Have Stocks Hit the Snooze Button?

On February 14th, 2013, posted in: Economic News, Newsletter by

As a passive market manager, it is out of character to watch the market closely. Markets go up and markets go down. But recent days have been interesting and deserve a comment. The market has been on a 3 month upward ascent, but has recently hit the snooze button. Many of the voodoo economists are predicting a major correction and planting seeds of doubt. Is it time to pull out your gains and sit on the sideline? As passive market investors, we know the answer, don’t we? Markets go up and markets go down. In fact, the real profit comes after a correction. This is when we want to be positioned to take advantage of the coming bounce. Interestingly, for almost two weeks now, the Dow Industrials have traded in a very tight range. How tight you might ask? Looking at the difference between the Dow’s intraday high and low; it has been 1.35% over the past 14 trading days. Looking back in history, we cannot find a time this has happened since 1986. You may remember back then, the 1986 stock market was reacting to the Reagan tax cuts. This was when the tax law changed real estate deductions and caused an enormous correction in values overnight. Many investors took a huge loss in portfolio value because Congress suddenly changed the rules related to passive losses. It caused an economic pause of historic proportions. The reaction/rebound though was a huge run-up during 1987 as money moved from real estate to the market. The run-up did not slow down until Black Monday in October, when the market fell dramatically. But then it quickly rebounded. So the question is, which way will the Dow break this time around? Is it headed for another run-up or meltdown? Look at the Wilshire 5000. It may be a precursor to a long run up to new highs.

Past performance is no guarantee of future results. Indexes are not available for direct investment.

Recent Wilshire 5000 results (index consisting of all stocks trading in the United States) show the broad market is posting all-time highs. For some reason, the Wilshire draws little attention even though it’s one of the best broad market indicators. As for the major indices, it is unlikely the Dow will stay stuck in this narrow trading range especially if the Wilshire is any indicator of significant growth. The Dow now sits just below its all-time high of 14,164. The S&P is just shy by about 3% from its all-time high of 1,565. If the Wilshire is any barometer of the future market movement, the S&P and the Dow could follow and reach their respective highs in short order. It is always fun to watch the markets and see what they are doing. As Eugene Fama postulated in his Efficient Market Theory, markets are unpredictably unpredictable. In other words, no one knows what the market is going to do day to day. What we do know is that the market prices reflect the current value and there is rarely anything left on the table. Barring some unforeseen calamity or economic event, the markets seem to be in a positive mood, at least, for the moment.

 

 

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. All investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

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