Tuesday, February 21, 2012

How To Have Fun Following the Stock Market

Over the course of 40 years, I have been following the stock market. Obviously, I have a bit of a personal interest, but it’s also fun to make up my own mind about what it all means. And, of course, it’s a bit like rooting for a team – with the added fun that, over the long term, the stock market has gone up by about 10% per year, so you tend to win at the end of the day a bit more frequently than you lose – definitely not the case with some of my sports teams.

So let’s talk about how I might do it (bearing in mind, of course, that these are brief glimpses via a TV stock market ticker in places like restaurants or on the radio while travelling on occasional days, plus checking the results at night as part of looking for good news to go to sleep with). The first thing I do is, concentrate on the S&P 500. The Dow Jones, I have found, isn’t always representative of the overall stock market, because its selection of stocks is a bit quirky; and, of course, the NASDAQ is too heavily high-tech-weighted. The S&P contains stocks from both, and so, if the NASDAQ goes one way and the Dow goes another, as happens surprisingly often, you can pretty much count on the S&P being somewhere in the middle.

The next thing I do is remind myself that the S&P 500 does not include income from dividends. According to studies I have seen, those dividends add about 2.15% to the S&P’s return each year. So, if the S&P is down a little on a given day, I can comfort myself with the reflection that so far in the year, it has actually returned, say, 1% more than the number suggests. If you want a further comforter, S&P publishes “total return” (S&P 500 plus dividends for the year so far). And that doesn’t include reinvestment of dividends, which, if the market has gone up by 15% so far, will yield you another 0.15% by the end of the year (p.s., due to the magic of compounding, that will be nothing to sneeze at in 5 years or so). See, I’m winning already!

If I happen to be able to look at the stock market before the opening bell, the only thing I look for is “S&P futures”. That happens to be a fairly reliable indicator of where the stock market will hover around until about 2-2:30 pm … more on that later. Be careful of the name, because there’s another S&P futures market whose abbreviation is very similar, but which tends to be negative when S&P futures is positive, and vice versa.

And then there’s one more thing I can do, and pretty much do every day. That is, look to see if it’s sunny out. You see, I live near Boston, reasonably near NYC – near enough to guess what the weather is like around 8 or 8:30 in the morning, when the traders go into NYSE to prepare for the day’s session. A fascinating study a while back showed that when those traders see sunny weather outside, they tend to be more optimistic in their outlook, and so the S&P 500 tends to go up more often. And so, when it’s sunny out at that time, no matter whether it’s pouring the rest of the day, I am more likely to anticipate a good day. It’s sunny this morning! I’m going to win, yay!

Unfortunately, I find that the news rarely gives a good indication on what will move the market today, no matter when in the day you check. After many years of listening to them, I tend to distrust ex post explanations. So I just check, if I’m lucky enough to see, what is happening around 10:30-11, when the spurt of the S&P 500 to its futures level has been pretty much over for a good half hour. On the rare occasions when the futures projection is countered by sudden events, that’s when the big drops or big gains will show up. Yay! The Fed is going to give guidance today, and traders usually overestimate the effect on the positive side before they announce around 2!

If by some amazing chance I get a chance around lunch to watch the S&P 500 update on an every-half-minute basis, I can watch the dance of the buyers and sellers. The way it plays out is, these days, a surge up of less than a point as buyers buy the prices up, followed by a drop of less than a point as sellers sell the price down. It’s only after 2-3 minutes that you can see whether the overall trend is up or down – unless a thrilling jump up suddenly moves the market up by a point or more. Or an annoying big drop down interrupts the festivities. To heck with the business news – where’s the sports?

But the real surprises tend to occur around 2-2:30, when suddenly the market can go completely away from the futures prediction. It almost always is due to breaking news – the Fed, late-in-the-day government reports, political news, late news from Europe. If no break occurs then, the futures prediction is probably good for the rest of the day. Yay if it was sunny this morning!

And then the final bell rings at 4, and about 4:04 to 4:06 you get the final S&P 500 figure of the day. But, oddly enough, if the S&P is up more than 1% (these days, about 13 points), I don’t get too happy, and if it’s down more than 1%, I don’t get too sad. Because if traders really understood what was happening, there’s no way there would be jumps like that. I’m a cynical guy; as far as I’m concerned, traders can be pretty unsophisticated in their fears and enthusiasms, so what this tells me is that traders are running around like chickens because it’s going to take them forever to see that the latest news, ultimately, is no big deal. And since that kind of thing can last for months, I just sit and wait until sanity arrives, with my own idea of where the S&P 500 should be. On the other hand, if it reaches the point where Intel is at 60 times earnings (as it was in 2000), or 5 times, that’s real craziness.

Next, I factor in yearly cycles. The one I like right now (or maybe “like” is too strong) is the end-of-the-month cycle in which, I suspect, traders start trading the price back towards the value at the beginning of the month, to show gains in their monthly performance report if there are any, or because they have oversold through panic and now are just waiting until the price comes back up through lack of sellers in order to cut their losses. That tends to mean that I pay less attention starting around the 21st. Ho-hum.

The next thing I like to anticipate is the quarterly period from about Month 1 Day 15 to about early in Month 2 when companies make their earnings reports. Those companies, I really suspect, manage their numbers to analysts’ estimates. And that means, most times, many more times where the companies beat the numbers by a little, and the stock market keeps bouncing up, bit by bit. Or, there’s negative news, but the earnings reports match it until the panic goes away (or outlast the reports, in a few cases). Fun times. Less than 1% S&P 500 daily increases. Yay!

And then there is the full yearly cycle in which, many times, the “Christmas rally” tends to take place right after New Years’, followed by continued upward movement to the later part of April, followed by slow and at the end more rapid decline to mid-October, followed by comeback until the end of the year. This varies a lot, but it typically means that about 2/3 of the year is an up-tick. Yay! And if it isn’t, one of my sports teams won again. Yay!

But the best part of it all is those times during the year when the S&P 500 is really on a hot streak, or at the end of the year. If the S&P 500 is on a tear, I can sit down and fantasize what my teeny S&P 500 index fund has grown to. If I’m at the end of a down year, I can sit down and remind myself that the underlying S&P 500 is growing by 10% per year, blithely ignoring inflation and eventual capital gains taxes (don’t rain on my parade!) And at the end of the year I can raise a toast, to my teeny S&P 500 index fund that over the last 25 years of 10% average returns has grown 10-fold, to a slightly less teeny amount, and fantasize that if life were just that index fund, I would be rich, rich beyond the dreams of avarice, and that my stock-market team had therefore won the Super Bowl.

Happy New Year! Yay!

No comments: