Rags to Riches, 23 January 2011

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
23 January 2011

The Market

The market was generally down in the past week. All of the major metrics (S&P 500, NASDAQ, Wilshire 5000 and the Russell 2000) were down except the DOW and the VIX. The DOW was up less than 1%, but the VIX was up 19.5%. The Russell 2000 was down the most at 4.26%. The rising VIX suggests increased volatility in the market in the next month, but increased volatility may present greater opportunity for profitable options activity.

Last week we looked at market trends as expressed by the Dow Jones Index, a collection of 30 blue chip, large-cap stocks. This week we examine the Wilshire 5000, which is the broadest index of the market containing 6700 US companies. Stocks are included in this index if they satisfy the following three rules:

1. The company has its headquarters in the United States.
2. The stock is actively traded on an American stock exchange.
3. The stock has pricing information that is widely available to the public.

The Wilshire 5000 is not only the broadest surrogate of the US market, but some say the best representation of market behavior.

Figure 1: Wilshire 5000 Index – 18 Year History

In the past 18 years the Wilshire 5000 has had three up periods and two down periods. From 1 May 1993 until 1 January 2001 the Wilshire 5000 rose from 4,438.55 to 12,181.33 or 174% in less than 8 years. From 1 February 2003 until 1 October 2007 this index rose from 7,896.94 to 15,673.36 or 98% in less than 5 years. From 1 February 2009 until 1 January 2011 the Wilshire 5000 rose from 7,473.97 to 13,499.30 or 80+% in less than 2 years. The two down trends began on 1 January 2001 and 1 October 2007. From 1 January 2001 until 1 February 2003 the index fell 4284.39 or 35%. From 1 October 2007 until 1 February 2009 the Wilshire 5000 fell 8199.39 or 52%. Two observations seem evident. First, clearly the up trends (bull market) are longer than the down trends (bear market). Second, this index seems to be oscillating about a mean value of approximately 11,000. In statistics this phenomena is called “mean reversion.” I call it “market elasticity”. What goes up must come down and vise versa. The summary of major market metrics for the past week can be seen in Table 1.

Table 1: Summary of Major Market Metrics

	Last	Now		%
Index	14-Jan-11	21-Jan-11	Change	Change
DJIA	11,787.38	11,871.84	84.46	0.7165
S&P 500	1,293.24	1,283.35	-9.89	-0.7647
NASDAQ	2,755.30	2,689.54	-65.76	-2.3867
Wilshire 5000	13,672.74	13,499.30	-173.44	-1.2685
Russell 2000	807.57	773.18	-34.39	-4.2585
AMEX	2,185.52	2,125.88	-59.64	-2.7289
NYSE	8,174.12	8,105.75	-68.37	-0.8364
Vix	15.46	18.47	3.01	19.4696
Crude Oil	91.67	89.10	-2.57	-2.8035
US$/Euro	0.7469	0.7423	-0.0046	-0.6159
US$/Yen	82.8672	83.0293	0.1621	0.1956
Pound/Yen	131.5061	131.9427	0.4366	0.3320
$Index	79.05	78.11	-0.9400	-1.1891

14 January 2011

WEEKLY SUMMARY

The market continues in an uptrend with the DOW up 112 points (.96%) while the S&P 500 rose 1.7% and the NASDAQ (tech stocks) was up nearly 2% this past week. This trend is very similar to the week before. The dollar is down and oil and the market are up. This is the relationship that I have observed to be normal over the past two decades. The Dow closed last Friday at 11,787.38. We haven’t seen this level since 23 June 2008. We should note there has been a relatively steady uptrend (bull market) since 2 March 2009, when the DOW closed at 6,626.94 and almost everyone thought the sky was falling. We have enjoyed a 20-month bull market, with indications that it may continue.

It has been a rough ride since the last market top on 1 October 2007 when the DOW closed at 14,066.01. We see from Figure 1 that the last bull market run was from 1 September 2002 until 1 October 2007 for 5 years and 1 month.

Figure 1: Dow Jones Index – 20 Year History

We also note that the second previous bull market was from January 1995 until December 2000, or approximately 5 years. Do you see a trend developing here? Could we be almost two years into a 5-year bull market? Who knows for sure? Also notice that for the last 20 years the bear markets are shorter in duration than the bull markets. Another way to say the same thing is that market corrections usually are more rapid than up-trends. My forecasts suggest the strong possibility that the bulls will continue to run during 2011 and 2012. That would be nice! The summary of major market metrics can be seen in Table 1.

Table 1: Summary of Major Market Metrics

	Last	Now		%
Index	7-Jan-11	14-Jan-11	Change	Change
DJIA	11,674.76	11,787.38	112.62	0.9646
S&P 500	1,271.50	1,293.24	21.74	1.7098
NASDAQ	2,703.17	2,755.30	52.13	1.9285
Wilshire 5000	13,428.94	13,672.74	243.80	1.8155
Russell 2000	787.83	807.57	19.74	2.5056
AMEX	2,150.58	2,185.52	34.94	1.6247
NYSE	7,980.32	8,174.12	193.80	2.4285
Vix	17.14	15.46	-1.68	-9.8016
Crude Oil	88.03	91.67	3.64	4.1350
US$/Euro	0.7748	0.7469	-0.0279	-3.6009
US$/Yen	83.1488	82.8672	-0.2816	-0.3387
Pound/Yen	129.2789	131.5061	2.2272	1.7228
$Index	81.17	79.05	-2.1200	-2.6118