I look at markets from a number of angles. There's the fundamental view, which is the assessment of the general condition in terms of valuations, economic conditions, interest rate trends, currencies, etc. Then there's the technical approach, which is where we consider price trends, relative strength, breadth and a host of other indicators. But I must tell you, with regard to the overall market condition, as well as, and in particular, our work with individuals, I find the study of behavioral investing to be utterly fascinating.
Here we are, staring down 20,000 on the Dow. And we can sense that clients (some), the long-term thinkers they may profess to be, are getting a little fidgety. Now, conventional wisdom says the individual at large should be throwing all caution to the wind and betting the farm on stocks right about now. And, for sure, the sentiment indicators (investor surveys) have turned decidedly bullish. But in our little world that's not at all the case, at least not in every instance. Yes, we have had folks recently show up with "new" money who seem almost desperate to put it to work in this rising market. But we've had a nearly equal number express at least some concern with the present levels of the major averages. Although I should point out that the latter are mostly questioning whether it's a good time to invest more money, as opposed to whether they should attempt to time their way out of the market.
Of course the forever lack of consensus comes as no surprise. I mean if everyone felt the same about a given level of the market, well -- in that each transaction requires a disagreement (i.e., buyer seeing attractive price, seller seeing expensive) -- there'd be no market. Nevertheless, I have always found interesting the fact that two folks can look at the same situation and form entirely different conclusions (oh, and this goes for PhD economists and market analysts as well).
Having worked with many of our clients for literally decades, I've determined that one's view of the stock market when it's reached an historic extreme (either direction) often has more to do with who one is, bless his/her heart, than it does the realities of the situation at hand: Some forever see downward trending prices as golden opportunities to load up, others see them as beginnings of ends. Some see a fresh all-time high as a breakout of a new upward trend that they must participate in, others see it as the market teetering on the edge of the steepest of cliffs and fear that the slightest of breezes will topple it into the abyss. My task is to understand the client and allocate his/her assets in a manner that minimizes the chances that he/she will impose his/her anxious self onto his/her portfolio. Mix anxiety with an investment decision and you end up with a concoction that seldom yields favorable results.
So, again, here we are pushing 20,000, and some folks are wishing, some are worrying, some are whimsical, and some are wondering if the Macy's line they're standing in will ever start moving. The latter are the blessed ones who probably only read my stuff if I can sucker them in with a catchy title. I.e., they don't sweat, nor find sweet, the market.
This week there'll be no delving into the overall market setup (that'll come your way soon in our year-end letter). Instead we'll simply gander at a weekly chart of the Dow -- where I've drawn horizontal lines at every 1,000 point milestone all the way back to 5,000 -- and ponder the meaning, or lack thereof, of bumping up against numbers ending in triple-zero: click chart to enlarge...
After moving right through five and six thousand like the proverbial hot knife through butter, the Dow bumped it's head on seven. So was it the number 7,000, or was it what had to be sheer buyer exhaustion after one of history's great bull runs? Well, in either event, we survived.
Then came 8,000. Now there's the market struggling with a thousand mark! Or I guess it could've been the Asian Currency Crisis. Oh well, whether it was numerology or Thailand's non-serviceable foreign debt that had stocks ebbing and flowing for five straight months, we survived.
Then came 9,000. A number that for sure had the market stalling, then utterly tanking, right? Well, whether it was that particular number or Russia devaluing the Ruble, defaulting on its debt, and, in the process, taking out the world's largest hedge fund Long Term Capital Management, we survived.
So 10,000 was easy peasy.
Ah, but 11,000, dang! What a mess! Beware the thousand! Yeah, well, whether it was 'the thousand' or tech stocks trading in the unbreatheable stratosphere -- leading to a bubble burst felt throughout the world -- we, after an extended period of angst, survived.
After that painful weeding out period the Dow found 9,000 easy to surmount, sliced through 10,000, once again, and then, alas, stalled, yet again, at 11,000. That 11,000 had to be the problem! Well, okay, whether it was that, or it was the market giving up its steam against six consecutive Fed rate hikes, we survived.
Made it through 11,000 in early '06, found support there a little later, then pushed through 12,000 and 13,000 relatively unscathed. I wonder how many number-focused folks found themselves fidgety as the market pressed through those milestones??
What can we say about 14,000? Well, I could get clever, but we all know it was the real estate/mortgage bubble that brought world markets/economies to their knees.
So to bring it home (call it 'writer exhaustion'), we'll dispense with the explaining of round numbers, commodity busts, sub-zero interest rates, European debt crises, China's currency woes, etc. Suffice it to say that there's nothing magical (for anyone other than perhaps day trading market technicians) about indexes hitting round numbers, even those ending in three zeroes. It's all about the prevailing conditions the market finds itself in as it reaches those milestones. And that's what we'll be exploring in the weeks and months to come.
Wishing you and yours a Very Merry Christmas!!