I hope you celebrated and enjoyed today. The Stock Market is certainly acting like it's Halloween. Why is it acting like it is psycho where it goes down even with good news? Normally when this happens some large issue looms in the darkness.
Earning season is in full swing and most companies are reporting better than anticipated earnings and projecting that revenue and earnings will continue to increase as the economy is improving. Almost all companies are upbeat about the future. How did the Stock Market celebrate this good news, mostly by going down, very strange.
On Thursday, the GDP growth for July through September was 3.5%, better than anticipated and the Stock Market rose 2%. On Friday, other economic data is issued that is in-line with expectation and the Stock Market dropped 2.5%. Lots of experts gave their justification for this psychotic behavior, none made sense to me. The only thing that makes sense to me is fear in the overall business environment associated with uncertainty with health care legislation. I am not sure how effective the proposed 1900 page legislation will be but the lack of clarity makes investors nervous.
What does a smart investor do when things get unclear, stay with the plan. Perhaps you saw the news that the average 401(k) account balance has recovered and returned to the level of 2007. The joke of the 401(k) being a 201(k) is no longer true. How did this happen? Investors stayed with the plan, kept buying when things went down, aka on sale, and made lemonade from a lemon.
My guidance during the last few weeks has been that the Stock Market has a floor and that the rate of recovery would be more normal going forward. We are entering the next phase in the business cycle and companies are announcing plans to hire people. The news in the local paper suggests that the unemployment rate will be coming down sooner than later. While the Stock Market may decline further, it will be NOTHING like what we have already gone through, so relax. The Stock Market will recover in the long term and a higher high should be reached in a couple of years.
Bottom Line: Stay with the plan and relax. Keep investing using a business cycle strategy and avoid the noise and you will be rewarded in the long run.
I mentioned WWEE and investing in it. The data from companies in this segment showed this trend is alive and well, wireless traffic continues to grow around the world. Also a recent FCC ruling on Net Neutrality, probably the most significant unreported news this year, that keeps special interest barriers from internet growth will keep this trend alive and well.
Showing posts with label Stock Market. Show all posts
Showing posts with label Stock Market. Show all posts
Saturday, October 31, 2009
Wednesday, November 26, 2008
Stock Market Capitulation
The stock market seems to have periods when it acts somewhat logically and periods when it acts on pure emotion. When logic goes out the window and emotion is the driving force then the market it at a top or at a bottom. When it market reaches the bottom it is called capitulation or the point when investors give into emotion and essentially throw in the towel.
How can you tell when capitulation occurs? Here are 5 signs:
How can you tell when capitulation occurs? Here are 5 signs:
- Wild swing during the day. The events of October 10th represent this nicely. The Dow opened down big and kept going down which means that people were selling just to get out and in the afternoon a large rally happened where institutional buyers saw it as a golden buying opportunity. A previous blog indicated that this looked like a market bottom and it was time to buy. October 10th gave us the largest 1 day price swing in the history of the Dow. It was massive selling by people who had finally had enough and emotionally had to get out.
- Another sign is when the common belief is that it is going to keep going down and any sense of reason is discarded. For example, on Monday November 24th, when the Dow was about 8,000 CNBC reported that about 70% of people who responded to a survey question thought that the Dow was headed to 6,000. Now many experts have said that now was a great time to buy. However, the people who are investing based on emotion have an underlying belief that it will keep going down regardless of the number.
- When you read it in the newspaper that long time investors have quit. For example, the Monday November 24th Wall Street Journal had an article: "Fear and Frustration: Some Investors Quit." The article gave examples of people who had been long time investors in the stock market and finally could not take it anymore and walked away.
- When bad news occurs and the market keeps going up. The news in the Tuesday November 25th Charlotte Observer was that home sales had fallen more than expected in October. On Monday November 24th it was reported that existing home sales dropped on average 3.1% nationwide during the month of October. In the past, news like this would have send the Dow tumbling down. In spite of this news the Dow rose.
- When you are tired of hearing about it, can not turn on the news, and physically feel sick to your stomach. This is a good indicator that you are at the point of capitulation and the question is will you capitulate or not.
What does this mean? If you have not already changed your investments to prepare for a recovery in the stock market now would be a good time to do it. A recovery always follows capitulation.
Monday, April 14, 2008
The Stock Market and a Recession
It seems that the main economic question in the media is whether or not the United States economy is in a recession. The answers from the experts, including the political pundits, are not conclusive. In fact, different experts give us different definitions for the word “recession”.
