New Highs!
Unless one lives in a cave and said person was asleep yesterday, the stock
markets in the USA made new all-time highs.
Small Caps out-performed.
Surprised?
With all the dooms day prophets around, it may have been
surprising. Hitting a new high very
likely gets your worried.
If so you are not alone.
Most everyone is still worried.
Traders and investors seem to hold a common belief that if we are
setting new highs, there cannot be much upside potential.
Trading and Investing for whatever the reasons we invest,
is a game of probabilities. There are
millions of people and organizations investing; some think the market will go
up; some think the market will go down.
Price explores where this ocean of investors think there is value. Yes, the daily price in the market is nothing more than an
auction that explores where people will buy and sell.
Your history in investing indicates your success at
determining your ability to make a decent return.
We hit new highs (last Friday and Monday). Sixty-three times since 2009, the stock
market (S&P 500) has closed the week with a new 52 week high. That is 63 different Fridays the stock market
closed higher.
If you are a long time (not necessarily long-term)
investor, if you had sold all your stocks at any one of those 63 closes, you
would very likely be unhappy now.
In academic theory, we can read over and over again why the
market is efficient, and therefore, we should not have trends. Yet trends continue to exist, and academic
theorists continue to explain away trends.
They are right, however, in that the market is mean-reverting. In general, this means that prices will
revert to their average over time. You
and I do not have to invest very long before we learn that the USA stock market
reverts to the 200 Day moving average over and over. There is nothing magical
about 200 days. The average is reported on over
and over, and nearly every investor follows that average. The consequence is that trader and investor
behavior tends to change at that average.
However, note, that in the strong bull market we now enjoy,
the 200 Day MVA line's slope is up. It
will continue to be up even after the price penetrates below it, and stays
there for awhile.
Buying new highs is a surprising (maybe) winning
strategy. This is the basic strategy of
Momentum Trading. The strategy
out-performs the buy low investors since the inception of the USA stock
market. (Yet, I can hear anyone who
stumbles across this blog. Warren Buffet
buys value stocks (buys low), and holds forever. Many analysts recommend this strategy. Yes, that works as well, and therein lies the
conundrum of the retail trader; yes? no? maybe?
What should we do?)
What should We Do?
You and I should have a plan and stick to it. We should know when and why to enter an
investment. We must have an exit
strategy. We must use asset
diversification. We must rebalance our
portfolio at least once a year. At the
time of rebalancing, we should "audit" each and every asset. Is the investment thesis still valid? If not, liquidate, and buy something
better.
What am I suggesting?
Don't worry about new highs. Have
an investment strategy, and stick to the strategy.
History suggests that new highs are better than new lows
for most all retail investors, and new highs are not a reason to sell (but not
a reason to buy either unless you are a momentum trader). Making a new investment is based on your strategy. Value Investor's strategy and fundamentals are different than Momentum Traders technical analysis.
Long-term investors should love new highs. Why is this?
Because over time, stocks have an inherently upward bias.
Daily prices are more or less random - some up some
down. Price explores value, and Mr.
Market is schizophrenic, making price basically random. Over the long
term, stocks tend to go up. Over 10
years or more, with asset diversification you have a better than 90% chance of
making money (assuming you stick to your discipline).
There will be a new high eventually, and then there will be
a major correction. When will that
correction take place? The answer: no
one knows, but investment banks world-wide are spending billions of dollars in
investment research to find out. At
least what they publish to the general public, they are no better at calling a
"top" or "bottom" than economists are about calling the
economy.
Zew Economic Sentiment
Germany's ZEW Economic Sentiment reading dropped to 33.1
from 43.2 and now stands at its lowest level since January 2013.
Wall Street Journal reported today that Bundesbank is open
to significant ECB stimulus if inflation decreases. Confusing signals between ZEW and Bundesbank
for the normal investor.
New information This Morning
Retail Sales - uninspiring
Core Retail Sales Declined in April by .2%
(uninspiring).
Is it possible? Bad
news is Good news again?
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