Fear
Stockscores.com Perspectives for the week ending June 11, 2005
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Have a great summer!
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In this week's issue:
We are now about five years in to a bear market. Technically, stocks have been going lower for five years but few would argue that this last half decade has not been a great time for investors. If the Clinton era could be proclaimed one where Greed dominated, then the era of Junior Bush should be characterized by Fear.
Think about how Fear dominates our everyday life. Parents are afraid to let their kids walk to school by themselves because they are afraid of Pedophiles. Even pop stars are now labeled as such.
When we step on to an airplane headed for a sunny vacation spot, most of us have some Fear in our mind, wondering if that Middle Eastern person sitting four rows ahead of us is a terrorist. Sadly, my Middle Eastern friends feel this sentiment every time they fly.
We are afraid of what our captains of industry are doing to steal our money so we have put in so many regulations to limit fraud that we have limited the good people too.
People are also stealing identities, so we are now afraid of what we throw in to our garbage or what private information we share with someone on the telephone or by email.
What happened to good old Greed?
Since the collapse of the technology bubble and the start of the war on terror, our lives have been dominated by Fear, and the stock market performance has shown it. Few investors are in the mood to believe in the positive effects of Greed and the innovation necessary for Bull markets has lagged.
There has been a bull market in Energy stocks. Why? Because of Terror - which is an intense form of Fear.
Real Estate stocks have done well as investors have focused on the sanctity of their homes. We feel less Fear when we are at home, the United States even created a department called Homeland Security to ensure this.
When will be stop being scared and start feeling Greed again? Is five years of Fear enough?
For the stock market to turn around, for a Bull market to develop, we need Fear to lose out to Greed. And so, we have to look for signs that the darkness of Fear is being illuminated by the light of hope that Greed provides. Are there any signs of a sunrise?
Look at how people are dressing this year. Walk through a mall and see the colors in the stores. I can not remember a time when color was so prevalent, even men are wearing pink again. The last time that happened was when Ronald Reagan was President.; we all now how Greed dominated that period.
I am not sure that pink shirts are a sign that we are entering a bull market, but I do see signs in the activity of the stock market that investors are starting to come back and dream impossible dreams. Who thought a tech stock like Google would ever hit $300. Stock speculation is motivated by Greed, and Google is one example that Greed works.
Fear causes stocks to go too low, and Greed causes stocks to go too high. If we are in an era when Fear dominates, then that implies that stocks are undervalued and deserve to go higher. As a stock market investor, I am hopeful that some Greed is around the corner, but still afraid of what will happen if there isn't.
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Companies that announce major news after the close of trading will often gap up in price the following day. An upward price gap occurs when the low of the current trading day is higher than the previous day's high. This abnormal price activity is useful because it indicates that the stock is trading more on its own story and less on the general movements of the market.
The Gap Ups strategy seeks stocks that are gapping upward on abnormal volume from low price volatility. Adding in these extra criteria improves the probability of picking a stock that is likely to go in to an up trend in the future. By focusing on stocks with low price volatility before the gap, we focus on stocks that were truly surprised by whatever motivated the price gap. Since the market's psychology is shaped by the past performance of the stock, price gaps tend to influence the market's mood favorably, and create optimism. This optimism can lead to a further price appreciation.
However, stocks that gap up often have to take a rest before they try to go in to an up trend. The sudden move to the upside is met with selling pressure as some investors happily sell at a profit, without regard for where the stock may be going in the future. When faced with fast money, many investors take their profit and run.
Therefore, it is often better to wait for entry in to a stock that gaps up in price. After the gap up, patience for a subsequent close above the gap day high can improve the probability of success again. Of course, having this patience can also mean paying a higher price, or being left without a position in a strong stock.
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1. ALVR
ALVR is breaking out from a head and shoulder bottom as it moves through resistance at $10. Volume on the breakout was very strong, indicating buyer interest has finally come back to the stock and the Sentiment Stockscore has recently crossed above 60 - a sign of optimism. ALVR is part of the Communications Technology sector, which is also strong now, and I think it can move to $13 from here. The chart will go back to negative if support at $9 is violated.
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References
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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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