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Jim: Hi everyone, today is Thursday, July 26, 2018 and this is our weekly market update call with financial news and information plus a review of our relevant time-sensitive market indicators.

If you have ever read about herd mentality in your investment readings, you should know that it is not just a behavior that investors act on—it can be just as prevalent among financial professionals. I can think of two historical times where following the herd was symbolic of investing—and both had nasty outcomes. One was in the Dot Com Era—most historians define that period from early 1995 to the beginning of 2001—that’s the time when technology stocks overwhelmed the marketplace in multiple ways. My own personal view is that it actually ended in March 2000, which I see as not just the end of the dot.com bull market but the beginning of the longest bear market ever. Euphoria and financial celebrations were taking place weekly for months; millionaires were made in what seemed like overnight and everyone from stately aristocrats to stevedores was part of the hysteria. While herd mentality doesn’t have to contain hysteria, it usually does.

As recent as this morning, Raymond James market strategist Jeff Saut was pointing out that above all else—corporate earnings drives stock prices. Except of course, when other issues matter and shape buying and selling decisions. Such was the case in the Dot Com Era where revenues—not earnings—were the driving force. That meant that as long as you had revenue, earnings would either would catch up or earnings didn’t matter at all. Eventually, the importance of earnings became more important again and it was time to tell the emperor that he had no clothes on and the markets began a steady decisive decline that lasted almost 33 months—the longest bear market ever recorded.

Another time was the period just prior to the Great Recession. Wall Street had created these fancy fixed income investments—bundled together—they had a wicked combination of very high quality and extremely low quality income investments in the same investment package. These CDO’s or Collateralized Debt Obligations were a financial time bomb. Because they included a majority of high quality investments, they were rated AAA, the highest grade level by the rating agencies. As time went on, the mixture of higher to lower quality shifted so that more of the obligations were being made with more lower quality than the earlier versions. By the summer of 2007, the ‘street’ was beginning to “fess up” but investors chose to hold onto what they had because when they went to sell them in the marketplace, they found that there was no market or there was pricing that was not attractive enough for them to unload their holdings. The investments were blessed by the ratings agencies right up to the collapse that was witnessed, first with Bear Stearns in early 2008 and ultimately by the misguided outcomes of companies like Lehman Brothers later on that year in September. Once again, everyone was “doing it” and it made so much sense because interest rates were declining and investors didn’t like the yields they were finding in the safe sure investments they had owned in prior times.

So herd following seems to work the best when one can get out before the collapse—and doesn’t work out all when one doesn’t.

This week, we are starting a new feature to our weekly calls—for now, to be called The Defining Moment—a section dedicated to bringing more clarity for you around an existing investment term or introducing something brand new to your financial vocabulary.

This week, thanks to the Corporate Finance Institute https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/what-is-the-random-walk-theory/ and the friendly folks at Morningstar
http://www.morningstar.com/invglossary/efficient_market_hypothesis_definition_what_is.aspx our intern Jack Snopkowski has put together this explanation of what’s called the Random Walk Theory. It will be attached to this posting on our website by this time next week.

This week's indicators… Our indicators begin with three large groups of stocks. These groups range in size from 2200 to 3600 companies. One group is comprised of companies that trade on the New York Stock Exchange, another is comprised of companies that trade in the Over the Counter Market and the third is a combination of those two groups. What distinguishes that third group is that it is made up of companies from each of the first two groups but only with stocks that have option agreements––that trade parallel to the stock––through the Option Clearing Corporation's exchanges.

The reason why we track large groups is because the law of large numbers is a lighthouse, if you will, as the probability of investment choice can be enhanced by tracking how the large group is changing inside.

The NYSE is holding steady at 55.78%

The OTC market is also holding steady at 49.77%

The OPTIONAL Universe is 55.59%

The New York and the Optional group are tracking each other hand in hand and all three allow me to choose from all groups for our investment accounts.

We also rank 6 different asset classes. For weeks now the order has remained the same with Domestic Equities, International Equities and Commodities leading the group followed by the less impressive classes, Fixed Income, Cash and Currencies.

Interest rates? We follow the short term rate of the 13 week Treasury bill. That rate is holding at a ten year high of 1.97%. The next treasuries we look at are the 5-year and 10-year notes. The 5-year has crept higher in yield to 2.83% and the 10-year has moved higher in yield to 2.95%--both in the past week. While the 30-year treasury has shot back up from its 2018 low of 2.90% (just last week) to today’s high yield of 3.05%.

That's all for today's call. Does anyone have any questions or comments?

Opinions expressed are not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. There is no assurance these trends will continue or that forecasts mentioned will occur.

Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security.

There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

Commodities are generally considered speculative because of the significant potential for investment loss.

International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

The S&P 500 is an unmanaged index of 500 widely held stocks. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. It is not possible to invest directly in an index. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.

James Schmidt, Raymond James, its affiliates, officers, directors or branch offices may in the normal course of business have a position in any securities mentioned in this report. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.

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