How to Take the Temperature of a Stock Market

By Vinayak on Friday, September 13, 2013 with 1 comment

On every business news homepage there is what we call a “thermometer story.”  In a thermometer story, the writer will bring to the surface an abundant amount of issues, or news items, for investors to ponder. 
By doing this, an investor is supposed to get a solid grasp on the mental state of the stock market, or the ability to take the market’s “temperature.”  Read enough of these temperature pieces as our resident #StockStud editor does, and certain patterns begin to form that help to make a strong opinion on which direction stocks could head.  Follow along as we decodea thermometer story.
“U.S. stocks declined, following the biggest weekly retreat in 2012 for the Dow Jones Industrial Average, as Greece struggled to form a new government amid growing speculation the nation may leave the euro region.”
Decoded:Stocks started the week lower after already being down for a few straight weeks.  Negative on top of negative direction tells us something bad exists on the global economic stage, and that it’s not about to go away anytime soon.  That something bad is struggles in Greece to form a new government, which has caused speculation the country may be forced from the Eurozone. 
If Greece is forced out, banks in other European countries, and even U.S. banks, could lose more on investments in Greece.  The problem won’t stop there; it could very well tidal wave in the form of worsening demand for tools to cars in relatively healthy Eurozone countries.
“The fear factor is definitely higher,” said Madelynn Matlock, who helps oversee about $14.7 billion at Huntington Asset Advisors in Cincinnati. “The whole political situation is really the focus at this point. Nobody really knows what’s going to happen next and the market hates uncertainty more than anything.”
Decoded:This portfolio manager captures the essence of why global stock markets are reeling; one finds it trying to invest if economic stability is non-existent.  No economic stability, no confidence in earning a return for an investor and concern as to if principle is returned in entirety.  However, there is an interesting take here that is not so readily apparently. 
Obviously his lady is freaked out, admitting that Greece is the only focus by investors.  Well, that means nobody is expecting anything positive to occur, which is always a possibility in terms of Greece (though unlikely) and the U.S. economy (much likelier).  Our editor would actually use this comment as a clue in making a call to go against the grain and buy stocks.
“As individuals bail out of U.S. stocks at the fastest rate in three decades, professional speculators have cut bearish betsby the most since 2008. Money managers are net short 19,375 contracts on the S&P 500, down 82 percent from a four-year high in September even after the figure jumped from 3,584 last week.”
Decoded:Clue number two that stocks may be worth a look, or in financial jargon terms, are “oversold.”  If money managers that hold a portfolio of stocks are reducing wagers that stocks could decline, this is a positive.  It indicates a willingness to hold the stocks in the portfolio and not hedge against declines, and perhaps buy more of core holdings at cheaper prices (sound smart: valuations) than three weeks ago.
“U.S. equity mutual funds recorded $18 billion of outflows in April, the most since at least 1984, according to preliminary data from the Investment Company Institute.”
Decoded:The final part of the passage is clue number three to show interest in stocks.  It’s often said that the average investor is the last to dump stocks when they are plummeting and rising up a wall.  The pros have all the tools and connections and are better able to make informed, timelier decisions.  Maneuvers by average investors are a good indicator, however, in this sense that stocks could be oversold. 
To pull the most out of mutual funds since 1984 shows significant fear, and allows the pros to buy what he average investor is selling at lower prices.  Hence, stock prices are supported.  Then, those same Nervous Nelly investors that dumped stocks are lured back in at higher prices and after a while, the process feeds on itself.
Tags: Eurozone, mutual funds, personal finance




nidhi jain said...
October 8, 2014 at 5:30 AM

EPIC RESEARCH seems Gold futures managed to trade in the green zone on safe heaven buying while investors are looking ahead for the outcome of the third estimates of the US economic growth and University of Michigan consumer sentiment index later today.

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