Eye on the Market with David O. England

Last week, we learned the importance of market capitalization and answered the question, “With the S&P 500 making new highs, what is really driving this market?”

Today, I look back to the “Big Five” stocks in 2007 to see they gave us signals regarding the market top.

In the beginning (Q1) of 2007, the Big Five, the largest market cap stocks (per etfdb.com) in the Standard & Poor’s 500 were Exxon Mobil (XOM), General Electric (GE), Microsoft (MSFT), Citigroup (C) and Bank of America (BAC). The price action of the top 5 market cap stocks can heavily influence the movement of the index up or down.

I designed a performance chart showing this price action (Jan 2006 through Dec 2009). Going into 2007, the “Big Five” and the market continued to rally. The market topped in October of 2007 (red box) and while it continued to rally, institutional selling hit and hit hard, signaling an upcoming plunge.

When the market tested price support and failed to rally July 2008 I warned my students it was time to take profits and put it in the storehouse. 

This is from a student, D. Keirn:

“I was in David’s class in July of 2008, the Tuesday after IndyMac Bank collapsed.  One of the students asked if this is capitulation and is it time to get back into financials?

“David said, ‘No! This is the beginning of a long ballgame that may go extra innings.’ He made a prediction that in mid-September a major bank would collapse, the federal government will step in and we will see what happens after that. He advised us to get out of the market. 

“One student asked which bank would collapse. David did not want to answer the question. The student then asked, ‘What do you consider to be a major bank?’ David paused and said with a grin, ‘Something the size of Lehman Brothers.’” (Lehman Brothers filed for bankruptcy on Sept. 15, 2008.)

So, here are the action points to think about:

First, in 2007, did you know which stocks were driving the market?

Second, if so, did you track the Big Five to signal the beginning of the 2008 plunge?

Third, when profit taking hits, are your strategies in place to prosper during the next downturn, correction or even recession?

Fourth, if not -- why?

While Wall Street adamantly states you can’t time the market, I wonder if “profit taking” with the “current” top five market cap S&P 500 stocks will signal the next market plunge? Next week we will find out.  

Remember, plan your work, work your plan, and share your harvest!
 
David O. England is the founder of the Eye on the Market-Training Academy (Davidoengland.com) and Associate Professor Emeritus of Finance. This column is for educational purposes only and is not intended as financial advice. Your decision to buy, sell, short or hold any investment product is a direct result of your decisions, free will, and research. Questions-send to thetraderseye@gmail.com.