In 1987 a book was written, entitled “The Great Depression of 1990,” by Dr. Ravi Batra, an SMU professor of economics. Sadly, I bought and read that book back then. Batra was claimed as one of the great theorists in the world and ranked third in a group of 46 superstars selected from all economists in American and Canadian universities by the learned journal Economic Inquiry (October 1978). The foreword was written by world-renowned economist Lester Thurow, who said The Great Depression of 1990 is crucial reading for everyone who hopes to survive and prosper in the coming economic upheaval. The title for Chapter 7 was The Great Depression of 1990 – 96. Not only did he pronounce the beginning of it, he also proclaimed to know the end. The 1990s saw the largest bull market in history, with the Dow Industrials rising from 2700 to over 11,000 during the decade of the 1990s. By the end of the decade we were flooded with books about the never ending bull market such as: Dow 40,000 by Elias, Dow 36,000 by Glassman and Hassett, and Dow 100,000 by Kadlec. From 2000 until early 2003, we witnessed a bear market that removed most of the gains of the previous ten years with the Dow Industrials back down to about 7350.
There are 10 types of people in this world, those who understand binary and those who do not. Yes, the title is binary for 20,000. I knew the title of this article would get your attention. The financial media is possessed with round numbers more than I can remember. Back in the 70s, the Dow Industrials bounced off (resistance) of 1000 many times and it was 1983 (10+ years) before it finally broke through on the upside like a homesick angel. I’m not sure but I think intraday in 1966 it bumped up against 1000 also, but did not close there. In the past few months if you listen to the experts and talking heads, you would think approaching and crossing 20,000 on the Dow Industrials was the only newsworthy thing to talk about. Most, who actually trade, don’t think a thing about it.
This will not be about punctuation. Have you ever wondered why most of the media focuses on the Dow Jones Industrial Index? Some would say it isn’t a good measure of the overall market, including me? Yet, it does a reasonable job of representing the overall market. Same goes for the S&P 500 Index. Let me explain.
1. the act or process of diversifying; state of being diversified.
2. the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.
Relying on Webster doesn’t provide much help to investors wanting to learn about diversification. Diversification is a free lunch! I do not know who said that, but I certainly agree with it. However, let me expound on some misunderstandings regarding diversification and a related concept known as multicollinearity. Chart A (Diversification Works) and Chart B (Until it Doesn’t) speak for themselves and I have shown similar ones a few times before, but the message is always strong.
Welcome to 2017! For those of use born in the 1940s or earlier, we’re delighted to be here. In the US Equity markets, there were 3 fairly big pullbacks. They stand out in the performance chart of the S&P 500, Dow Industrials, Nasdaq Composite, Russell 2000. Looking at the data over the full year instead of just the final numbers can give you a clearer understanding; in the case of 2016, without the rally in the last 2 months, it would not have been a very good year. Returns would have been in the 2-3% range instead of the annual returns shown on the right scale.
Each year for as long as I can remember pundits, experts, and talking heads are offering their projections (guesses) about the new year and what to expect from the market. There are a few ‘techniques’ that seem to be used each year such as the January Barometer, the Super Bowl Indicators, etc. Let’s review what they are then I’ll try to shoot them in the head to put them out of your misery.
Why is it that many will believe almost anything they hear or read? You need to learn to only pay attention to the facts. Let me offer a recent real-time event and some of the wild imagination used by the experts about what happened. Malaysia Airlines Flight 370, a scheduled international flight operated by Malaysia Airlines, disappeared on 8 March 2014 while flying from Kuala Lumpur International Airport, Malaysia, to Beijing International Airport in China. The aircraft last made voice contact with air traffic control at 01:19 MYT, 8 March when it was over the South China Sea, less than an hour after takeoff. It disappeared from air traffic controllers' radar screens at 01:22 MYT. Malaysian military radar continued to track the aircraft as it deviated westwards from its planned flight path and crossed the Malay Peninsula. It left the range of Malaysian military radar at 02:22 while over the Andaman Sea, 200 nautical miles north-west of Penang in north-western Malaysia. The aircraft, a Boeing 777-200ER, was carrying 12 Malaysian crew members and 227 passengers.
In an article, I published some time ago, The Many Faces of Technical Analysts, one example was the Story Teller. I captured this idea from Barry Ritholtz when he asked the question “Are you a Trader or a Story Teller?” Parts of that section are reproduced below. In that article, I also discussed the Newbie, Hobbyist, Salesman, Practitioner, Academic, and Authors.
“The noblest pleasure is the joy of understanding.” Leonardo da Vinci
Market breadth indicators are those indicators that are sometimes referred to as broad market indicators. Probably the simplest way to think of them is to realize they generally do not refer to, or use information relating to an individual issue. Breadth will treat all stocks in an index equally. The stock with the largest capitalization and the smallest are both equal in breadth analysis. Most breadth analysis is total market related in that it deals with the complete market. A rising tide raises all ships is the more picturesque way to grasp its meaning.
My apologies to the late Darrell Royal, the University of Texas football coach who used this saying often when defending his continued use of the “wishbone T,” an offensive football formation that some were always questioning. The saying has a valuable message that is applicable to many endeavors; simply, do not forget how you got where you are. It is very appropriate to investing strategies that have long-term success.