Monday, April 28, 2014

A Fable on Stock Market Valuation

Why valuation is a lousy measure.

King Midas gave up the gold thing, and bought all the outstanding float of $KMID.  Midas owned 1,000,000 shares of the stock, and on the day he bought the last share, he paid $100.  Therefore, the closing price of the stock gave him a market cap of $100 million.  That’s one hundred million dollars.

Now Little Johnny tended the King’s gardens and prevailed upon him to sell him a share of $KMID.  Believing it was undervalued he offered the King $110 for that share.  The King was an evil man, so happily took the money at the bid.  He was amazed to find out his value in the company had risen to $10,999,890.  And he had 110 bucks cash to show for it. 

When Johnny’s mother found out that he had blown the family grocery money, he forced him to return to Midas to sell the stock back.  The evil Midas agreed, but at the price of $105.  With no alternative, Johnny took the price, poorer but wiser. 

King Midas had all his stock back, $5 in his pocket, and a new market valuation of $10,500,000.  The stock caught the attention of the Wall Street pundits and trend followers. But, of course nothing about the company or the stock really changed.  

Farfetched?   I suppose.  It would take a lot of dumb, evil people make something like this happen in the real stock market.

Oh, yeah.   Think about that the next time you invest in a stock simply because the price changes.  

Sunday, April 6, 2014

Why the $QQQ and $IWM fell more than the $SPY and $DIA

I saw this stat for the following indexes just now, as of April 4. Thanks ro @stockcats for posting it.

: % off the all-time intraday highs as of Friday's close -5.0% -5.4% -1.3% -1.7%
It looks like $IWM and $QQQ are down seriously.  Well, they are, from the recent highs.  

However, look at how far they are up from the 52 week low based on Friday's close. 

$IWM 28.4%
$QQQ 29.1%
$SPY 21.4%
$DIA 13.8%

So, it seems pretty reasonable for the small caps and Nazz to have the biggest decline, since they had the run-up to get there.  

Saturday, April 5, 2014

Calling the Top of the Bull Market

I tried a few weeks ago to call the top of the bull market.  Silly me.

No one can call the market top.  If they do it's just luck.  Really, what happens is that someone repeatedly calls for a top and when they it finally happens, they claim victory.  Silly them.

The latest attempt to find an indicator that we are at the top relates to the fact that the NASDAQ and small caps ($IWM) have fallen a great deal in the last few days.  They are supposed to be leaders, and when fall, the market will follow them.

But they haven't been leaders in this market.  Tech hasn't performed nearly as well as the broad market, and although small caps have exceeded the S&P, they haven't done that much better, and were partially driven by the ridiculous jump in biotech stocks.  Which have hit a wall and dropped like a rock in the last few days.
So it the bull market over?  Nah, not in my opinion.  It may take a few days or weeks off, but as long as interest rates remain low (and they still are ridiculously low in historical terms) there is no reason to think that money will flee the stock market for a better opportunity.

Long and strong.

Nothing here is a recommendation to buy or sell stocks.