the winners and losers theme became apparent.

Here’s a quick recap:

On July 1st, exactly half of the Dow Jones Industrial Average components—that’s 15 stocks— were positive on the year. The other half of these stocks was in the red, so the winners and losers balanced each other out perfectly. The Dow was just slightly in the red for the year. So if you sought out the strongest of these stocks, you found yourself sitting on some sweet gains (If you’ve been following along at home, you know that’s what we were doing most of the year).

But the late summer correction put the brakes on even the beefiest Dow trades. By the middle of September, there were only four Dow stocks up double-digits on the year: Home Depot, Nike, UnitedHealth, and Disney. Put all 30 of ‘em together, and the Industrials were down almost 8% at the time.

But thanks to the recent rally, the winners and losers Dow is back in action…

Here’s an update on where we are now:

Twelve of the 30 Dow components are now up at least 10% year-to-date. But before you bust out the champagne, you should also know that 7 Dow stocks are down at least 10% on the year.

The lesson? You can’t just load up your shopping cart with Dow stocks, sit back, and watch the rising tide fill your pockets. That’s just not the way the market is operating this year. Instead, you have to be choosy when it comes to what stocks you’re buying—even if the averages are rallying.

Think about it. Would you rather own shares of Home Depot or Walmart? Both are household name mega-caps. And both are Dow components. Walmart is down about 30% year-to-date. Home Depot has gained 22% in 2015 and is sitting near all-time highs (of course, you’ve had a chance to ride a big chunk of this rally for gains since July).

Bottom fishing will only get you burned in this market. Buying an index fund will also lead to choppy results. The solution? Stay choosy and ride the strong stocks and you’ll easily top the Dow’s 2015 returns… no matter what.

Sincerely,

Greg Guenthner
for The Daily Reckoning

 

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