Nice round numbers, such as the FTSE 100 index hitting 7000, shouldn’t make any difference whatsoever to the underlying fundamentals of the firms making up the stock market.
However, a market making new highs grabs attention, and economic sunshine can loosen the muscles of the tightest hands gripping purse strings.
Will there be a dash for shares?
I reckon there’s a good chance that recent good headlines surrounding the economy might combine with new highs for the most-watched share index, the FTSE 100, to draw out previously non-participating investors.
It’s human nature to want to join in when things are going well. Over the years, I’ve overheard people owning up to getting out of the market “because it is down” and getting back into shares “because they are up.” So, with a FTSE 100 breaking the 7000 barrier and blasting new highs, it wouldn’t surprise me to see 8000 fairly soon afterwards.
Value-minded investors might well shudder at this apparent back-to-front approach to investing. After all, we all want to buy shares low and sell higher, but buying a market hitting new highs can often work out well.
Advocates of buying new highs
One famous trader/investor of the last century was a passionate advocate of buying new highs. Jesse Livermore was interviewed for the classic tome Reminiscences of a Stock Operator, in which he said, “Stocks are never too high for you to begin buying.” Now, I wouldn’t take that advice literally today, because speculation can drive shares up to insane valuation levels, but the principle remains sound; shares hitting new highs can often indicate good underlying operational performance.
Jesse Livermore maintained that what he called ‘the line of least resistance’ was usually up when shares hit new highs. However, he also cautioned against adding to an initial position in a share, or market such as the FTSE 100 index, unless the first position shows us a profit, thus proving our conviction correct.
Even in his day Jesse Livermore’s approach to the markets was witnessed in astonishment by other experienced traders who naturally looked for market bottoms and fallen share prices to buy. Yet, Jesse Livermore’s record of success left those other market operators well behind and many back-testing studies since then have shown that buying market highs outperforms buying market lows most of the time over the shorter term of a year or so. Needless to say, many that followed in the markets emulated Jesse Livermore’s methods and they became rich through their investments, too.
Buying FTSE 7000 could work out well
Jesse Livermore also said that the investing public likes big round numbers and he reckoned major milestones, such as FTSE 7000, often presaged big continuation moves. Whether that will happen this time remains to be seen.