The Week Ahead: Is There A Stop Sign At The Old Market Top?
Jeff Miller | Mar 03, 2013 04:25AM ET
There is a psychological barrier at market tops. Think about this conundrum:
- By definition, a former top failed. That is how it got to be a top!
- A new high is the most bullish thing a market can do. Also by definition, since going higher means reaching and taking out old tops.
As market averages approach old highs it becomes a great story for financial media. It can be played either way – A or B. It is such a natural that I expect it to be a dominant theme next week, despite the important employment news.
For story "A" feel free to do a Google search for "lofty levels" or the like, perhaps including the name of a popular pundit. Alternatively, you can search for "double top" or "triple top."
For story 'B" we find those whose business success is firmly aligned with the success of their investors – independent financial advisors. Josh Brown is a leading advocate for this group and he does a nice job analyzing a complex story. Ned Davis Research looks at past occasions when the market revisits prior highs. Mark Hulbert reports the story. Hulbert gets featured on CNBC. Everyone involved acknowledges that there are only 13 prior cases, so we should not make much of this.
And then we do.
Josh has exactly the right touch, navigating between data analysis and a few anecdotes. He is not wildly bullish, but he understands that a little data can be a helpful antidote to misleading headlines. Here are the past occasions from Ned Davis:
Even allowing for the small number of cases, the result is encouraging.
I have some further thoughts about the new high which I'll report in the conclusion. First, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I especially like is the weekly post from the WSJ's 2013 preview. This covers the same theme along with some other key catalysts. There are also some specific stock and sector ideas. My recommendations did well last year, and we are off to another good start. You need to be comfortable in taking the other side of one of the most hated rallies in history.
But please beware! General ideas are not for everyone. Each person needs unique treatment. We have several different approaches, including one that emphasizes dividend stocks with enhanced yield from writing near-term call options.
Get The News You Want
We have collected some of our recent recommendations in a new investor resource page -- a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love feedback).
Final Thought
Should we be worried about the new market top?
I recently suggested that investors are too easily victimized by the media focus on fear. Many have missed a nice market move (so far) by following those who offered headlines without data. There is an infinite supply of headlines!
It is a sad irony that our intelligence and reading – skills that work so well on most fronts – fail us so badly when it comes to investment decisions. The intelligent investor will always find persuasive things to worry about.
Abnormal Returns, everyone's choice for the leading curator of financial stories, noted that I was not alone on this theme. Tadas has an excellent story, with great quotations from Barry Ritholtz, Josh Brown, and Seth Godin. Pulling together these stories is both rare and helpful, so please take a look. It is also one of many important themes from his book.
We are all suggesting, in slightly different ways, that the best investment choices require more than simply following the list of worries from financial media.
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