Saturday, April 5, 2014

The Week Ahead: The Stock Market Is NOT Rigged for Investors

The fear the stock market is rigged, a controversy that ignited with Michael Lewis's latest book, may have stalled market action last week, but MoneyShow's Tom Aspray explains why focusing on rigged markets does a disservice to investors.

The action in the global markets last week was lost in the uproar over the high frequency trading (HFT) controversy that resulted from the new book by Michael Lewis. Though many of his past books have been good reads, I think his biggest triumph may be the marketing of his latest book.

Last week, you could have almost seen Mr. Lewis 24/7 as the bullet point was that the  "stock market is rigged." This likely caused many regular investors to either call their advisors or to alter their plans to invest in the stock market. 

In Monday's column, I expressed my view that this was probably bullish for the stock market, as it would keep bearish sentiment high, as many individual investors would wait to invest. However, I think the focus on rigged markets does a disservice to investors.

As the  NY Times pointed out " But as an investor, high-frequency trading doesn't matter because you're focused on the boring work of buying good things and owning them for a long time." In discussions with veteran traders a year ago, few were concerned about HFT as they had seen little impact on their results.

chart

This long-term chart of the S&P 500 compares the price index with the total return that reflects the reinvestment of dividends. Though the bear market pullbacks in 2000 and 2008 were severe, the argument for long-term appreciation in the stock market is strong.

This chart is from last August's article from David Blitzer of S&P Dow Jones Indices, who pointed out that "One thousand dollars invested in the S&P 500 at the end of January, 1998 would have been worth $5557 at the end of July, 2013. However, if the dividends were reinvested in the index, the investment would be worth $10,635 by the end of July."

One last comment on what it really means for investors is the generally ignored quote from Mr. Lewis that  "It doesn't follow from the story in the book that you should flee the market." Too bad there wasn't more focus on this comment as the dividend's reinvested chart makes a powerful argument for investing in stocks.

chart

As the first quarter has ended, the performance of many asset classes has seen some significant changes in just the past two weeks. In the middle of March (see chart), the Vanguard Emerging Markets Index (VWO) has gone from down 1.9% to up over 3% as the performance now matches that of the Spyder Trust (SPY).

In fact, for the year, these two markets and the previously recommended Vanguard European Stock Index (VGK) are all now about even as they are up just over 3%. The SPDR Gold Trust (GLD) has given up more of its gains as it is now up just over 5%. (Editor's Note: This chart does not include Friday's trading.)

Based on the quarterly pivot point analysis, as discussed in last week's Follow the Trend with Quarterly Pivots this may have been an important week for both GLD and the Market Vectors Gold Miners (GDX).  Both started the second quarter below their new pivots, but rallied last week to close back above their pivots, suggesting that the worst of their decline may be over.

The bond market, as represented by the iShares 20+ Year Treasury Bond ETF (TLT) is still up just over 5% as the yield on the 10-Year T-Note is still locked in it's trading range. The generally bullish job report last Friday should allow the Fed to stay on its tapering course for the near future.

NEXT PAGE: What to Watch

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