26 January 2018: Wrong glasses

Many stock market analysts consider stock prices to be excessively high at the moment. And if we take a look at the graph below, how could we question their opinion? The graph represents the historic growth of the NASDAQ since its installment in February 1971. The current value of this index is almost two times higher than its peak in 1999, which is considered to be a period of ecstatic valuation of stocks. It is really a miracle that a correction has not taken place much sooner…

Below is the same graph. What? No, that is a completely different graph, you might reply. No, really, it is the same graph. Or, to put it more correctly: it is based on exactly the same data as the graph above. But these data are in the second case not projected onto a linear but rather a logarithmic scale. And suddenly the current valuation of tech-heavy stocks does not look that exceptional at all.

It looks like many analysts forget the simple fact that the growth of stock prices is in its core an exponential process. If we take the first graph as our starting point, it is very tempting to say that stock prices are way too high. However, the second graph puts matters into perspective. One could easily argue that we are still catching up for the exceptionally big correction that took place in 2000, for which the expansion period until 2008 was hardly a remedy.
Does this mean that stock prices will keep rising for many years? No, not necessarily. Just like stock market analysts are wearing the wrong type of glasses to inspect the current valuation of stock prices, many investors will have this gut feeling that stock prices must be excessively high after such a long period of expansion. And it is only that gut feeling that ultimately determines the prices of stocks.

white-chapel-logo-smallThe Dow finished firmly higher on Thursday buoyed by stronger-than-expected quarterly results in a pair of industrial heavyweights. The index gained more than 0.5%. For the S&P 500 and the NASDAQ it was a different story. The S&P was able to squeeze out a small gain of 0.06%, but the NASDAQ ran into a small loss (-0.05%). Volatility remained at relatively high levels if compared to those of the previous year. The VIX remained well above 11 points and recorded a small gain of 1%. UVXY ETFs were able to make a gain of 3.6% and XIV ETNs lost 0.7%.
Danny Daredevil was a happy man yesterday. He re-entered the world of black figures. His RSS closed just above 0%. Adventurous Anny´s RSS remained unchanged at 23%, as she is still holding a cash position. Solid Suzy and Lazy Larry made a small loss and their RSS dropped to 106%.
None of our models gave a trading signal at the end of yesterday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

0.39%

-1.57%

-1.57%

0%

Adventurous Anny Cash 6 March 2017

22.91%

0.00%

0.00%

26%

Solid Suzy XIV 6 March 2017

106.37%

2.36%

2.36%

125%

Lazy Larry
XIV 6 March 2017

106.37%

2.36%

2.36%

125%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

RS_v05-smallRené’s Reflections @ Friday: To live forever

In 1926, somewhere in France, a 27 year old Russian immigrant did a wonderful thing. He got an idea, took his camera and made a movie that was well ahead of its time in many respects. People today who discover this gem of the past, are still enchanted and moved by Dimitri Kirsanoff´s 1926 masterpiece. Myself included.
The idea alone that you make something today, that is capable of making a big impression on those who live in the year 2110, is nothing short of tantalizing. How could you ever be forgotten?

Photo of Nadia Sibirskaïa: still from the movie Ménilmontant (Dimitri Kirsanoff, 1926)