market not sharing wall st optimism, page-8

gann45

Thanks so much for your chart - fantastic to see original thinking and charting here.

I agree with your sentiment about the dubious value of some indices - the DJIA is the classic case where the general public holds a pretty meaningless data set up as if it is the most relevant expression of what constitutes US markets. The DOW is too small in its' sample size.

I would however, defend the usefullness of studying broader indices such as the S&P 500; Nikkei 225 and ASX 200.

These are indices:
a) which capture the larger stocks as determined by relative market capitalisation of each constituent (so therefore are the currently 'important' companies); and
b) also capture a large proportion of the total market capitalisation of the bourse.

They are therefore, imo a good reflection of where the public and major institutions have invested their money, and so they relect pretty accurately whether the average punter and the institutions are having a good time of it or not. They also reflect the relative confidence of the community to invest in stocks.

I don't think it matters that the constituents change over time - the point is the indices are representative of the major money flows. So there - I have completely revealed my personal bias to trading indices and blue chip stocks :-)

Anyway, the messages in your chart and post are well made - your use of a semi-log y-axis and semi-log trendlines is spot on. I'm mightily impressed with the laser-like clarity the chart gives to analysing whether the market is relatively expensive or relatively cheap.

Bravo. Wish I'd thought of it!

Regards

- HBG

---

Trade the market you see - not the market you hope for!