How are Stocks Like Helium Balloons?

NYSE: SPY | SPDR S&P 500 News, Ratings, and Charts

SPY – Stocks and ETFs like SPY should be going higher…but it’s never quite that easy. That’s why this is a great investment lesson that tells us about the nature of stock movements and what that means for our current investment strategy.

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We all have that childhood memory of letting go of a helium balloon watching it effortlessly float higher.

Yes, there is very little effortless about stock investing…but there is something to be learned from this metaphor. That indeed stocks are like helium balloons where their natural tendency is to rise over time.

First, we need to appreciate why that’s true. Next what stifles their upside potential. And lastly, how this applies to our current investment strategy.

The Natural Order of Things

Consider this…that continual improvement is a prime driver of the human species. We have an innate desire to make things better and more productive which leads to a higher standard of living.

Or to put it another way…this improvement process creates greater economic activity > which churns out higher profits > which propels stock prices higher.

This perpetual machine forward is what makes stocks kind of like helium balloons where going higher is the natural outcome. And why bull markets typically last 5 times longer than bear markets (and this one is actually 10X longer than the average bear).

Unfortunately as we come back down to earth…we know its not that easy. Which leads to the next point…

Sometimes Stocks Are Held Down

The only way to stop that helium balloon from rising is to hold it down against its will. A recession is an obvious example. Where the excesses of the past expansion come home to roost as a period of decline. This will hold down profits and, obviously stock prices.

Yet even during the most raging bull market there are still a series of temporary sell offs, pullbacks and corrections. Meaning you don’t just float higher for ever and ever.

So think of each of these downturns as healthy realignment periods. That’s when previously lofty expectations are brought back down to earth allowing a positive path forward.

How Do We Apply it to Today’s Market?

This helium metaphor works perfectly for today’s market environment. With Treasury rates lower than the dividend yield on the S&P 500 it creates a strong demand for stock prices. (This was explained in greater detail in this recent commentary: Does 1 Equation Hold the Key for Stock Prices?)

Meaning that stocks want to float higher as they are the vastly superior investment value to bonds. The main thing holding down our helium stock balloon is concern about US-China trade. Because if not rectified, it could usher in the next recession and bear market.

It is for this reason that every time you see any iota of good news on trade talks that stocks instantly rush higher. And now it is like we have a 30 day reprieve as we await their next round of talks in early October.

The point is that stocks will likely float higher from here as there is less pressure holding them down. Certainly back to 3,000…quite likely up to the previous highs…maybe even a notch or two above.

No I am not saying to go gung ho bullish at this time. The trade deal may still go sour with stocks plummeting as a result. However, it is quite reasonable to increase your long exposure and even take on a bit more risk in your portfolio. Meaning to toss in some aggressive growth stocks in with your more conservative income producing selections.

My 3 recent articles below should help you cobble together a pretty well rounded portfolio perfectly suited for the times:

15 Greedy, Greedy, Growth Stocks

20 Under the Radar Momentum Stocks

Top 10 Growth & Income Stocks to Weather the Storm

Wishing you a world of investment success!


Steve Reitmeister

…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network

Editor of the Reitmeister Total Return

 


SPDR S&P 500 (SPY - Get Rating) shares rose $0.39 (+0.13%) in after-hours trading Friday. Year-to-date, SPDR S&P 500 (SPY - Get Rating) has gained 20.37%, versus a 20.37% rise in the benchmark S&P 500 index during the same period.

 


About the Author: Steve Reitmeister


Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...


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