Baker Column: Investing in the Stock Market
I saw a meme this morning that said, “By getting in my car you are acknowledging that I am a racecar driver and it’s going to be a crazy ride.” Likewise, when we invest in the stock market, we are acknowledging that it can get bumpy at times. I think we might be starting the “crazy ride” part.
It’s easy to be overly confident when we see the Dow Jones or the S&P 500 indexes on the nightly news. But professional investors, like myself, know not to fully trust what we are seeing because the stocks that make up the indexes are not equally weighted. For example, the DOW only has 30 stocks in it and can report a positive number for the day if 3 of the big companies do well, even if the other 27 are negative for the day. What I watch for is how many companies are positive, not just a few of the big guys.
If there are a lot of stocks going up then that tells us that the overall market is doing well and is strong. If a large number of stocks are declining together then it may be showing us that the market is weaker than it appears.
The hard part of managing investments is when there are a mixture of stocks going in different directions. This type of situation makes it hard to evaluate the direction of the overall market.
We are trained to use a chart called New Highs and New Lows which shows how many stocks are making the new 52-week highs or lows. This technical chart is an indicator that shows us how many stocks are involved in the rally or in a decline at any given moment. The New Highs represent the number of stocks reaching new 52-week highs and the New Lows represents the number of stocks traded at new 52-week lows.
What I am seeing right now is fewer stocks having positive momentum and fewer stocks hitting their 52-week highs during the most recent all-time high for the S&P 500 on August 16. This could suggest that a correction in stock prices is coming. Though I think we might have a correction in the coming weeks I don’t see the makings of a new bear market (big drop).
Some of the negatives happening right now that could bring about a correction are:
- Slowing economic growth
- A drop in consumer confidence
- Higher-than-expected rise in prices
- The possibility of the Fed’s tapering bond purchases
- COVID numbers increasing
- Fallout from the difficult Afghanistan withdraw
If the market gets volatile, expect investors to move toward the stocks that are more stable, such as utilities, consumer staples, and health care. There will also be investors who have cash and will “buy on the dip” which will prop the market up at times making the market bounce up and down some.
I get the race car driver analogy. I’m not saying I have a lead foot, but my attorney did tell me once I was his “most consistent client!” So, I understand crazy rides. I don’t think we are going to crash, but put your seatbelt on because it might get interesting if those negatives above don’t get worked out.
Have a blessed week!