Stock market takes hit, while analysis debate heats up

Weekly Review: MAAD & CPFL Report


Market Snapshot:


Week Chg

Week %Chg

S&P 500 Index




Dow Jones Industrials




NASDAQ Composite




Value Line Index




Russell 2000




Minor Cycle* (Short-term trend lasting days to a few weeks) Positive

Intermediate Cycle* (Medium trend lasting weeks to several months) Positive

Major Cycle* (Long-term trend lasting several months to years) Positive

*Cycle status is based on S&P 500

Been there. Done that. Déjà vu all over again. Once again, confronting the vagaries of the financial markets last week, we were compelled to ask, “When does the learning process begin?” In the wake of the week’s stock market losses, we were impressed with some of the reactions to unfolding events. First came the justifications, then the predictions again. Again.

On the heels of Thursday’s 175.98 point loss and then Friday’s 318.25 decline in the Dow 30, Minor Cycle market trending took on a decidedly negative tilt. In fact, losses Thursday and Friday finished off the majority of the gains in the Dow and S&P 500 since the December 18 short-term lows. But what followed is probably only the tip of a wobbly analytical iceberg that will melt forth in the period just ahead, as many opinions dip into the well of déjà vu market history. “We’ve got a relatively favorable market. As long as the economy continues to accelerate and liquidity is still pretty strong….” Or, “…the markets are leading the fundamentals rather than the fundamentals…leading the market.” Or, “…we recently have seen some readings that point to some uncertainty.” And, our favorite, the “markets have not played out as conventional wisdom expected.”

Those comments tend to underscore why we perform our analytical chores deep in a metaphorically isolated cave while hovering over a candle with no telephone within easy reach. Only a winking computer screen with a high speed data feed is necessary. In that context, any reader of this column has probably come to the conclusion that we like to take a more basic approach to the stock market by letting market pricing reveal trend direction. The methodology is a lot like following a bird dog in pursuit of a duck. The task of digesting information becomes somewhat easier to the extent we can preclude a lot of useless opinion. In that vein, we present, again, the “Top Ten Realities of Wall Street,” a list written with Robert W. Colby, of Robert W. Colby Asset Management some years ago:

The Top Ten Realities of Wall Street:

1. The market is never wrong. Only opinions about the market are wrong.
2. The conventional wisdom of Wall Street, "Buy good stocks and hold them for the long-term," is likely to work – but only if you live forever. For mere mortals, timing is overwhelmingly important.
3. A company and the price of its stock are not the same thing. Even stocks of good companies can decline. An investor can lose a lot of money owning stock of the best firm in the world when its major stock price trend turns lower.
4. Earnings per se do not cause stock prices to rise and fall. Rather, the balance of demand and supply for the stock itself is the cause. Expectations of future earnings are but one of many factors to be weighed. Earnings news and estimates usually lag stock price action.
5. Knowing when to buy is important, but knowing when to sell is even more critical to investment success.
6. Even though there is a surplus of "investment research," unbiased and intelligent analysis is extremely rare. Such analysis is valuable in direct proportion to its rarity.
7. Without proper analysis, news, data, charts, and, especially opinions and "chat," can be harmful to an investor’s wealth.
8. An investor’s hopes and fears work against his ability to make objective and rational investment decisions. Consequently, the more an investor thinks about buying or selling, the greater the odds he will make a mistake and lose money.
9. So-called "conventional wisdom" which advocates "buying the dips" can be a short-cut to financial ruin if performed at the wrong time in a market cycle.
10. Knowing the true direction of the most relevant trend is the single most important contributor to investment success.

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