THE MARKETS
We're only three weeks into the New Year and already some very
interesting trends have developed in the markets. Consider these
four:
- The worst performing stocks in 2011 have been the best
performing in 2012. Bespoke Investment Group did an
analysis and discovered that the 50 worst
performing stocks in the S&P 500 in 2011 were up a whopping
11.2 percent YTD 2012 as of last Wednesday. By contrast, the 50
best performing stocks in 2011 were up
only 2.1 percent so far in 2012. What a difference a "turn of the
calendar" makes!
- U.S. Treasury securities are off to their worst start
in nine years. With improvements in the employment
situation, housing sales hitting an 11-month high and a reprieve in
the European debt problem, investors have less need for
conservative treasuries and a bigger appetite for riskier stocks,
according to Bloomberg and CNBC. At the moment, investors seem to
be saying, "risk on."
- U.S. stocks rose for the third consecutive week and are
near a six-month high. Despite a decidedly mixed start to
the 4th quarter earnings season, stocks have roared out of the gate
this year and are now up 20 percent from the October 2011 low,
according to Reuters. Of course, too much euphoria could lead to
disappointment later.
- The CBOE Volatility Index (VIX) declined nearly 22
percent in the first three weeks of this year. The big
decline in the VIX suggests investors are less fearful about
near-term market volatility, according to CNBC. In fact, the VIX is
down to a seven-month low, according to Reuters. While the markets
may be calm now, we're not complacent.
Trends come and go in the market, but one thing that stays
constant is our diligence in helping you reach your goals.
|
Data as of 1/20/12
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
2.0%
|
4.6%
|
2.5%
|
17.8%
|
-1.6%
|
1.6%
|
|
DJ Global ex US
(Foreign Stocks)
|
3.9
|
5.4
|
-12.3
|
14.6
|
-4.2
|
5.3
|
|
10-year Treasury Note
(Yield Only)
|
2.0
|
N/A
|
3.5
|
2.4
|
4.8
|
4.9
|
|
Gold
(per ounce)
|
1.1
|
5.0
|
22.9
|
24.7
|
20.9
|
19.3
|
|
DJ-UBS Commodity Index
|
0.5
|
0.4
|
-12.3
|
8.6
|
-2.6
|
4.8
|
|
DJ Equity All REIT TR Index
|
2.5
|
3.7
|
11.2
|
32.2
|
-1.5
|
10.6
|
| Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS
Commodity Index returns exclude reinvested dividends (gold does not
pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested
dividends and the three-, five-, and 10-year returns are
annualized; and the 10-year Treasury Note is simply the yield at
the close of the day on each of the historical time
periods.Sources: Yahoo! Finance, Barron's, djindexes.com, London
Bullion Market Association.Past performance is no guarantee of
future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable or not available. |
WHY IS IT THAT CONSERVATIVES TEND TO WATCH FOX
NEWS and those with more liberal leanings tend to watch
MSNBC? Psychologists would tell us it's because of what they call
"confirmation bias." Confirmation bias is the tendency of humans to
seek information that confirms an already held belief or opinion
and to avoid or discount information that might contradict an
existing belief or opinion.
This concept also applies to investing and it's very important
to avoid it as much as possible.
For example, let's say we're really bullish on the U.S. stock
market. If we let confirmation bias cloud our judgment, then during
our research, we would tend to read the reports that support our
bullish view of the market and let that reinforce our decision to
be bullish. By contrast, we would tend to avoid reading the reports
that are bearish, or, if we do read them, we would come up with
reasons why they were wrong.
When we're under the spell of confirmation bias, it's easy to
miss turning points because we're stuck on our current belief or
opinion and won't change even when we see contradicting evidence.
That, of course, would be bad for your long-term wealth.
How strong is the confirmation bias pull?
A 2009 meta study published by the American Psychological
Association reviewed 91 studies in the area of confirmation bias
and concluded that people were nearly two times as
likely to seek information which supported their existing view than
to seek information which contradicted their current
view. That's a strong pull!
How do we overcome this pull?
Here are two keys that could help:
- Acknowledge that confirmation bias exists.
Knowing that it exists helps us try to avoid falling into its
trap.
- Actively seek contradictory opinions. This is
another way of asking what could go wrong with an investment and
then doing our best to ensure we understand the "other side of the
coin."
So, in addition to making a "rational" case for an investment,
we have to make sure we avoid letting psychological biases get in
the way.
WEEKLY FOCUS
If you take emotion - would be, could be, should be - out of it,
and look at what is, and quantify it, I think you have a big
advantage over most human beings.
--John W. Henry, trading advisor, principal owner of Boston
Red Sox
For your convenience the sources have
been listed below:
http://www.bespokeinvest.com/thinkbig/2012/1/18/losers-beco...
http://www.bloomberg.com/news/2012-01-21/treasuries-off-to...
http://www.reuters.com/article/2012/01/21/us-usa-stocks-week...
http://www.marketwatch.com/story/us-stocks-start-cautiously-d...
http://www.cnbc.com/id/46070779
http://www.apa.org/pubs/journals/releases/bul1354555.pdf
http://trendroom.wordpress.com/2011/02/08/trend-following-qu...
