You are Nothing
Stockscores.com Perspectives for the week ending March 18, 2005
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In this week's issue:
So, you think you are pretty smart? Do you think you have the intelligence to make money in the stock market, the work ethic to beat the millions of other investors and traders that are out there? Are you confident that you have the determination to out analyze the pros and beat them at their own game?
You know what? It doesn't matter if you have all of this, none of guarantees your success.
You know why? Because in the world of investing, you don't matter. Even with millions in the market, you are a small speck of dust. Smart or stupid, rich or poor, famous or infamous, hard working or lazy, connected or shut in - you don't matter. I don't mean to bring you to tears, but you are nothing.
Warren Buffet is nothing. Henry Kravis is nothing, Bill Gates is nothing. George Soros is nothing. As the Hunt brothers once proved, no one can overpower the market. Therefore, no one is important. We are all equals.
There is only one way to make money in the stock market. I will not charge you millions for this sage advice. I ask that no one set their first born on my doorstep. Simply take this insight as a friendly helping hand.
To beat the stock market, you have to do what the crowd is going to do.
Yes, that is all there is to it. It does not matter if you are right or wrong in your analysis. It does not matter if you base your decisions on the path of the stars or the secrets from the balance sheet. All you have to make money in the market is be half a step ahead of the masses. Predict where the crowd will go, and you will be rich.
You can do fundamental analysis, technical analysis, behavioral analysis, read the tea leaves or whatever analytical method you like. You simply have to gain insight in to what the crowd will do next.
What is the method for achieving such a simplistic goal? If you root yourself in logic and rationality, you will not be successful. Instead, you may learn more about predicting where stocks will go by heading to your local Walmart on a busy Saturday afternoon.
Watch how the crowds behave. Notice how a crowd gathering around a product display attracts more people. Notice how people pick up items near the entrance of the store more often that the items that are in the middle of an aisle. Notice how some people get emotional when someone is in their way.
Predicting where the crowd will go requires an understanding of crowd behavior. Parallels can be made between the activity in a busy store and those of the stock market. Abnormal behavior in a stock is a sign of excitement about a stock. This excitement attracts a crowd. Crowds can create feeding frenzies where emotion takes over people's decision making.
The reason you do not matter in the stock market is because your opinion can not stand up against the collective opinion of the market. You can be completely correct about your determination of a stock's value, if the crowd disagrees with you, you lose. When the crowd is wrong, it is right, because it has the power to push prices toward its perception of value.
Stop thinking about the stock market as a collection of businesses trying to make money. Instead, think about the stock market as a bunch of products that can attract the interest of buyers. And remember that what attracts buyers often does not make sense. At least no more sense than people buying rocks as pets.Back To Top
The most important factor affecting stock price is information. As information about the earnings potential of a company is made public, prices move to reflect the new knowledge. Often, stocks move in advance of the public release of information because there are market participants who have access to the information early. In other words, the process of information dissemination is gradual and not always fair.
Fortunately, this process often shows up in market activity. If significant new information is available, those with access to that information at an early stage may buy or sell in the market. In doing so, they can cause abnormal market activity.
For example, if an individual learns that Company A is likely to announce an alliance with Company B that will have significant impact on Company A's bottom line, that individual may decide to purchase shares in Company A. If there are enough people with enough buying power doing this, they can cause the price of Company A to move significantly, and trade an abnormal amount of volume.
Mathematically, we can define what a normal price move for a stock is based on its past trading history. A stock like Microsoft may move up or down 3% on average in a day. A smaller, more speculative stock may have a greater range of price movement. Based on their specific trading history, it is possible to extrapolate an expected range of price movement for the next trading session. If that stock moves outside of that range, it is deemed to have made an abnormal price change.
We can apply the same reasoning to the quantity of stock traded on a particular day as well. If a stock trades far beyond the average number of shares that it has traded historically then, statistically, it has traded an abnormal number of shares. Identifying stocks that make statistically significant abnormal price movements while trading an abnormal quantity of shares provides clues that the stock is trading on significant new information. That information may have been made public, market participants may be making an educated guess on future information, or privileged market participants are trading on private information. In certain situations, stocks that behave abnormally are often telegraphing future price trends.
Identifying stocks that have made statistically significant abnormal price gains is an excellent way to find stocks that may continue into up trends. However, using only this filter is insufficient as you will simply find too many candidates and a success rate for finding winners that is too low.
Recognizing that price volatility defines uncertainty, we also want to focus on stocks that have recently been in a period of low volatility, relative to the past trading history of the stock. Market participants are confident about the value of a company that shows little volatility. In other words, the market is confident about the price it has given to all available information. Therefore, if a stock breaks from this period of low volatility with an abnormal gain, we hypothesize that the move was motivated by new information. This new information will take the stock higher as more people learn about it. If the stock makes this abnormal break out of a period of low volatility with strong volume support, we have even more evidence that there is new information causing some investors to get excited.
The concept of resistance is very important to this strategy. When looking at a stock chart, it is relatively easy to see that there are price ceilings that seem to prevent a stock from moving upward. In our previous example, that ceiling was at about $12. This line of resistance is really just a boundary above which the market is unwilling to pay. Based on all the information that the market has about a company, the market is unwilling to pay more than the resistance price.
Therefore, if a stock breaks above resistance, it may imply that there is new information that makes the company worth more, and therefore, the market is prepared to pay more. Therefore, the logic of this strategy is as follows. Identify stocks that are behaving abnormally to the upside and trading abnormal amounts of volume because that is an indication that there is something positive happening. If the stock is moving from a period of low volatility, we can assume that the market was confident about the valuation it has given the stock. Further evidence of new information is found if the stock breaks from this period of low volatility and above a line of resistance to prices beyond which the market was previously unwilling to pay.Back To Top
1. AMPL
Abnormal price movement with abnormal volume, AMPL is breaking out of a lengthy trading range through resistance. That has the Stockscores up, making this stock a good consideration provided it can hold above support at $3.90.
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2. UFPT
A big break to the upside on UFPT today, something has investors excited and a crowd is gathering. The stock may see some profit taking in the short term, but as long as it can hold above support at $3.50, has good potential.
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3. TIF
TIF is breaking out from a six month ascending triangle pattern today with strong volume support, the market looks like it likes this stock the way Tiffany's customers like diamonds. Support at $31.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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