S&P 500: Just A Trend Follower After All
Top 5 of the Week of February 29
Despite last week’s Bloomberg data, many are still asking if we are in a bear market? Simon Maierhofer, of Market Watch, gives us insight into the four key stock market drivers to determine the answer. Steven Quint, from Seeking Alpha, then reveals “the mystery of the S&P” and compares index investing with value investing to show why it isn’t a representative average.
An interview with Michael Covel and Jim Rickards highlights why the Fed has the worst forecasting record in the world. Alex Houlding, from M&G Investments, questions whether current bearish outlooks are defining the market, or being defined by the market.
Finally, Rupert Hargreaves, of Value Walk, has us finding the perfect quality and value balance for our portfolios.
Do These Four Indicators Have the Answer?
- For first time in six years, a proprietary liquidity measure used to predict S&P 500 indicates no guarantees for further highs
- Technical indicators show that even though the decline following May’s high last year did some damage, developments are bullish
- Looking at investor sentiment, “more up side over the coming weeks/months is likely”
- With no particular “seasonalities or cycles in play”, a bear market in 2016 is more unlikely than many believe
S&P 500: Just A Trend Follower After All
- S&P 500 focuses on uptrend ‘winning’ shares and makes the most from its 10 best stocks, thriving on 2% of the index
- It’s ruthless in its disloyalty; “when a company’s market cap drops to the bottom of the index, the S&P replaces it with another on the rise”
- Most of us should probably be index investors, but if we choose not to: to gain from value investing during a bear market, don’t look for bargains “unless the inflection point is obvious”
Fed Forecasting Models are Out of Touch
- Fed’s equilibrium models are too simple and static to cope with market data—wrong for past six years
- Measure market data using Complexity Theory (CT) accounts for financial panics; considers the “diversity of actors” in the global market, and “interconnectedness”
- CT also takes into account “market interaction”—specifically scale—and “adaptive behavior,” or herding
Do you agree, as the Fed demonstrates, that our economic forecasting models are outdated and inaccurate? Share your thoughts with us in the comments section below
Emotions Causing Quick Shifting Views in Investors
- Investor beliefs shift quickly and easily; in just the last few months we’ve changed viewpoints from seeing potential recession recovery to being concerned and panicked
- Bearish commentators getting more airtime and overselling biased bear market doom and gloom
- See the current market as a possible opportunity, avoid emotional behavioral biases
Find the Quality and Value Balance
- Paying too much for high-quality investments will increase risk for your margin of safety—the distance from your entry price up to your estimate of the intrinsic value
- Investing in a bull vs bear market differs vastly—“at the bottom of the market cycle, there will be plenty of opportunities” to find both quality and value”
- Find the balance: investing in high-quality stocks might lead you to overpay, but focus too much on value and “your portfolio becomes a slave to the business cycle”
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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