Will the Dow Go Up In Smoke?

With all the mixed data that investors have been getting over the past few weeks, it has been difficult to determine which way the economy and stock market are heading. During these periods of vague information, investors begin looking for signs of change, even if that sign is an unproven "omen."

By Jessica Alling
August 12, 2013
The Motley Fool

It's another off day for the Dow Jones Industrial Average (DJINDICES: ^DJI ) as investors try to decide which way the market will be headed without much data to rely on for support. But as the index waffles between positive and negative territory this morning, with just a 2-point gain as of 11:45 a.m., are those same investors creating the very conditions that could lead to a big market correction?

Floating omens
With all of the mixed economic data that investors have been getting over the past few weeks, it has been difficult to determine which way is up for the U.S. economy, not just the stock market. It's during these periods of vague information that investors begin looking for signs of change, even if that sign is an unproven "omen."

The Hindenburg Omen has been popping up as the latest sign that the market is bound for a correction. By measuring 52-week highs and lows, some believe that the omen is the best way to predict a sharp sell-off in the near future. The omen "works" because it signals investors' inability to determine the direction of the market, thereby sending some stocks to new highs and others to new lows.

But with every stock market prediction, there's one truth: It's not always correct. The latest cache of Hindenburg omens occurred in late May -- and the Dow has moved 2% higher since then.

Legal demons
It looks like more trouble for the banking giant JPMorgan (NYSE: JPM ) , as the FBI is now investigating the bank's London Whale trading scandal, as well as whether the bank should have warned authorities of its suspicions of Bernie Madoff's Ponzi scheme. Just the latest governmental entity to join the pack, as the Securities and Exchange Commission, Department of Justice, and New York attorney general's office are already on the scene, the FBI investigation could lead to fines and a reprimand.

Bank of America (NYSE: BAC ) is also in the process of being investigated by the SEC and DOJ over its sale of $850 million in mortgage-backed securities. Though the broadening story of JPMorgan's legal troubles has somewhat overshadowed B of A's, the Charlotte-based bank is sure to make the headlines as new information about the investigations breaks. Investors should take the news in stride, as the bank has battled with various legal troubles ever since the financial crisis -- and it's still able to make positive strides forward in both profitability and corporate strategy.

Outside the Dow, Wells Fargo (NYSE: WFC ) got some good news on the legal front last week when a Minnesotan jury found the bank not guilty of misleading investors in its securities lending program. The bank had been accused of misrepresenting the risk associated with its program, which led to investors losing millions. Wells faces several other cases on the same topic, but with the latest judgement, it's 1-1 out of the first two suits to be tried.

Legal matters are just one reason that investors are still shying away from the nation's banks as investment opportunities. And with some uncertainty in the overall market, it's no surprise that many investors are still terrified about investing in big banking stocks after the crash. But the sector has one notable standout. In a sea of mismanaged and dangerous peers, it rises above the rest as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report.

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