Many investors watch the financial news or view another source of media to see how the market and their investments are performing on a daily or other periodic basis.  Because the market averages are at much higher levels than say 1985, 1995 or 2005; a 20 point move in the S&P 500 in either direction is considered a bad or good day.  How many investors look at a 100 point Dow Jones move and are either euphoric or worried based on the direction?   Yet a move of that magnitude in either index equates to 1% and approximately 0.50%, respectively.

Since the end of November the market has generated a return that is relatively flat.    The S&P 500 has appreciated from 2067.56 to 2102.31 or about 1.68% and traded within a range (from high to low) of approximately 7.8962%.   During that time period there have been only two days where the index had a gain or loss of more than 2% and that occurred in the middle of December.   

If you look at individual stock performance of companies that have been in the S&P 500 from the end of November through June 25th (there are 485 that meet that criterion with 15 stocks being added in the interim, so they are to be left out), the average performance has been 1.8175%.  That is slightly better than the index itself with 255 of the 485 (or about 53%) showing positive returns during the period.

If you dig deeper, however, you will discover that 277 and 223 of the 485 stocks are trading below their 50 and 200 day-moving-averages (dma), respectively as of June 25th.  At the end of November only 88 and 125 of the 485 stocks, respectively, had the same type of underperformance.  

This tells you that despite the fact that the indexes have maintained a positive return and haven’t shown a great deal of volatility, the underlying trend below the surface is a little worrisome at this time.   The importance of those moving averages cannot be underestimated.  A large number of traders and investors use these figures as “pivot points” to determine when to buy and sell.   

They are very fluid and one must remember that they can change direction rapidly as a result of bad or good news.  Proof of this can be found during the swoon last October.   On the 15th, the percentage of S&P 500 stocks under their 50 and 200 dmas were 87% and 65%, respectively.  At the end of October the numbers were decidedly much better, 26% and 29%, respectively.

So how do you invest in a market like this?  If you have a long-term view and strategy, then this will be a non-factor in your decision making process.  Cash should be applied when you feel comfortable and have found one or more issues that you find appealing.

If you are involved in a risk management strategy and the market turns lower, there is the opportunity to have positions liquidated and cash accumulated for future redeployment.   The key will be to have a “shopping list” of stocks you are looking to build on or include in your portfolio should a pullback materialize.

If there is no meaningful correction and you have cash to put to work, you might want to look for companies with good fundamental and technical characteristics which have a high level of liquidity.  While everyone wants the next stock that appreciates 100% in short order, the reality is that it is in your best interest to avoid the urge to gamble.

If you have any questions or comments regarding this blog or any other thought, please contact me at trgblog@trgcap.com.  Thanks for reading!!!

                                                                                                                                                                                            

Sources: Yahoo! Finance, RealTick

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.