"Is That A Good Thing?"

This morning, my 11 year old son, who was missing school because of a dental appointment, calls me to ask: "Daddy, I see on the television that stocks are making 52 week highs. Is that a good thing?"

"Is that a good thing?"

How do I answer that?

My first reaction was what a contrarian signal. Everyone now knows - including my 11 y.o. son - that good times are ahead now that stocks are making 52 week highs. But then I thought, my son is too naive, too pure. He is not a contrarian signal like a news anchor on TV spouting off about the resiliency of US equities. Rather, knowing my son, he is just very aware of what is going on around him, and oh, like his father, he always try to ask the insightful question.

Obviously, I was thrilled at such a wonderful question and I told him so. My quick answer -because I hate talking on the cell phone - was that things were a lot more complicated than stocks making 52 week highs. I was really telling him that I would have to talk to him later and face to face. This was just too deep of a topic than stocks hitting 52 week highs.

So what should I tell an 11 year old boy about the stock market?

I could tell him about these two academic papers that look at stocks hitting their 52 week highs:

"Does Trendfollowing Work On Stocks?" from Cole Wilcox and Eric Crittenden of Blackstar Funds

"The 52 week High and Momentum Investing" from Thomas J. George and Chuan Yang Hwang

I could tell him that the stock market is all about psychology. Remember it was only a year ago that Dow 10,000 had people in a panic. Now Dow 10,000 has people in a state of euphoria.

I could tell him that the stock market isn't the real economy although pundits would have you believe that the stock market is the great barometer as it is all knowing and all seeing. Of course, I am still trying to figure out what the market was "seeing" in October, 2007. Somehow Mr. Market missed the biggest economic crisis of our generation.

I could tell him that the stock market is a discounting mechanism, and it often goes to extremes in both directions.

I will tell him about all this and more. I just wonder when I should start showing him some charts?