Is the stock market really back? I don't want to be a lemming.Another thought provoking article by Ernie McDaniel - as seen in Forum News. |
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Before I get more into that, let me make sure I understand what you're asking. You want me to predict the future movements of the stock market?
Do you perhaps ask your broker to do the same? Based on my observation, some brokers themselves choose to believe the most positive predictions and to become what I call stock market cheerleaders; otherwise, they must dash customers' hopes…not an easy thing to do. For delivering possible bad news, for advising that you the customer not invest, a broker gets get paid what? Bottom line: Some brokers tend to join the stampede, if not lead it, over the cliffs.
Here's an interesting bit of information from the American Association of Individual Investors (AAII). The organization does regular surveys of its members, a group of investors more informed and independent than average. Who's bullish, these investors are asked? (Who has positive expectations of the market?) And who's bearish? (Who has negative expectations?) A simple percentage is then calculated. The highest percentage of those surveyed ever to be bullish was 75%. This was on January 6, 2000…just before the stock market began its long, miserable decline.
Okay, referring to the same ongoing AAII survey, when was this group of AAII members least bearish? Answer: On August 21, 1987, there were only 6% bears…just weeks before the “Crash of '87”. I repeat, these are generally better informed investors than average. They are less likely than average to be led blindly by a broker, and still… So let's not stone the cheerleader brokers too badly. People may be bad investors with or without brokers' help.
It is impossible to predict accurately the future of the stock market (or bond market either, for that matter). This is true for the short-term. This is true for the long-term. One can make guesses - I repeat, guesses - about the future based on the past. My observations suggest that many investors…and their advisors…make short-term predictions by extending the current trend into the future. But trees don't grow to the sky, and holes don't sink to China.
Better guesses can perhaps be made for the long-term based on past long-term trends - but these too are nevertheless guesses. Based on past long-term trends, called “secular” trends, we entered a secular bear market in 2000 that may last for a decade or two. That would imply that investors have 5 to 15 years of future secular bear market to face.
For the duration of secular bear markets, stock prices may be quite volatile. During the last such trend, from 1966 to 1982, the market (referring to the DOW) swung down and then back five distinct times, each drop ranging from -24% to -45%. After 18 years, the market had only reached its starting point, and after quite a gut-wrenching rollercoaster ride. Furthermore, due to inflation, the value of a dollar had dropped to thirty cents during the same period. In other words, investors who simply rode out the stock market as a whole lost their…well, you pick the metaphor. (And did you know the annualized rate of core inflation for January, 2005 was 9.6%?) Information from Dow Theory Letters
A useful indicator of the direction of the market in the past has been the number of insider sales relative to buys. In other words, the question is asked, are company executives, each of whom we might assume is in the know about his own company, buying or selling that company's stock? After all, who would sell a large amount of his stock when he has “inside information” that his company is doing well. And who would buy his company's stock when he expects the company to do poorly. This “insider” trading information is legally available and, without getting into detail, the recent ratio of sells to buys is 55 to 1, the worst it's been in years. Information from the Oxford Club
While your question about the future of the market has no answer that isn't based on conjecture, there are helpful methods for investing which are not based on predicting the future of the market as a whole. There are also strategies that avoid market risk altogether, were you to want to steer away from the lemmings and bulls and bears, and to, like a cat, strive to land on your feet.
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