Market Commentary May 2015

One month later and we’re still experiencing a “ZZzzzzzzz…” market!

This has been an exhausting year so far, with very little to show for it. Sure, we hit another all-time high on the S&P 500 recently, and that’s great, but, based on the current CAPE adjusted P/E Ratio of 27.4 (Price to Earnings of the entire market as reflected by the Shiller P/E Ratio), the market’s growth has historically shown little progress beyond this point. In other words, in our opinion, going forward the market could have a tough time climbing higher without a reasonable correction. The last time we saw this number we were at the top of the market in 2007, just before things started to break down.

But while there is much to be negative about, as of last month, we consider all of the major market segments to be trending UP. Just not by very much. Since our primary approach is Trend Following, though, we don’t believe it makes much sense to fight the trend.

SP500daily
This month’s chart (left) brought to mind the book “How I made $2,000,000 in the stock market” by Nicholas Darvas. What Darvas saw in his charts was that stocks would bounce around in a box and then break out (up or down) to the next box. So far in 2015, the S&P 500 started in the lower (Box 1) area, then in February moved up to the upper (Box 2) area, and has stayed there through the middle of May. The 2nd point of interest from the book was Darvis’ mention of “turning off the noise.” At one point he spent time at a brokerage to be closer to the action. But what he found was being that close to information created confusion and didn’t help him make good investment decisions.

Darvis wrote the book in the 1950’s, but I think this observation is even more relevant today. From personal experience, turning off the noise (the news, CNBC, etc…) helps you keep a clear head about where things are and what action, if any, you truly need to be taking at the moment.

The (above) Chart is the Daily S&P 500 From January 1 to May 15 of 2015

So while things are still looking UP, we will take advantage of that trend and remain cautious and ready to act should the data (not the news) tell us we need to.

Fun Fact of the Month: Happy Birthday to the Stock Market!
The “stock market” began on May 17th, 1792 when 24 stock brokers and merchants signed the Buttonwood Agreement. (The buttonwood tree was simply the local name for the sycamore tree.) The organization named itself the “New York Stock & Exchange Board.” In 1863, this name was shortened to its modern form, “New York Stock Exchange” or “NYSE.” The original agreement had two provisions: 1) the brokers were to deal only with each other, thereby eliminating the auctioneers, and 2) the commissions were to be 0.25%. Needless to say, times have changed in 223 years!