Pac-Man and Zelda for us, X-Gen’s, or for the Millennial’s, Fortnite, are games of strategy that swaths of the population can relate too. The satisfaction of winning and advancing over the other players is motivational to try again and again until the level is beaten. Once you clear the old level, you engage in a more difficult scenario. You are reassured that you won’t fall back to the previous level though. These games train their players to keep playing by enticing them with the next level. No risk, if you lose, try again.
Wall Street doesn’t quite work that way. There are levels, and they do mean something to your portfolio. It would be difficult for anyone to say they never heard of the S&P500, the Dow Jones, or the NASDAQ. They may not know what they mean, and if you don’t, here is your chance to understand them and what levels mean. With a little understanding, you will be better prepared when your portfolio level’s up.
So, let’s start with the indices mentioned above, the S&P500, the Dow Jones and NASDAQ. These are certain groups of businesses, companies, or categories of the economy used as a measurement. Think of them as a thermometer. The S&P500 is a thermometer of the 500 largest publicly-traded companies in the U.S, where the Dow Jones represents the 30 largest industrial companies in the U.S and lastly the NASDAQ reflecting over 3,300 companies listed on the NASDAQ exchange, from all countries. When the health of these companies goes up, the index representing goes up or vice versa downward. It is an easy gauge to understand the health of the top 500 companies, the top 30 industrial or 3,300 listed companies. Or your portfolio more importantly.
So, when you hear that the S&P500 or one of the others are hitting all-time highs, it means that the companies combined are selling at a premium and the markets are expecting them to perform even better than before, increasing their value. For the last twelve months, for example, the S&P500 has not been able to go to new highs. It would trade up to the same high point (the ceiling) and couldn’t break through or level up. This is telling us the market thinks the companies are valued too richly, and there are no buyers at a higher price. Now when the index makes a breakthrough and makes new highs, the previous ceiling becomes the floor. It is named as such because the same resistance it took to go higher is now the resistance for the market to go lower.
Like a game. You cleared a level. The market is not like a game, and yes, you can break through and fall several levels back down.
Why is this relevant? The indices or markets have broken through a tough level of resistance lately making new highs and a new floor. For your portfolio, this means that for now, the bull market is continuing and valuations are at all-time highs. A strategy some have is to buy when the market level’s up since it is now technically on the new floor of the new level and the new ceiling hasn’t been found yet, expecting the market to go higher. Other’s place computer orders to sell if and when the market drops through the new floor to take profits and protect from falling to the next floor. I have recommended both depending on the investor.
If the market has leveled up, most likely so has your portfolio. Train yourself at the wealth game.
Formulate your game to continue winning and knowing when you are by simply reading headlines on the markets. After all, you can lose. Choose one index, get to know its highest price, and monitor the market, push it higher or bounce back down off it. Once it finds the next ceiling, it won’t stay there long.
At the same time, see how your portfolio is behaving. Be a winning Pac Man.
Andrew F. Kotyuk, CIMA* is CEO and Principal of Alpha Wealth Management LLC, send questions or comments to [email protected].