Skip to main content
Home Working together to build your tomorrow

About that light at the end of the tunnel, it might not be the headlight of the locomotive after all.

Mark Hulbert, an investment newsletter analyst, is on record recently as pointing out that one of the more accurate forward indicators of future stock market performance is flashing a green light.

Meanwhile, anyone who remembers what I write about will recall that the several recent columns have focused on what could go wrong and how wise it might be to curb our enthusiasm for stocks. If the world could go to hell in a hand basket, it might be wise to be hedging our bets.

While we might have accomplished some year-end reallocation and shifted some money to some bond funds, there is still the question of what might happen with those stocks and stock mutual funds we have left. Apparently, there is reason for optimism.

Hulbert, who is famous for pointing out that less than 15 percent of all investment newsletter writers ever beat market averages over any 10-year period, cites a survey done by Owen Lamont at Yale that studies the extent to which corporations turn to the stock market to fund their growth.

When stock markets are toward the top of a bubble, companies needing money prefer to issue new stock to raise cash rather than borrow money. When stock is selling at high prices, they can get more cash per share of stock sold. Studies going back to 1929 have monitored the tradeoff ratio of stock financing to debt financing.

At the height of the 2000 bubble, the ratio was 11 percent. In 1929, it was 15 percent. In October of 2007, it was 5.6 percent and today it is 5 percent -- just about the long-term norm. That would tell us that stocks are fairly priced today, and certainly not cannon fodder for a further bear market.

Apart from this straightforward indicator, there is something called the Volatility Index, which is known as the "VIX."

This is a measure of the volatility or the "investor fear gauge." The VIX starts to rise during periods of financial stress and falls when investors get complacent.

What creates the VIX is the extent to which investors are buying options on stocks -- mostly put options that make money if stocks go down in value. Inevitably, the professionals turn out to be wrong. The higher the VIX or measure of volatility, the greater the chance that the market will actually perform better.

Back about Jan. 28, for example, the VIX signaled a buy in the minds of those who watch it, and the 500 Index has risen roughly 5 percent in the weeks since.

Then, there is David Korn, who writes an online newsletter that slices and dices Bob Brinker's every utterance. Those for whom Brinker's monthly newsletter can't come often enough will find that each week Korn transcribes Brinker's Saturday radio talk show.

Readers have been advised to remain fully invested since March 2003. We have been assured that the stock market will reach new historic highs by the end of this year or early in 2009.

It is helpful to get beyond the headlines that would lead any reasonable person to feel pessimistic about market performance. After all, our government owes $9.3 trillion and everything we pay in taxes after about August goes to pay just the interest on that debt.

How can we be optimistic about stock market performance when the economy seems to be headed into a tailspin?

Fortunately, the stock market isn't always in lockstep with the economy. A recession may be when your neighbor loses his job and a depression may be when you lose your job, but elsewhere across America and across the globe, those companies operating more profitably with fewer employees may be making more money than ever.

Let's hope a few green lights aren't just broken traffic signals at a dangerous intersection.

Get weekly articles delivered to your inbox!

* indicates required