Why The Approaching Stock Market's New High Matters A Lot

Oct. 17, 2012 4:37 PM ETDIA4 Comments
John Tobey, CFA profile picture
John Tobey, CFA

ArrowsRecent articles note that the stock market is nearing its all-time high. So how should we view this news? Is a new all-time high important information, or is it just a media tidbit, similar to the Dow Jones Industrial Average (DJIA) crossing some seemingly important value like 10,000?

Let's talk first about that latter event. While the DJIA passing through 10,000 may be visibly impressive, the number itself results from happenstance. Determinants are the date the index was created (May 26, 1896), the beginning value (40.94), the stocks chosen (originally 12 industrials; now 30 from many sectors), how it's calculated (price-weighted with divisor adjusted for component changes) and the company component changes that occurred along the way (both from corporation actions like stock splits and from company replacements in the index). Alter any of those factors, and the numbers become uninteresting. In other words, crossing 10,000 should be viewed as "meaningless" as passing through 9,386.

Now, let's look at a new high. Here, the number doesn't matter. For example, the DJIA's all-time high is 14,198.10 set on October 11, 2007.

(click image to enlarge)

DJIA price chart

(Chart courtesy of StockCharts.com)

While the number is uninteresting to look at, the market's crossing that level will carry valuable information, especially in today's market. When the stock market exceeds its previous all-time high level, we gain insight into both business fundamentals and analysts'/investors' outlook for stocks. Because all-time highs necessarily mean fundamentals and/or outlook are better than ever, they serve as proof of business growth and/or stock enthusiasm.

In today's market, an index all-time high is especially meaningful.

In pre-2008 stock market periods, an index move to new high ground was viewed as proof that the economy was sound and growing. Plus, it showed that analysts and investors were bullish about future prospects.

In today's

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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