Talking to the Puppet Master
Stockscores.com Perspectives for the week ending November 18, 2007
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In this week's issue:
Have you ever wondered if there was some one steering the movement of stock prices, a sort of master puppeteer pulling on prices and making the markets dance like Pinocchio at a wood carvers convention? It would be easy to think so, the markets seem to move with a rhythm that can not be explained by randomness and yet often distributes cruelty and passion with schizophrenic selection.
What if you had a chance to ask some questions of this market marionette master as he pulled the strings tied to each of our hearts? What would the answers to those questions be? Here are some that might come up.
Question: I have done a lot of research and bought in to stocks that are good value, they are trading at less than what their fundamentals are worth. Why are they going down in price?
Answer: Investors buy stocks because they think they are going to go up. Value stocks tend to have value because they have fallen a lot in price; they are cheap because investors are pessimistic about the company. Pessimism takes time to reverse; we rarely rally stocks that are in downtrends. First, let them base, let optimism build and then I will start to pull them higher. But I like to play tricks too, many value stocks are only valuable based on what happened in the past, not on what will happen in the future. Value today can disappear when new information comes out that shows that the value is not really there, that the fundamentals are not as good as many thought.
Question: Why do I always seem to hold the big loser?
Answer: You are like most people; you like to gamble when you are suffering a loss. Despite what the market may be telling you, the pain of crystallizing a loss overcomes your rational mind and you hang on to bad stocks. You hope that the stock will turn around so you won't have to suffer the pain of the loss. I get a real kick out of seeing that happen, it is funny to watch how people let their emotions take over and they let their losses get out of control. It is really funny when you buy more of the stock you are losing on, that usually lets me inflict even more pain.
Question: Why do stocks always seem to bounce back right after I sell them?
Answer: Well, that is part of my natural selection process. Most rookie investors only have so much pain tolerance before they panic and give in. They will ride out a loser for a long time, hoping that their stock will turn around but of course I don't like to make it easy. I will let the stock drop, I want to test your resolve and wait for the smart buyers to find the floor where they will step up and act. That floor is right below where the weak investors panic, where those guided by hope finally give in and exit. After that, there are no more sellers and the stock can bounce back.
Question: How can I find the best stocks to own?
Answer: The best stocks are the ones that go up right after you buy them, and which go up with more intensity than we would normally expect. I call these Alpha stocks, they are the leaders of the pack. To get these stocks to go up requires volume, abnormal volume that will lift these stocks like a rocket heading for the stars. So, the simplest way to find the next hot stock is to look for the stocks that are trading unexpectedly abnormal trading volume, a sort of violent end to quiet, sideways trading. Most stocks that do well have abnormal behavior very early in their upward trends.
Question: I was told to use stop losses, but so many times my stop gets taken out and then the stock turns around and goes up. What am I doing wrong?
Answer: Heh heh, yes, I have really had some fun with you on that one. We let people think that this is because the market makers can see your stop and push prices toward them, but really, it is a lot simpler than that. You have two problems. First, you enter stocks that are not probable to go higher after you buy them, stocks that don't have a committed group of buyers. These stocks will be volatile before they go higher and take out stops. Second, you put your stop in the wrong place. Many people base their stops on a percentage draw down but that makes little sense. Stocks have natural floors that act as a barrier, the stop should be set just below that floor. If the floor gets taken out, then it is likely that the stock will fall lower.
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Market conditions are not great right now, there is a good deal of uncertainty and I think that limits the opportunities that we can find. I could not find some stocks to feature so this week, I thought I would do some shameless self promotion. It is possible to subscribe to a daily Stockscores Perspectives newsletter, each day I make a comment different aspects of trading or market conditions and I feature stocks that I think have good potential for a money making trade. You can take a 14 day free trial of this newsletter by going to Stockscores.com, clicking on Products and going to the Newsletter area.
Here are some recent features from that newsletter which have done quite well, hopefully it will help show the kind of stocks that I am looking to identify:
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1. COPY
COPY was featured about two weeks ago, this stock made a nice run higher the past week and I think that it has more to go, although a short term pull back is likely.
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2. QSC
QSC was featured on Oct 1 at $0.75 it hit $5 on Friday, this stock has been my top performer of 2007.
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3. T.ITF
I found T.ITF on a breakout on Sept 22, the stock has rolled along quite nicely and is still a good hold for those that got in.
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4. HINT
HINT came up on Sept 18th at just below $8 and got through $11.50 this week, still a good hold.
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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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