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« Recession Dating: What the Investor Needs to Know | Main | Weighing the Week Ahead: Skip the Sideshow »

April 13, 2010



John - Each and every day people compare every market sector and every asset class to the others. They also compare stocks within a sector. You can view the closing price as the market verdict on relative sector value.

If there is a move in a stock or sector, a move that is not justified by any fresh information, then the market will restore the balance. That is why there is a great capacity for fresh stock when there is no fresh information.

This is widely understood in the microstructure literature, but not by most market observers, even professionals..

You ask a good question. I probably should not have gone there without being willing to discuss it in much more detail.

As to examples, look at stocks added to or dropped from the S&P 500 or another index. There is a near-term effect, but then a return to normal. Normally the addition does not convey any "news information".

Thanks for the tough question.


John Smith

Could you explain and provide some examples for what you mean by "discrepancies in various markets".

Mike C

Excellent point IMO. I think there are numerous attractively priced individual stocks irrespective of one's view on overall market valuation levels.

I own Berkshire Hathaway and think it is quite cheap according to a variety of metrics. A few weeks ago I bought a particular energy stock at 17 that was 5 at the beginning of July 09 and closed near 23 today and that could double from here if crude goes to 100 and they meet stated production goals.

I would add that it isn't just a question of being "in" our "out of" stocks as there are more sophisticated approaches one could take that benefit from attractive individual circumstances yet hedge out market exposure. Hypothetically, one could purchase attractive individual names and pair that up with put options or inverse ETFs on the overall market.

Paul Nunes

this was great Jeff. i agree that when we look at individual stocks the market looks much cheaper. thanks!

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