In an increasingly perplexing market, it seems that the more one observes, the more baffling it becomes. The daily fluctuations of the stock market often appear devoid of logic, meandering without a clear direction or purpose.
Last week concluded with stocks marking their second consecutive week of gains. Notably, the NASDAQ reached levels reminiscent of 2000—almost 14 years ago. In addition, the S&P 500 is now just a fraction away from its historic peak.
Is this a sign of a “risk-on rally?” Honestly, it’s tough to say. A multitude of factors could be influencing investor behavior, leading to a complex dance of buying and selling.
While it’s easy to speculate on reasons for a potential market downturn, one glaring concern is the current price level. The S&P 500’s price-to-earnings ratio currently stands at 19.48 percent, significantly higher than the historical average of around 15.51 percent.
While not at alarming levels, stocks aren’t especially affordable either. True, the S&P 500 may still rise, but a doubling of its value seems unlikely without a substantial decline first.
How to Outperform 90 Percent of Others
The essence of the matter is that we rarely experience unexpected events, such as snow in California during August; more often than not, August is characterized by sweltering heat. Or, to put it another way, there’s a 50 percent chance that your doctor graduated in the lower half of their class.
This invites the concept of mean reversion. Markets that are valued above their historical averages are likely to revert downward, while those below their historical averages will tend to rise.
What does this information imply? Not much on a day-to-day basis. The S&P 500 may be overvalued, yet it continues its upward trajectory.
Over the long term, however, this serves as a valuable reference point. Are the markets or stocks we’re considering overvalued or undervalued in relation to their historical averages? This is crucial information to have before making investment decisions.
Ultimately, our goal is to follow paths that have proven successful for others in building and nurturing wealth. We seek methods that can foster generational fortunes, even starting with minimal resources.
To kick things off, one must accumulate a small initial capital. This requires diligence, discipline, and patience—qualities that many might wish to bypass. However, if you aspire to succeed, a committed approach is necessary.
In essence, this means consistently spending less than you earn while striving to increase your income. Mastering this simple principle will place you ahead of 90 percent—or more—of the population.
Price Rebound Speculating for the Calculated Profit Seeker
After saving a starting capital, the next step is determining how to grow it. You could opt for a mutual fund tracking the S&P 500, as many brokers might suggest, or consider a more unconventional and slightly riskier route.
For instance, agricultural commodities present an intriguing option. Back in mid-2008, shares of PowerShares DB Agriculture (NYSE: DBA), reflecting the agricultural sector’s performance, were trading above $40. When the financial crisis struck, they plummeted to the low $20s.
Despite a modest recovery to $35 in early 2011, DBA shares have since stagnated around $25. However, this situation may soon shift… Agricultural prices are known for their cyclical nature.
Rising prices lead to increased production, which subsequently saturates the market, causing prices to drop. Eventually, production declines, setting the stage for prices to rebound.
Currently, we seem to be in the rebound phase of this cycle. Moreover, adverse conditions such as a drought in California or an unexpected freeze in the Midwest could further drive prices upward. Yet, purchasing DBA shares should be viewed not as a long-term investment but rather a calculated speculation on agricultural price increases over the next six months.
Warm regards,
MN Gordon
for Economic Prism
Return from Price Rebound Speculating for the Calculated Profit Seeker to Economic Prism
