Other Things Matter
Stockscores.com Perspectives for the week ending July 14, 2007
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In this week's issue:
Stock price is supposed to be based on the present value of the company's future earnings. Financial analysts create models that predict what future earnings will be and discount them back in to today's dollars to arrive at the total value of the company. The total value of the company divided by the number of shares provides the value per share and allows the analyst to determine if the market price is too high or too low. Of course, when the present value price per share is more than the current market price of the stock, a trading opportunity is identified.
That is how it is supposed to work in theory but of course theory often breaks down in the real world. There are many other factors that affect share price that all traders should keep in mind. Here are a few things to look for beyond the basic fundamentals:
Share Supply
Supply and demand for stock is not supposed to affect share price but there are instances when it can have a major effect. The most important thing to consider is when blocks of shares become free trading. Financing transactions that involve the issuance of new shares often have hold periods on the new shares. That means that the buyers of the new shares can not sell them before a certain date. So, the issuance of new shares may not be sellable for many months after the offering of these new shares and most investors forget to think about the effect that these new shares will have on the market price when they become free trading.
Prices will often go down around the time that a block of shares become free trading because there is an increase in the supply of stock and the sellers are often motivated to exit the stock.
You can see what a company's share structure is by looking at their news releases, annual reports or regulatory filings. Look at the share issues that the company has made and when the shares are tradeable. Warrant issues can also affect share price around their expiry date as these are essentially call options that have value if the market price is higher than the exercise price of the warrant.
Savvy investors in new issues will short sell the stock shortly before the date that a large block of shares becomes free trading to try and beat the other new issue investors to the selling table. They then cover their short when their new issue stock becomes free trading. Therefore, expect that weakness may come before the free trading date of a large block of newly issued shares.
Investor Psychology
When it comes to prices, investors are like elephants. They remember exactly what they paid for the stock and look to past highs and lows as price targets. Investors are often motivated to sell for psychological reasons that have nothing to do with the company's fundamentals.
How do you feel if a stock you bought goes down in price? Frustrated, nervous, worried, angry?
As the stock falls you begin to look toward pain avoidance. Selling the stock at a loss hurts so most investors avoid selling, instead hoping for a turnaround in the market trend. If you are losing on stock, what would make you feel better?
To get out of the stock for what you paid for it.
As a result, price levels where a lot of stock has traded hands establishes psychological barriers where sellers who have been frustrated by the weakness in their stock will be looking to get out so they can break even and feel better. That is why it is important to look at stock charts to see where there are areas of price consolidation that will form resistance as investors are motivated to sell for psychological reasons.
Systematic Risk
Every stock has some correlation to the overall market, a factor that affects stock price and is called Systematic Risk.
If the overall market is going down, even companies that are undervalued fundamentally will perform poorly because of their correlation to the overall market. The fact is, people will evaluate information differently when a market is going up than when it is going down so the direction of stocks in general will affect individual stock price performance.
This makes general market analysis an important part of the process to pick stocks for your portfolio. The strategy you use to pick stocks should depend on the outlook for the overall market.
Liquidity
Liquidity is a measure of how often a stock trades. The more active the stock, the more liquid it is. Liquidity has value because it reduces the costs of buying and selling. If you want to buy 10,000 shares of a stock that trades millions of shares each day, you can expect to get filled easily and at a price that is close to the last trade. However, trying to trade 10,000 shares in a stock that only trades 100,000 shares a day will be more difficult because there are not as many market participants to absorb your order and so you may get filled on your order at a number of different prices that can be away from the last trading price.
Therefore, remember that it is more expensive to trade less liquid stocks, not because the commissions from your broker are higher but because the prices you get your order filled at may be away from where you tried to get the order filled.
Seasonality
There are seasonal factors that affect share prices and investor psychology. Historically, September is the worst month of the year for stocks because it is when investors begin to look toward third quarter earnings announcements. The third quarter is the worth time of the year for most business because of the general economic slowdown that comes in the summer.
Within every sector of the market there are seasonal factors that affect share prices. It is important to understand these factors when you manage your portfolio. For example, investors in speculative stocks should know that this market sector almost always slows down by May because speculative investors lose their interest in the market over the summer. It is important to be cautious with this group of stocks as the market goes through the Spring.
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Here are two charts that stood out from the rest when I did some Stockscores Market Scans through the week:Back To Top
1. T.UEX
T.UEX is breaking out of a pennant pattern and looks like it is starting the next leg up in a long term upward trend. The stock may pull back for a few days, I am watching for a green candle day as a cue that it is likely going higher. The stock has to hold above support at $7.
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2. TLAB
TLAB has been forming an optimistic ascending triangle pattern over the past year and is now breaking out of the pattern, making me think it is likely to go in to an upward trend. I think it can go to $15 from here but will need to hold above support at $11.
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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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