- Variable Rates of Return from Stocks
- Speculative Bubbles Are Often Followed by Years of Below-Average Investment Performance
- The Moral of the Story—Be a Flexible, Opportunistic Investor
- Growth Targets—"The Magic 20"
- Growth Target Zone
- Active as Opposed to Passive Management of Assets
- Diversification—A Major Key to Successful Investing
- Income Investing—Time Diversification
- Creating a Bond Time Ladder
- Increasing Returns from the Stock Market while Reducing Risk
- Useful Market Mood Indicators That You Can Maintain and Use in Just a Few Minutes Each Week
- Relationships of Price Movements on NASDAQ and the New York Stock Exchange
- How to Identify Periods When NASDAQ Is the Stronger Market Area
- General Suggestions
This chapter is from the book
This chapter is from the book
This chapter is from the book
Useful Market Mood Indicators That You Can Maintain and Use in Just a Few Minutes Each Week
Market mood indicators are indicators that can help you identify the general outlook for the stock and bond markets—whether credit conditions, public psychology, and the behavior of the stock market itself are suggesting a generally favorable or a generally unfavorable outlook for stocks and bonds. Mood indicators do not provide precise entry and exit points into the stock market but do provide guidance as to how fully you may want to be invested and/or whether you want to emphasize aggressive or more conservative positions in your investment portfolios.
Illustrations of Mood Indicators
Public Psychology Mood Indicator
Probably the best mood indicator of all is the general mood of the investing public and particularly of the financial media. Reflections of public and media investment psychology should be approached in a contrary manner. The more bullish the general public, and especially the more bullish the articles appearing in magazines and newspapers, the closer we likely are to a significant market peak. Conversely, the most bearish articles regarding the stock market tend to appear on the front pages of newspapers after the stock market has undergone some serious decline, fairly close to the times that such declines are likely to come to a conclusion.
You can often secure an informal feel for public sentiment from conversations with your friends, family, and acquaintances. The more people who want to tell you how much money they have made and how smart they have been—it is very easy to confuse a rising stock market with being smart—the more likely that trouble is lurking on the horizon. Conversely, the more people hate stocks, the more fearful they are, the more likely are prospects for a market recovery. (Bad as public timing can be, the media is probably worse.)
Your emotional task, of course, is to avoid being swayed by the crowd and by the appealing newspaper and magazine crews and to be prepared to travel a more lonely, independent, and probably more profitable path to your own rather than the public drummer.
Interest Rate Indicators
As a general rule—not always—stocks tend to perform better during periods of declining interest rates compared to periods of rising interest rates.
It is often worthwhile to follow announcements and commentary from the Federal Reserve Board, which has the ability to control short-term interest rates directly and usually longer-term rates indirectly. In past times, two or three consecutive interest rate reductions by the Fed without intervening actions to increase rates would suffice to end bear markets, and two or three consecutive interest rate increases would suffice to end bull markets. In recent years, market responses to patterns of action by the Fed have taken longer to develop. The 2000–2002 bear market did not come to an end until the Fed reduced short-term rates 12 times in succession. The ensuing bull market did not seriously falter until seven consecutive rate increases were fostered by the Fed.
Significant actions by the Fed—which can include raising or lowering discount rates, setting maximum margin levels, and/or changing the federal funds rate—are reported in financial media such as the Barron’s Financial Weekly. Television programs that concentrate on financial news report frequently on news releases from the Federal Reserve Board.
Seasonal Mood Indicators
The stock market tends to perform best between the start of November and the end of April, when almost all net gains for stocks take place. The period between May and October tends to do little better than breaking even on balance. The market also tends to perform best during the years immediately prior to years of presidential elections (for example, 1991, 1995, 1999, and 2003), well during the years of presidential elections, and worst during the two years following presidential elections. This pattern seems to be holding as we move into the twenty-first century. Stocks did very well in 1999 (year prior to election), topped a little early in 2000 (year of election), fell badly in 2001 and 2002 (years following election), and then recovered very strongly in 2003 (best year of cycle, year prior to the 2004 election).
These two seasonal indicators—best six months of the year and the presidential market cycle—have actually had a strong history of accurate past performance.
A Great Market Mood Indicator: The NASDAQ/NYSE Index Relative Strength Indicator
The oldest and most established trading exchange in the United States is the New York Stock Exchange, home to most of the largest corporations in the country. The American Stock Exchange lists somewhat smaller companies and has not been nearly as influential as the New York Stock Exchange. The NASDAQ Composite Index, home to over-the-counter rather than exchange-traded securities, used to be thought of as the home of small, emerging, and more speculative companies. This is still the case to some degree, but in recent years many companies listed on NASDAQ—such as Intel, Cisco, e-Bay, Yahoo!, Microsoft, and even Starbucks—have grown to be among the most prosperous of market leaders and technical innovators.
The NASDAQ Composite, like the New York Stock Exchange Index and the Standard & Poor’s 500 Index, is weighted by capitalization. Larger companies are given more weight in the index than smaller companies. In fact, in April 2005, the five largest companies on NASDAQ—Microsoft, QUALCOMM, Intel, Apple Computer, and Cisco—represented 25% of the NASDAQ Composite Index. There were, at the time, approximately 3,500 issues listed on both the NASDAQ Composite Index and the New York Stock Exchange, with trading volume more or less equal on both exchanges, increasing on NASDAQ in recent years so that on most days trading volume there exceeds volume on the New York Exchange.