Wednesday, October 04, 2006

Brother, can you spare a dime...?

The last three months of the calendar year tend to give stock traders the yips. Perennially, money flows disfavor stock investment for a number of reasons and downard pressure on stock prices often ensues during this quarter. While my better judgement dictates that I refrain from comment on the stock market or money management, the recent hoopla over the Dow Jones Indusrial Average hitting a new high gives me pause. A few stats from Barry Ritholtz, market maven and famous contrarian:

All time high Date of high Recent high % off all time high
Dow 11,750.28 (1/31/00) 11647.69 0.25%
Tran 5,013.67 (5/31/06) 4433.34 11.57%
SPX 1,552.87 (3/31/00) 1333.7 14.11%
Nasdaq 5,132.52 (3/31/00) 2258.3 56.00%
NDX 100 4,816.35 (3/31/00) 1656.07 65.62%
Russell 784.62 5/31/2006 729.94 6.97%

The Dow has only 10 stocks above their January 2000 highs, and of those 10, four are responsible for dragging the index higher – Boeing, United Technology, Altria and Caterpillar...

• Cash has outperformed the Dow since January 2000; Even considering reinvested dividends; cash STILL out performs the Dow.

• The Dow's Real (inflation adjusted) performance, even with dividends reinvested, is significantly below breakeven.

• Lastly, see this for Why the 1994 Goldilocks scenario is so unlikely.

Aside from a handful of stocks, most major indices have not fared so well since the market highs of six years ago. Large cap tech is still off over 65% from that high. International indices, junk bond funds and plain old cash have outperformed the US market indices since 2000.

I'll leave the interpretation to each individual, but the possibility exists that the economy may not be as strong as some would have us believe. Pressures on the market, such as decreasing home equity values and continued underemployment can have significant effects on the economy. Soft landings in such scenarios are rare.

If you trade, remember to keep disciplined stop-losses. If you are a long term investor, prepare for some short term volatility. And remember, holding cash isn't always a bad thing.

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