FLAT STOCK MARKET
It’s not what you look at that matters, it’s what you see. -Henry David Thoreau
“In moving to the woods, Henry David Thoreau sought to discover the true necessities of life and built a cabin, for the cost of $28. 12 near Walden Pond, where he lived for two years, beginning in the summer of 1845. Thoreau explains that most people become trapped in their lives. He went to the woods to prove that one could break free of the slavery and take care of his own needs.’
Retreating to a cabin by the lake allowed Thoreau to retrench and think in a more expansive fashion. This week ‘the market’ achieved new highs. Would Thoreau take that at face value? Is that true? When commentators reference ‘the market’ it sounds like all stocks are doing great.
If we take a closer look would we reach the same conclusion?
You have to understand that there is more than one market and you have to review all of them daily. The bond aggregate index also hit a new high and recently gold has been hitting new five year highs on a daily basis (you haven’t been hearing about that have you?). This is a contradiction. The strength in gold and bonds is a flight to safety, indicating lower economic growth expectations and concerns over excessive stock market valuations. (source: Bloomberg, Bloomberg Barclays US Aggregate Bond Index).
The press does investors a disservice in two ways – First, understand that the big move last week was due to the algo’s (algorithmic traders = computer trading = artificial intelligence) buying the Dow and S&P indices after Trump Tweeted that he was meeting China’s Premier Xi at the G20 meeting this weekend. The computers believe that Trump and Xi will strike a deal at the meeting. Second, the press predominantly quotes the Dow Jones Industrial Index which has drawbacks: a) it isn’t global, b) it only represents 30 companies, and c) it is price weighted and subject to distortions when a handful of companies with big stock prices have a good day.
Let’s break this down visually.
Dow Jones Industrial Average: The Dow is back to new highs, a level that has failed three times previously. The blue line across the top of this chart is referred to as ‘resistance’, a point where sellers overcome buyers (valuation reasons would be a reason). The real story is if the Dow can break resistance. So far it has failed. If it fails here it could be a big negative.
Note: If price breaks resistance we could have a europhoric breakout, which we would want to own using trailing stop loss orders to protect our principal.
Looking at broader indices that are not subject to the undue price influences of a handful of super-cap companies with a high stock price, we see things from a different perspective.
The Value Line Geometric Index is one of the broadest indexes, including mid and small cap companies; it is a ‘total market’ index. The Value Line Geometric Index is clearly in a bear market.
Most investors are diversified globally. The Dow Jones Global Index is not at a new high, having just gotten back to where it was 18 months ago.
Mid cap stocks are still in a bear trend (S&P 400 Mid Cap Index).
Small Cap stocks are in a bear trend (S&P 600 Small Cap Index).
Europe is in a downtrend.
Asia is in a downtrend.
So the market hit new highs? It’s not what you look at that matters, it’s what you see. – Henry David Thoreau
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