Six Market Phases
Stockscores.com Perspectives for the week ending May 25, 2007
|
| Upcoming Events |
Stockscores Pro Online Video
Stockscores Pro members will have access to an exclusive online video discussing this week's newsletter topic on the six cycles of the stock market.
|
|
In this week's issue:
"Bull markets are born on skepticism, mature on optimism and die on euphoria." - Sir John Templeton
These words from the good Sir are among the wisest ever spoken on the stock market. In one statement he has summarized why most people fail when trying to outperform the overall market. I would only add that bear markets are born on denial, mature on pessimism and die on fear. Human beings are programmed to respond to the market in a way that hurts their ability to make money from it because most buy on euphoria and sell on fear. It is time you stopped being like most people and started to understand these six important phases in a stock's life.
Skepticism
The sideways, boring trading that occurs when no one is interested in the stock. Characterized by low volume, directionless trading, this is when insiders accumulate their own stock with the knowledge that good things are coming. The Sentiment Stockscores are likely below 60 but going sideways or starting to rise.
Optimism
Begins with a break from the sideways trading pattern, an increase in trading volume and a formation of rising bottoms on the stock chart. Continues so long as the stock is in a linear upward trend with consistently rising bottoms. The Sentiment Stockscore crosses above 60 and the Signal Stockscore will spike above 80 on days when there is a strong chart pattern.
Euphoria
The upward trend switches from being linear to curved, a dramatic increase in trading volume. The stock is moving away from its upward trend line that had been drawn across the rising bottoms. Often the stock or industry catches the attention of the media who tend to be a good contrary indicator. The Sentiment Stockscore will be above 60, likely above 70 and the Signal Stockscore will be making high scores repeatedly.
Denial
The bubble must burst eventually and the denial phase begins with a sharp sell off on high volume that breaks the upward trend. The smart money is running for the exit door while unknowing investors hang in, hoping the stock will turn around. The Sentiment Stockscore will still be above 60 but the Signal Stockscore will spike sharply down below 60.
Pessimism
The trend of rising bottoms has given way to falling tops and a downward trend is forming. Trading volumes start to go down but most investors hang on to their shares arguing that long term investing with a buy and hold strategy is the best way to play the market. The Sentiment Stockscore falls below 60 and continues to go lower.
Fear
The final push toward multi year low prices as even the buy and hold investors can't take the pain any longer and sell their shares. Happily, the insiders and well informed snap up the bargains, knowing that the company is worth more than the emotional market has given value for. The Sentiment Stockscore will dip below 30.
With these things in mind, what is the best way to make money? Buying stocks in the Fear stage that have Sentiment Stockscores below 30 may get you some good bargains but you may have to be very patient in waiting for it to turn around. This is kind of like trying to catch a falling knife, if you succeed all your friends will be impressed but you might get hurt trying.
Buying stocks in the Skepticism phase is not as dangerous but you may still be putting your money in a parking lot. The sideways trading that characterizes this phase can go on for a number of years, threatening to start in to an up trend any day.
I prefer to buy stocks when they are moving out of the Skepticism phase and in to the Optimism phase. The Sentiment Stockscore should have recent crossed above 60 after being below for a number of months. The stock should be forming some rising bottoms within its sideways basing pattern and starting to break through some resistance levels.
When applying this view of a stock's life cycle, it is important to consider at least a two year chart. Try looking at these long term charts of some stocks you are interested in and see how these phases have played out.
Back To Top
What phase is the market in right now? I think we are in the late stages of Optimism, perhaps bordering on Euphoria. The upward trend of the Dow (DIA) has gone in to steepening upward trend that is pushing toward a parabolic curve. The Nasdaq (QQQQ) is not showing as much Euphoria and the TSX remains pretty linear in its upward trend but it is starting to run away a little bit, indicating there is some emotion coming in to the Canadian market as well.
My thought is we will soon see some money come out of the hot US sectors that are showing Euphoria and move in to the sectors that have lagged. I used the Stockscores Sector Watch tool to look at the sector charts to see which have not participated in this rally but could benefit from a sector rotation of capital. For those with a long term view of the markets, here are some sectors to keep an eye on and what to watch for.
Advanced or higher members of Stockscores can see all of these sectors, their charts and the stock that make up the sectors.
Back To Top
1. .DJUSNS
The two year chart shows an ascending triangle pattern and this sector has been in a sideways trading pattern for about seven months. Watch for a break through 415 on this index.
Back To Top
2. .DJUSPP
This sector had resistance at 170 but broke that this week, volume is increasing and it appears that the buyers are in control.
Back To Top
3. .DJUSIT
This sector is at a critical point because it is right at resistance and could either break out here or retrace back from resistance. Watch for a break through 415 as an indication that money is coming in to this sector.
Back To Top
4. .DJUSCT
In the last month, this sector has tried to break through resistance twice and failed to go in to a rally. It seems the buyers are eager to take this sector higher but just need to overcome the power of the sellers. Watch for a sustained move through 750.
Back To Top
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.
Back To Top
|
If you wish to unsubscribe from the Stockscores Perspectives Weekend Edition or change the format of email you are receiving please login to your Stockscores account. Copyright 2006 Market Perspectives Inc.
|
|