The real question for an investor is: How does the stock market perform in a recession? A recession is a normal part of the business cycle and does tend to occur at least once a decade. If recessions occur periodically, then we can study them and learn how to invest when one occurs.
Investors have the option to purchase stock in an individual company or a grouping of stocks in an index. The performance of a stock index invested in the largest 500 U.S. companies, also known as the S&P 500 index, is shown for the last 5 recessions.
S&P 500 Index Performance During The Past 5 Recessions
Overall Recession Period: # of Months//First Half//Second Half//Total
December 1973 - March 1975:16//-17.4%//5.1%//-13.1%
February 1980 - July 1980:6//-6.9%//14.5%//6.6%
August 1981 - November 1982:16//-14.5%//23.7%//5.8%
August 1990 - March 1991:8//-9.5%//16.5%//5.4%
April 2001 - November 2001:8//4.4%//-5.9%//-1.8%
Average Since 1953 - 1954: //-8.6%//13.2%//3.1%
Source: Citigroup Global Markets
Each recession is unique and the length, severity of the downturn, and magnitude of the rebound cannot be predicted. The period from December 1973 – March 1975 had the largest downturn at 17.4%. The latest downturn in the S&P 500 index started in October 2007 and has gone through March 2008 with about a 20% reduction in value, eclipsing the previous mark. If you believe that we are in a recession, the data says that a 20% decline is about as bad as it gets.
Generally, the S&P 500 index does perform better in the second half than the first half of a recession. An investor needs to understand the reasons why this can occur. Insight can be gained by looking at market timing, leading versus lagging indicators, and the relationship of the S&P 500 index with a change in interest rates.
Market Timing
No announcement occurs when the S&P 500 index is at the top or bottom of a cycle. History tells us the date and value when the top occurred and when the bottom occurred. In fact, the low of March 2008 may not be the low of the cycle. We only know the dates for the first half and the second half after the recession is over.
When the S&P 500 peak occurred in October 2007, no warning signs flashed on the TV screen or were printed in the newspaper. If a prophet did say it, would an investor believe it? Human nature tells us probably not.
It is hard to comprehend the idea that stocks should be sold when the news is good. It is equally hard to comprehend the idea that stocks should be bought when the news is bad. What is the bottom line for an investor? You cannot time the market.
Leading versus Lagging Indicators
The official announcement of entering a recession or leaving a recession is a lagging indicator. At some point in the future, an economist will tell us the date when a recession started, when it ended and the halfway point. Do not use a lagging indicator to predict the future.
The S&P 500 index is more of a leading indicator because investors are making buy and sell decisions on a value in the future. This most recent decline in the S&P 500 index is suggesting that our economy is in a recession.
An investor should not use the official announcement that we are in a recession to buy or sell stocks or the S&P 500 index. Why? A lagging indicator cannot predict the performance of a leading indicator.
Relationship with Interest Rates
As the economy slows down, the Federal Reserve lowers interest rates. As the interest rate drops, the return on a bond, CD, bank account, or money market account goes down, making them less attractive to an investor. People are more attracted to these types of investments when the interest rate is high and less attracted when the interest rate is low.
As the interest rate and the S&P 500 index fluctuate, an investor considers the appropriate to move from one investment alternative to another. In a recession when both the interest rate and S&P 500 index price have gone down an investor will consider the right time to purchase stock or a stock index. This occurs when the interest rate is sufficiently low and the price of the S&P 500 index has gone down enough in value that an investor believes the future reward of owning the S&P 500 index is worth the risk of it going down even further.
This suggests that an inverse relationship exists with interest rates and the future direction of the S&P 500 index. Higher interest rates tend to make fixed return assets, like bonds, more attractive and the S&P 500 index less attractive. The reverse happens for lower interest rates.
Summary
A long-term investor should realize that recessions do occur. An announcement that it has occurred is not a good indicator of the future direction of the S&P 500 index.
Is now a good time to buy the S&P 500 index? Yes, relative to October 2007. Since the value of the S&P 500 index is about 20% lower than in October 2007 it means that it has essentially gone on sale. If you were happy to buy it in October 2007, you should be even happier to buy it when it is cheaper. Also the drop in interest rates from October 2007 until now makes the S&P 500 index more attractive.
Human nature tells us that it is more difficult to purchase the S&P 500 index when the news is bad. Invest using data rather than emotion. Do you really want to pass up a 20% off sale?
