Shoes or Shares?
Stockscores.com Perspectives for the week ending December 16, 2011
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In this week's issue:
In case you missed it, one of the pairs of ruby red slippers worn by Judy Garland in the Wizard of Oz will be auctioned off today in Los Angeles. It is expected that the shoes will fetch somewhere between $2 and $3 million. Alternatively, you could buy 200k to 300k shares of the Internet game company Zynga, which went public today at $10 a share.
What would you rather?
There are relatively few people willing and able to pay a couple million dollars for shoes that, when heels are clicked, will take you back to Kansas. But what is it that makes them worth more than $2 million while shares in a company devoted to virtual farms are worth $10?
Economists and financial academics will tell you that the price of the shoes is based on supply and demand and the price of the shares is determined by the ability of Zynga to make a profit. Those explanations are agreeable but I think they miss the point. Ultimately, the price of anything is solely based on what people are willing to pay.
Today, Chief Investment Analyst from Citi Investment Research Tobias Levkovich gave some good sounding reasons why we are approaching a "raging" bull market in the next 12 to 18 months, including:
a housing recovery
energy independence
a domestic manufacturing renaissance
fiscal reform
an emerging investment class in their late thirties
further innovation of smart mobile devices
Reading this list, I can understand his reasons for optimism. However, I also know that today, there is not enough buyer motivation to push prices in to a bull market trend.
There may be people willing to pay $2 million for ruby red shoes, but they are not yet ready to pay 20% more for the S&P 500.
When it comes right down to it, the fundamentals do not matter. It does not matter what companies are doing, how well they are being managed, how much money they are making. What really matters is what people are willing to pay.
Fundamentals will have an effect on what people are willing to pay but what is even more important is their emotional state. For people to pay more, they have to be optimistic. Optimism causes people to look at the fundamentals in a positive way and act on them with motivated buying.
The great investment opportunities come when there is a change in mood. This allows undervalued assets to become fairly valued and then, eventually, overvalued. As prices move up, more investors are attracted to the buy side because more people feel optimistic.
Investors have been pessimistic since the beginning of May. Until that changes, do not believe in a raging bull market. Do not be a buyer of stocks outside of defensive sectors. However, when the buyers take control, realize that a raging bull market can happen and will happen. Most investors will come back to stocks late but I want to show you what to watch for to determine your timely return to being fully invested.
The chart above is of the SPY, week by week over the last four years. You can see that the upward trend line was broken in May and we have been in a cycle of falling tops since then. For this market to switch from pessimism to optimism requires that prices move up and through the red line.
You can check this chart once a week to watch for that. It will take you a minute per week.
Breaking that line does not mean we are in to a raging bull market. For that to happen, prices will have to move through the April highs and then make it through the highs of 2007. There is a lot of work to be done.
The downward trend line could be broken in a week or in a year; it is hard to know when the buyers will find the motivation to buy stocks. Until then, be cautious with owning stocks. Also remember to not take your eyes off of the market because the reversal could come at any time and reversals often surprise most investors.
In case you would like to change investment vehicles, a pair of Wizard of Oz ruby red shoes sold in 1970 for $150,000. That makes them a worse performer than Microsoft.Back To Top
There are a few stocks that are doing well despite the general market malaise. To find them, run the Stockscores Simple Market Scan each day and inspect the charts. Look for stocks that are breaking from periods of sideways trading, preferably with increasing volume. Very few stocks will enjoy a long term upward trend and not have a Sentiment Stockscore that is over 60 so rely on that indicator if you are looking for stocks to own.
Here are two stocks that I found using this Market Scan strategy:
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1. OGE
OGE is breaking through long term resistance from a series of rising bottoms which indicate optimism. Volume was strong on the breakout today. Support at $51.90.
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2. PACR
PACR looks like a decent turnaround situation as the stock is breaking its long term downward trend line and formed a rising bottom in to the trend line break. Support at $3.90.
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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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