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M = Market Direction: How You Can Determine It 201

or 20 years has always been extremely rewarding in the past and should con-
tinue to be in the future. However, you, as an individual investor owning 5,
10, or 20 stocks, don’t have a large size handicap. Some of your stocks can
drop substantially and maybe never come back or take years to do so. Learn-
ing when it’s wise to raise cash is very important for you . . . so study and
learn how to successfully use this technique to your advantage.

What Is the General Market?

The general market is a term referring to the most commonly used market
indexes. These broad indexes tell you the approximate strength or weakness
in each day’s overall trading activity and can be one of your earliest indica-
tions of emerging trends. They include
• The Standard & Poor’s (S&P) 500. Consisting of 500 companies, this index
is a broader, more modern representation of market action than the Dow.
• The Nasdaq Composite. This has been a somewhat more volatile and rel-
evant index in recent years. The Nasdaq is home to many of the market’s
younger, more innovative, and faster-growing companies that trade via
the Nasdaq network of market makers. It’s a little more weighted toward
the technology sector.
• The Dow Jones Industrial Average (DJIA). This index consists of 30
widely traded big-cap stocks. It used to focus primarily on large, cyclical,
industrial issues, but it has broadened a little in recent years to include
companies such as Coca-Cola and Home Depot. It’s a simple but rather
out-of-date average to study because it’s dominated by large, established,
old-line companies that grow more slowly than today’s more entrepre-
neurial concerns. It can also be easily manipulated over short time peri-
ods because it’s limited to only 30 stocks.
• The NYSE Composite. This is a market-value-weighted index of all stocks
listed on the New York Stock Exchange.

All these key indexes are shown in Investor’s Business Daily in large,
easy-to-analyze charts that also feature a moving average and an Accumula-
®
tion/Distribution Rating (ACC/DIS RTG ) for each index. The Accumulation/
Distribution Rating tells you if the index has been getting buying support
recently or is undergoing significant selling. I always try to check these
indexes every day because a key change can occur over just a few weeks, and
you don’t want to be asleep at the switch and not see it. IBD’s “The Big Pic-
ture” column also evaluates these indexes daily to materially help you in
deciphering the market’s current condition and direction.