Yesterday's Market Melt Down

"The way to make money is to buy when blood is running in the streets" 
-- John D. Rockefeller, Co-Founder of Standard Oil.

When the DOW Jones Industrial Average falls 318 point in a single session as it did yesterday, it tends to get everyone's attention. Quickly. It can easily become the main news story during the nightly national newscasts and can end up on the front pages of the morning newspapers. For the veteran trader, it's just a data point in a long string of data points reaching back months and years.

Daily chart of the DJIA, 24 Jan 2014

As you can clearly see on the charts below, the DOW Industrial Average and the S&P 500 Large Cap Index actually started deteriorating during the first week of January. Anyone watching the charts would have easily seen this happening realtime. Once identified and confirmed by the RSI, the MACD  and the deteriorating ADX, it's easy to take appropriate measures. 

DOW Jones Industrial Average

S&P 500 Large Cap Index

One of those measures is to realize that when these two market indices start to falter they tend to take individual stocks with them. So noticing these charts would have sent the astute investor to the individual charts associated with their particular positions. The appropriate assessment would be based upon knowing the appropriate price point that would signal a buy in that stock and then to determine whether their individual stocks were overbought or oversold. The answer to that question would dictate the action that needed to be taken. (A really astute investor would already know that information and would have already determined the appropriate action to take as a result of this type of event).

I believe in owning dividend growth stocks but I also believe that stocks can, at times, be overbought or oversold. Most investors look for oversold equities when they are making their initial buys but they never seem to reassess their holdings to determine if they are overbought. Sometimes stocks can get ahead of themselves and even a dividend growth investor needs to take his profits and move them into another dividend growth stock that is oversold.