The real question for an investor is: How does the stock market perform in a recession? A recession is a normal part of the business cycle and does tend to occur at least once a decade. If recessions occur periodically, then we can study them and learn how to invest when one occurs.
Investors have the option to purchase stock in an individual company or a grouping of stocks in an index. The performance of a stock index invested in the largest 500 U.S. companies, also known as the S&P 500 index, is shown for the last 5 recessions.
S&P 500 Index Performance During The Past 5 Recessions
Overall Recession Period: # of Months//First Half//Second Half//Total
December 1973 - March 1975:16//-17.4%//5.1%//-13.1%
February 1980 - July 1980:6//-6.9%//14.5%//6.6%
August 1981 - November 1982:16//-14.5%//23.7%//5.8%
August 1990 - March 1991:8//-9.5%//16.5%//5.4%
April 2001 - November 2001:8//4.4%//-5.9%//-1.8%
Average Since 1953 - 1954: //-8.6%//13.2%//3.1%
Source: Citigroup Global Markets
Each recession is unique and the length, severity of the downturn, and magnitude of the rebound cannot be predicted. The period from December 1973 – March 1975 had the largest downturn at 17.4%. The latest downturn in the S&P 500 index started in October 2007 and has gone through March 2008 with about a 20% reduction in value, eclipsing the previous mark. If you believe that we are in a recession, the data says that a 20% decline is about as bad as it gets.
Generally, the S&P 500 index does perform better in the second half than the first half of a recession. An investor needs to understand the reasons why this can occur. Insight can be gained by looking at market timing, leading versus lagging indicators, and the relationship of the S&P 500 index with a change in interest rates.
Market Timing
No announcement occurs when the S&P 500 index is at the top or bottom of a cycle. History tells us the date and value when the top occurred and when the bottom occurred. In fact, the low of March 2008 may not be the low of the cycle. We only know the dates for the first half and the second half after the recession is over.
When the S&P 500 peak occurred in October 2007, no warning signs flashed on the TV screen or were printed in the newspaper. If a prophet did say it, would an investor believe it? Human nature tells us probably not.
It is hard to comprehend the idea that stocks should be sold when the news is good. It is equally hard to comprehend the idea that stocks should be bought when the news is bad. What is the bottom line for an investor? You cannot time the market.
Leading versus Lagging Indicators
The official announcement of entering a recession or leaving a recession is a lagging indicator. At some point in the future, an economist will tell us the date when a recession started, when it ended and the halfway point. Do not use a lagging indicator to predict the future.
The S&P 500 index is more of a leading indicator because investors are making buy and sell decisions on a value in the future. This most recent decline in the S&P 500 index is suggesting that our economy is in a recession.
An investor should not use the official announcement that we are in a recession to buy or sell stocks or the S&P 500 index. Why? A lagging indicator cannot predict the performance of a leading indicator.
Relationship with Interest Rates
As the economy slows down, the Federal Reserve lowers interest rates. As the interest rate drops, the return on a bond, CD, bank account, or money market account goes down, making them less attractive to an investor. People are more attracted to these types of investments when the interest rate is high and less attracted when the interest rate is low.
As the interest rate and the S&P 500 index fluctuate, an investor considers the appropriate to move from one investment alternative to another. In a recession when both the interest rate and S&P 500 index price have gone down an investor will consider the right time to purchase stock or a stock index. This occurs when the interest rate is sufficiently low and the price of the S&P 500 index has gone down enough in value that an investor believes the future reward of owning the S&P 500 index is worth the risk of it going down even further.
This suggests that an inverse relationship exists with interest rates and the future direction of the S&P 500 index. Higher interest rates tend to make fixed return assets, like bonds, more attractive and the S&P 500 index less attractive. The reverse happens for lower interest rates.
Summary
A long-term investor should realize that recessions do occur. An announcement that it has occurred is not a good indicator of the future direction of the S&P 500 index.
Is now a good time to buy the S&P 500 index? Yes, relative to October 2007. Since the value of the S&P 500 index is about 20% lower than in October 2007 it means that it has essentially gone on sale. If you were happy to buy it in October 2007, you should be even happier to buy it when it is cheaper. Also the drop in interest rates from October 2007 until now makes the S&P 500 index more attractive.
Human nature tells us that it is more difficult to purchase the S&P 500 index when the news is bad. Invest using data rather than emotion. Do you really want to pass up a 20% off sale?
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