The Clinton Herald, Clinton, Iowa

Local News

May 4, 2013

Stocks come and go so beware of indexes

One of the basic rules of military strategy is that when aggressively pursuing the enemy, you have to be sure you don’t outrun your supply lines. If the guys bringing the food, ammo and fuel can’t keep up, it doesn’t take long before bad things happen.

There is a similar analogy with the stock market. One has to ask how much longer can the Dow and the S&P 500 continue to outrun the rest of the market? There is an old story about a potentially ominous situation when the blue chip stocks continue to make new highs while the rest of the market has possibly topped out or is in some degree of correction.

The story suggests that when the generals leading the advance up the hill eventually look over their shoulders and see the troops in full retreat, they soon have to join the retreat.

At the risk of being the skunk at the party, I have to ask how much longer can the blue chips (the generals) pretend that everything remains positive for the economy and supportive of higher stock prices when the broad market (the soldiers) and the transportation index (the supply guys) are not?

Does it matter that new home sales fell 4.6 percent in February — the biggest decline in two years? Or that durable goods orders without aircraft orders fell 2.7 percent in February? Or that consumer confidence fell from 68.0 to 59.7 in March? Or that consumer sentiment plunged from 79.3 to 72.3 in April (a nine-month low

Have you noticed in the past few months a divergence between a rising stock market and declining commodity prices? This is a potentially ominous sign for the economy and stock market going forward. A six-year chart of the CRB Index of Commodity Prices shows declining commodity prices usually indicate demand for goods is dropping and the economy is in trouble.

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