What gaps down? What gaps up? What "corrections"? What "crashes'? What "rallies"? What bull market? What bear market? What analogies with 1929?
All Maya, as the Indians would say. Looking beyond the veil of illusion, you will see that most stocks went down less than one percentage point during the recent (ongoing?) tsunami, just as they did not go up much before it struck. At least, that is the view in an interesting article in The New York Times' business section this Sunday.
For those who did not see the article, here are some excerpts:
Stock Indexes Paint an Imperfect Market Picture
by Mark Hulbert
What's all the fuss?
From the day the Nasdaq composite hit a record high on March
10, through its trough on April 14, the index lost 34 percent of its value. Yet over that same period, the average stock fell less than 1 percent.
That's right. By simply using a somewhat different methodology, it is perfectly reasonable to argue that not only are stocks avoiding the clutches of a bear market -- traditionally viewed as a decline of 20 percent or more from a high -- but that they also have a long way to go efore even entering a correction -- usually defined as a sell-off of 10 percent or more....
Why? Basically, of course, because the indexes are weighted.
As a result of its capitalization-based weightings, the Nasdaq composite paints a far too rosy picture when the largest-cap Nasdaq stocks are leading the market, as they have in recent years. In 1999, for example, when Cisco rose about 131 percent, it led the Nasdaq composite to an 86 point gain. The average Nasdaq stock, however, gained less than 10 percent that year.
Conversely, the Nasdaq composite often paints a far too pessimistic picture when the dominant stocks perform poorly, as was seen over the past month....
The same thing is true of the other indexes, even of the Wilshire 5000 Total Market, which also uses weightings. Unweighted indexes aren't perfect either, according to the author.
For example, in part because of the way price changes are translated into percentage changes,the Value Line Arithmetic Index of some 1,700 widely traded stocks has an upward bias -- it rose 0.4 percent at the same time the Nasdaq was plunging 34 percent. Its sister benchmark, the Value Line Geometric Index, makes use of logarithms in its calculations, which gives the index a downward bias. It fell 1.6 percent over the same period. I simply split the difference to arrive at my estimate of a loss of just 0.6 percent for the average stock....
The lesson is simple: If you are gauging the market...by using an index that is prejudiced toward a few large-cap technology stocks, chances are that you're reaching the wrong conclusion.
Comments, anyone? |
