Price is intersection between supply and demand

5 mins read

Investing in the market as it really is, not how we want it to be, is the key to keeping one’s sanity in this business.

Just how baffling can the stock market be to investors? So often the market just does not behave the way investors think it should. Morgan Housel of The Motley Fool provides some data points that can make investors’ heads explode:

• Coca-Cola is fighting 12 consecutive years of soda consumption decline. Its stock is at an all-time high.

• Tesla is changing the world, and orders for its new car are off the charts. Its stock is lower than it was 18 months ago.

• Cigarette consumption has dropped 44 percent since 1981. Altria is up 71,000 percent since 1981.

• Walmart net income has tripled since 2000. Its stock has lost -1.5 percent since 2000.

• Apple has earned almost a quarter trillion dollars of profit since 2012. Its stock has barely budged.

• Amazon’s profits round to zero since 2012. Its stock has tripled.

• 2009 was one of the worst years for the economy in a century. The market rose 27 percent.

• 2015 was a good year for the economy. The market rose 1 percent.

• Brazil’s economy is a disaster. Its stock market is flat over the last two years.

• America is enjoying the longest streak of low unemployment claims in four decades. Its stock market is also flat over the last two years.

And so on.

Housel sums up the problem:

Outcomes are determined by performance within the context of expectations, with importance heavily weighted toward the latter. And if predicting future performance is hard, calibrating them against expectations is close to sorcery…

… In a world where analysts focus most of their time analyzing performance – what earnings will do, or what the economy will do – and it’s no wonder we struggle to predict outcomes.

This is where many investors simply throw up their hands and give up on finding a logical, organized way to analyze the market.

It is also where investors who are introduced to the Point & Figure method of technical analysis “see the light” in the sense that the market gets boiled down to understanding that price is the intersection between supply and demand.

The motivation for buying and selling activity may remain elusive, but the imbalance between supply and demand can be seen on the chart.

Momentum of the trend of the security can be identified and derived by looking at the relative strength of the security compared to all other securities in the investment universe.

With that information, investors can invest in the market as it really is and not as they wish it to be.

This article was written by Dorsey Wright and Associates Inc., and provided to you by Arthur Levin, managing director, TLS Wealth Management of Raymond James. Arthur Levin is a financial advisor with Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC located at 2015 Boundary St., Suite 220, Beaufort SC 29902. He can be contacted at 843-379-6100 or arthur.levin@raymondjames.com or visit www.tlswealthmanagement.com

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. Raymond James is not affiliated with nor endorses the author or his firm. All opinions are as of this date and are subject to change without notice.

The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by Dorsey, Wright & Associates, LLC (collectively with its affiliates and parent company “DWA”) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any information contained herein. Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. 

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