My pal David Rosenberg points out that the Value Line Arithmetic Composite Index is at an ALL TIME HIGH. (This is an equal weighted price index of the 1650 stocks surveyed by Value Line, averaged daily).

Dave writes: “The average stock, by the way, according to the Arithmetic Value line index, just hit a new all-time high. And not just a new high for the year, but a new high that breaks the old peak set in the fall of 2007.”

That statement is incorrect — No, the average stock is not at all time highs.

Dave errs in using the Value Line Arithmetic index — its 1650 stocks, disproportionately impacted by small, and microcap stocks. (Value Line Arithmetic membership list available from the Kansas City Board of Trade).

What this chart below reveals is that lots of smaller names have had great runs:

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Value Line Arithmetic Index

click for larger charts

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Meanwhile, the Value Line Geometric index — where tiny companies matter less and big companies matter more — tells a very different story. Not only is this index below the 2007 peak, its still below its 2000 highs!

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Value Line Geometric Index

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Last, let’s consider the full market –the Wilshire 5000, which is also market cap weighted. Same story here: Below both the 2007 and 2000 highs:

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Wilshire 5000 Total Market Index

Category: Index/ETFs, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Value Line Arithmetic vs Geometric Index”

  1. 4horsemen says:

    SO then what this is saying instead is that Small and Mid-cap stocks are looking silly and the bigs have drastically underperformed. I’m not sure about the US, but in Canada the small-cap are dominated by resource names. In any case the point is clear – there is a fervent desire for risk out there.

  2. bear_in_mind says:

    @4horsemem: “…there’s a fervent desire for risk out there.”

    I suppose you’re correct if you’re referring to the actions of the Federal Reserve. For most retail investors, however, they’re in equities because there’s precious few alternatives for asset appreciation… thanks of course to the Fed.

    The real question is how far and how fast the market plunges when the punchbowl is taken away. Dr. Bernanke has prescribed high octane hooch through June 30th. With elections lurking in 2012, I suspect the Hawaiian Punch will continue flowing, along with streamers and party hats.

    What say thee? Can we zombie economy be ‘stimulated’ enough to keep it walking for another 24 months? Will 2013-15 be the era of reckoning?!

  3. dead hobo says:

    The two latter graphs agree with my intuitive approach to this market. There’s a lot of potential remaining. The slope, I believe, will be more gentle than in the past two market ascensions. This will allow the market rise to last a long time before the next slump for a new reason.

  4. Aristotle says:

    Isn’t it purely a mathematical issue.? The Geometric index takes the average geometric daily return and multiplies it by yesterday’s index value while the arithmetic index takes the average daily arithmetic of each stock times the index value.

    Example – stock A +4% stock B -4% with geomean index drops
    with arithmetic mean index unchanged

  5. yoganmahew says:

    I hate to pick you up on your use of english, but:
    “Dave writes: “The average stock, by the way, according to the Arithmetic Value line index, just hit a new all-time high. And not just a new high for the year, but a new high that breaks the old peak set in the fall of 2007.”

    That statement is incorrect — No, the average stock is not at all time highs.

    Dave errs in using the Value Line Arithmetic index”
    It is not an incorrect statement, as Mr. Rosey states that he is using the Arithmetic Value line index. So the statement is internally consistent. Whether or not it is an error to use one index over the other is a judgement call, so you can consistently say “Dave errs”.

    PS Love the blog…

  6. Patrick Neid says:

    When the futures market first started on these indexes in the early 80′s all kinds of confusion set in because of the way they are weighted. The spread traders didn’t know if they were coming or going. The Kansas City Value Line index ultimately fell out of favor as a result.