I got an email forwarded to my by Emily's father about the state of the equity markets and a pending move lower in the Dow. The email was from a service that he subscribes to. The author compared the Dow Jones to GM. Somehow there is a 4-month rule that states: In an up-trending Dow, if GM doesn't make a new high within 4 months, the Dow will correct itself.
My initial response was that this is nothing more than one of those anomalies that sometimes you can explain with some kind of outside correlation... such as: If the NFC wins the Super Bowl, the market will rally on Monday. Or, if a Republican wins, the market will rally on Wednesday. But, I still saw a little something in the chart, so wanted to explore a little more.
Regardless, I don't know if the author actually puts money behind his words. I do. So therefore, I will stick to the only unexplainable correlation when I trade:
If on the third Monday happening on a new moon cycle during the 135 Pentecostal year, an American were to be abducted by an alien while simultaneously eating an Italian gelato that was made by a Chinaman above the 145 parallel line sitting on a tree stump that is infested by flying ants, then the Dow may fluctuate to the downside by 2 points.
The timing on this particular trade is crucial. But it's dead-on-balls accurate.
Here's the chart comparing the Dow to GM:
There are some movements that are explainable that I could argue was part of a correlation. However, disregard all of it. The author missed something that completely explains all occurrences within the Dow: GM is part of the Dow and represents 1/30 of it. If GM goes down, so will the Dow.
But, my real honest to goodness reaction when I read the email was: Why bother with GM? The only real correlation that I could come up with between GM and the Dow is that the mere fact that Ken & Barbie and GM are laden with debt makes them about equal.
I firmly believe that ALL... meaning EVERY. SINGLE. COMPANY. OUT. THERE. answers to the consumer. There is not one company out there that doesn't in one fashion or another feel an effect by the pulse of the consumer. Some companies may be second tier to the consumer. But, ultimately, they are still dependent upon the consumer.
Companies do not get the economy rolling, nor do they perpetuate it once it gets going. It's all about the consumer. Period. I'll probably get about 75 emails by the end of the day with a counter argument about this. But, that's the way it is. So bring it.
With that in mind, let's look at a company that is down-and-dirty in the trenches with Ken & Barbie every single day, Wal-Mart (NYSE:WMT):
Although hardly an exact replica when compared, looks like Wal-Mart might have a stronger correlation with regards to the Dow. I have absolutely no idea about the weighting of the Dow and with the respective 30 stocks. I can only imagine that it is equally weighted.
But the Dow has moved more closely to Wal-Mart than to any other stock that I've found within the Dow. And since the consumer is king, when they start to entrench themselves, so does the Dow and every other equity index out there, since profits within the equity markets are a reflection of the consumers spending habits.