NOTW #5: Noise In Financial Markets And How Demand Moves Stocks

Articles of the week, market commentary, and more

Hi reader,

The indices were up again this week, driven by a handful of companies, as they have been for the past months. I discuss two things that I found interesting this week and the lessons we can learn from them.

Without further ado, let’s get on with it.

Articles of the week

I published one article this week for paid subscribers: part 3 of the deep dive about the most recent addition to my portfolio:

Subscribers also got a chance this week to choose the company that I will profile next. I will upload the deep dive of that company sometime around the 24th of this month. If you want to have access to all this content don’t hesitate to join Best Anchor Stocks:

You can also check out the reviews of existing subscribers clicking the button below:

Without further ado, let’s get on with this week’s market overview.

Market Overview

The indices were significantly up during Independence week, especially the Nasdaq, which rose almost 3.5%:

Again, this performance was primarily driven by Big Tech. The likes of Apple and Meta were up more than 7% this week. Meta is an interesting case study because everyone thought of it as a shitco when it traded at $90 two years ago, and it’s now trading at $540. And all this while many continue to claim that there are no inefficiencies in large caps:

As I’ve commented in other articles, beating the indices over the past few years without owning these businesses has become increasingly challenging. The reason is that the indices have become increasingly concentrated around these companies and thus have become heavily exposed to their performance. These companies are all outstanding businesses, but it’s obvious they can’t be outperforming at this pace forever. I talked about this in the podcast with someone with a strong view on the topic, and I believe you’ll enjoy it when it comes out.

It’s also worth noting that the reasons why people buy indices have (or should’ve) changed a bit compared to the last 10 years. People used to buy indices to go passive by diversifying their investments across the economy, but one could argue that buying the Nasdaq (and even the S&P 500) is not really a passive strategy anymore, especially since you are getting exposed primarily to 7 companies. The bottom line is that if you are buying the Nasdaq today, you should have a pretty strong view about Big Tech because that’s what you are ultimately getting exposure to. This, among other topics, is something I go over in that podcast (it should be uploaded in around 3 weeks).

Anyway, this week, I shared two things on Twitter that I’d like to share here with some thoughts. This is the first thing I shared, something that I hung up on my office not long ago:

I believe the first thing that any investor should strive for is to have a plan to remain long-term oriented when noise is abundant, especially since noise is the norm in financial markets. It’s crazy to think that after all that’s happened in the world since 2018, the S&P 500 has doubled since then, compounding at a double-digit rate. Someone who did not open their brokerage, and therefore forced themselves to avoid the noise, would’ve ended up with a handsome return without suffering too much psychologically speaking. It’s not the noise in financial markets that’s worrying but how we react to it, and I feel there are two ways of protecting ourselves against this:

1. Not looking at the market all the time

2. Having something that allows us to remain long-term oriented. This something might be an image, an article, a book…

What I hung up on my office helps me with the second one. As for number 1, looking at markets is part of my job, but I thankfully don’t get carried away by daily price moves. This ties well with the second thing I shared. This is an extract from Ken Fisher’s (Phil Fisher’s son) book called ‘The Three Questions That Still Count’:

In the short run, demand determines the price of stocks because the supply is somewhat fixed. Demand, as most of you know, is purely emotional over the short term, which is why we see such dramatic price swings. According to Ken Fisher, the good news is that emotional swings can only go so far, so the market ends up in a “steady” equilibrium. What I take from this is two things…

1. The market being extremely optimistic or pessimistic can only go so far and will end up correcting itself. This over-optimism or pessimism is not what determines long-term stock prices, so investors can potentially take advantage of them

2. Opportunities don’t tend to last long because people don’t like being out of their comfort zone for a long period, meaning that we must do our homework beforehand because when the opportunity presents itself, it’ll already be too late

The industry map was a good representation of why the Nasdaq outperformed the S&P 500 this week. Technology-related sectors were very green, whereas other sectors did not do so well:

Source: Finviz

The fear and greed index improved markedly and is now in neutral territory:

Source: CNN

Not surprisingly, the market breadth indicator, a subcomponent of the fear and greed index, is in extreme fear. As mentioned above, the performance of the indices has been increasingly driven by a handful of companies. Some people would say this is terrible, but it also shows why we should let our winners run:

That’s all for this week,

Have a great one!