Getting Emotional
Stockscores.com Perspectives for the week ending February 3, 2006
In this week's issue:
"Win the hearts of people, their minds will follow." - Roy H. Williams
In business school, I learned that stock price is based on the present value of future earnings expectations. If you can figure out what companies are going to make in the future, you can understand what a stock is worth. This logic continues to assert that we should then buy stocks that have a higher fundamental value than what they are trading at.
In the real world, I find that this approach does not really work. It is analogous to saying that the best actors star in the best movies, the best toothpaste sells the most or the best car is in everyone's driveway. The truth is, emotion has a lot to do with how we judge information.
Why is Julia Roberts the highest paid actress in Hollywood? I am sure there is some relative unknown working an off Broadway musical who has honed the skill of acting better than JR. But we all remember the magnetic character she played in Pretty Woman and associate her with the good feeling that so many romantics felt watching that film. Because of that, she sells tickets.
What makes a Ferrari a desirable car? If you look at the fundamentals, no one should want one. They get lousy mileage (8 pmg), they are extremely expensive to fix (replace timing belt - $6,000), there is no where to put a set of golf clubs, it is hard to get in and out of and they scrape the ground on any steep parking lot entry.
But, they look beautiful and sound great. Emotion wins.
Emotion wins in the stock market too. Stocks go up because there are people willing to pay more for them. They may cite some fundamental reason for doing so, but I have found that many people buy stocks because they feel elation in doing so. It is the dream of making money with money rather than effort that attracts us to invest. For a stock to go up, investors have to be optimistic.
Marketing people call this "buzz". A product needs to generate buzz to be successful. It is the word of mouth and euphoria surrounding a product that makes it sell strong. iPods have buzz. Yoga has buzz. Abercrombie and Fitch clothing has buzz.
Stocks have buzz too, except we call it an upward trend. Right now, junior Canadian resource stocks have buzz. In the last few months it has been hard to lose if you bought good chart patterns in this sector.
Identifying hot products is relatively easy for most of us, we just have to observe the world around us. Identifying hot stocks is easy too, you just have to find the ones that are in up trends. Making money in the stock market is just like being the coolest kid in school, you have to be able to identify the hot product of tomorrow and get if first. When everyone in your class is wearing the same thing, it is time to move on to the next trend.
Stock market fundamentals only matter when the market starts to buy in to them. To spot a market that is starting to listen, look for the stock that breaks in to an up trend out of a period of quiet, sideways trading. This is like finding the shelf for iPods empty at the electronics store.
Don't fall for company fundamentals until the market starts to take an interest. It is equally important not to chase fundamentals after the broad market has already discovered them. When analyzing stocks, make sure you take a logical look at emotion.
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Information affects stock price. The more important the information, the greater the effect on price. Recognizing that there are market participants who act on information that has not yet been made public, we can often predict the arrival of significant news by monitoring market activity. Statistically significant abnormal activity is often an indication that positive new information is becoming a factor in the market. The Abnormal Activity Market Scan and Strategy seeks out the abnormal behavior that can telegraph the future.Back To Top
1. V.GRV
V.GRV is making a head and shoulder bottom pattern with a break through the neckline today on abnormal volume. This stock was much higher at this time last year so there is some resistance to work through, but the strong speculative market should help it overcome this problem. Support at $0.69.
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2. FTEK
FTEK has been consolidating in a trading range for about five months but broke out of that range today with strong volume. Rising bottoms leading in to the breakout are a sign of optimism which I think holds up so long as the stock does not pull back through support at $8.70.
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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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