The Big Picture
Stockscores.com Perspectives for the week ending May 27, 2005
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In this week's issue:
What is the big picture? When considering your longer term approach to the market, it is often smart to look at the macro economic and psychological forces that drive it. Right now, those forces are leaning toward an improving stock market.
First, some history. The last real bull market ended in April 2000 when the tech stock bubble burst. The US Federal Reserve, recognizing that there was irrational exuberance in the market, began to raise interest rates in an effort to cool the hottest stock market ever. Anyone with an ounce of rational brain matter recognized that prices were over inflated, but few wanted to admit it. The party was too much fun.
The technology stock sell off created a wave of problems for investors, the financial industry and those who ran the public companies. Investors lost lots of money, the financial industry lost a lot of business and a few people running public companies found themselves in trouble with the law. Most company insiders found themselves with a paper profit that quickly evaporated. Those who sold their stock before the bubble burst were left rich enough to buy NBA franchises.
Most investors found themselves extremely unhappy with the stock market and the performance of their investments. Many saw their small fortunes shrink to near nothing simply because they refused to sell when things went bad.
The US Federal Reserve's monetary policy had put the brakes on the stock market, but had done so with so much vigor that all the passengers on the market bus went flying through the windshield. Many blamed Alan Greenspan and Co. for destroying the bull market and the retirement dreams of many, but truthfully, only the investors had themselves to blame.
September 2001, the World Trade Center is destroyed by amateur pilot terrorists. Now the US government had a real problem on its hands. While the financial loss of the tragedy was significant, the greater problem was the effect of fear on the western world's business psyche. The US Federal Reserve made dramatic drops in interest rates in an effort to stimulate the economy and the US government lowered taxes with the same aim.
This should have stimulated the stock market, but the memory of the pain suffered by investors still lingered. Instead, investors pushed their money in to real estate. A hard asset that could be enjoyed made more sense than a paper claim on a company that investors were not even sure was real. More importantly, low interest rates made buying homes affordable to the masses. A great boom in real estate caught upward momentum.
Today, investors remain complacent about stocks and eager to buy bricks and shingles. People are not only eager to buy a grander home for themselves, but to also purchase investment properties that they intend to flip for a handsome short term profit. And why not? After all, real estate is something we can all touch and appreciate, unlike stocks.
The US Federal Reserve has a new problem. There is a bubble in the real estate market, and bubbles have always ended badly.
While the economy is not dramatically better, it seems that US monetary policy must now cool the real estate market. Not because they want people to suffer, but instead, because they want people to suffer less now than later if the boom is allowed to continue.
In an upward trending market, the greatest fear is being the last person holding the bag. Denial that a bubble exists is what ensures pain when the trend turns.
I see irrational behavior in real estate. I see a stock market starting to find a footing. I see a US Federal Reserve that wants to slow the real estate market. I see a commodity market that is losing momentum. I see a general avoidance of the stock market by retail investors.
In the big picture, I think that money is going to come out of the real estate market, and people will feel pain. They will crave a place to speculate, and the stock market will find investor dollars again. The five year bear market will end.
I know many will argue with me, the more that do the better. But I believe we are at an inflection point for stocks and real estate, and it is time to move from the latter to the former. Before fear sets in on real estate and greed ramps up the stock market.
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Stocks go up in price because investors are willing to pay more. Investors tend to buy companies that they are optimistic about, so it is important to measure whether investors are generally optimistic or pessimistic about a company. Stock charts can provide many clues about the mood of the market. For example, rising bottoms on a stock chart indicate greater enthusiasm among buyers than sellers.
The Sentiment Stockscore considers these kinds of chart pattern factors, and provides an indication of whether investors are showing optimism or pessimism. I have found that stocks that have a Sentiment Stockscore moving through 60 and rising tend to continue to rise as investor optimism carries them along.
The Sentiment Crossover Market Scan seeks stocks that have their Sentiment Stockscore crossing in to the 60 and greater zone after a lengthy period below 60. If this occurs, and the stock does not have significant overhead resistance, then there is a good potential for a future uptrend. By limiting downside potential with a stop loss point just below a short term support price, investors can better manage risk while leaving the potential for price gains.
This strategy is good for identifying longer term trades that do not require constant monitoring. The criteria are relatively simple, and a regular check of positions for an exit signal may only take a few minutes.Back To Top
1. CRGN
CRGN makes a Sentiment Stockscore Crossover above 60 as the Biotechnology sector continues to attract interest. Looks like investors like the stock again, watch for a break of support at $3.90 as a sign that something is wrong.
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2. SUPG
The downward trend line on SUPG was broken early in May and we have since seen a rising bottom formation take hold, with some recent strong volume indicating the stock is under some accumulation. So long as support at $4.50 can hold up, I think this stock has good potential to go to $7.
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3. SIRI
Investors have been in a bad mood on SIRI for some time, but optimism appears to be returning as the stock has recently broken its downward trend line. I expect the stock will stall at $6.50 but $7.50 a more reasonable price target, provided support at $5.30 is not broken. Disclosure: I own this stock.
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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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