Morning Market Thoughts
Good morning. The Dow is up 92 points this morning on the back of IBM, which posted better than expected earnings. The stock is trading at around $156, which marked the last significant ceiling for the stock back in June. It’s been trending lower for much of the year falling 25% from the 2017 top in February to the August low. I’d say the bottom has been put in. Given the strength of the Dow this year, IBM has obviously been underperforming and exerting a downward drag on the index. This pop will now pull the Dow higher. I’d suggest watching how the stock trades this morning. If this is a “gap and run”, where the stock opens above $155 and keeps going, then we should see continued strength in the Dow-30 and a decisive move above 23,000. If not, then we’ll likely see another day where the bulls struggle to stay above that historic level.Look we’re at a stage where money is just pouring into the market. But unlike September, we’ve seen the mid-cap ($MDY) and small-cap ($IWM) indexes trading a bit lower. This is a bit of a yellow flag (“caution”…not “stop”) because it shows that money is becoming a bit more selective. I like to see a market where the small- and mid-cap stocks are hitting new highs. When money goes into the smaller, more poorly capitalized companies, it means that investors are very bullish about the future. They see young companies having great prospects for growth.
So when the smaller cap indexes flatten out while the large cap indexes move higher, the theory is that investors, while still optimistic, and being more selective. They’re investing in the strongest companies, which are a bit safer during flat or down economies.
I continue to believe in the uptrend in stocks, but it’s always good to really understand what’s happening beneath the hood. If you understand how money is flowing, you’ll be better able to make decisions when we start seeing weakness. Remember, this is October. Lots of seasoned investors are waiting for the big selloff. But the problem is that, if the selloff does not occur, they’ve got money on the sidelines with the end of 2017 approaching. And in that event, we’re likely to see a continuing rally into the end of the year as they start chasing performance.
One last point, which I mentioned the other day. Sorry, but the Fed isn’t going to raise rates much at all. They jawbone about it, and the threat is always there. But the activist Fed of yesteryear has become the “do-nothing” Fed of today. And if rates stay low, then stocks will remain cheap. The metric is a COMPARISON between the returns on fixed income versus the returns in equities. When you hear the “experts” talking about how expensive stocks are, you will never hear them discuss historically low rates. Why? Because they cannot raise that variable without ultimately concluding that stocks are actually cheap. Fixed income just isn’t an option for those who are looking for alpha (outperformance).
Keep that in mind. Always respect the trend, and never feel like you have some kind of insight that the market doesn’t. To feel like you have an “edge” over the market is both arrogant and dumb. The Crowd is always right. You’re not smarter than the collective wisdom of the Crowd. So it’s best to be a follower — as long as you’re not the last guy in line. So far, we know there’s money still coming into the market. And that money is going to push stocks higher.
Ride the bull…until it bucks you off.
–Dan
Market Update