How to Use Information
Stockscores.com Perspectives for the week ending November 20, 2012
| Lose Your Mind |
The Mindless Investor
New book from Stockscores founder Tyler Bollhorn
Coming Soon!
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In this week's issue:
Stockscores Trader Training
The 12 week Stockscores Investor and Stockscores Active Trader training programs start with the live Foundation class on November 24th in Vancouver and November 25th in Calgary. Click here to visit the information page.
Live Trading Day
For those who have completed the StockSchool Pro, Investor or Active Trader classes in the past, I will be doing a live trading day in Calgary on Monday November 26th. Watch me trade live and learn the processes I go through to find day and swing trading strategies. Email tylerb@stockscores.com for more information. Please advise by Wednesday AM if you would like to attend this event.
Stockscores Market Minutes Video
When is strength not a sign of optimism? In this week's Market Minutes video I outline how to evaluate strength and whether Monday's market rally was a sign of a trend reversal. You can watch it by clicking here. To receive email alerts any time I upload a new video, subscribe to the Stockscores channel at www.youtube.com/stockscoresdotcom.
This week's Trading Lesson
From The Mindless Investor, What is Price?
Fear and Greed
The great bull market in technology stocks was raging in late 1999 and early 2000. Stocks that made double-digit gains ever day were not uncommon, and the overall market went up without any regard for fundamental value. When PE ratios got so far beyond historical norms, fundamental analysts simply said that the rules were now different and these valuations were justified.
Emotion was what was really behind the astronomical price rise. People were willing to pay more because their judgment was fogged by greed. The law of upticks says people will believe in the fundamentals more if the price is going up, and during the technology bubble, people had very irrational beliefs about the fundamentals.
In 2008, the market crashed as the global banking crisis had investors fearing financial Armageddon. The price drop in August of 2008 was one of the biggest on record, and much of the selling was based in panic. With big daily losses, investors were jumping out of their positions fearing that the decline would get worse.
Fear and greed cause people to act irrationally, presenting an opportunity for the fundamental investor who can identify the mispricing of stocks because of emotion. Unfortunately, these opportunities are fairly rare and it is often difficult to know where the bottom or top is. Recognizing that a stock is trading for far less than what it is really worth doesn't mean the stock is going to bounce back tomorrow. Markets can act irrationally for a very long time.
Fundamental analysis can give the investor the ability to take advantage of opportunity created by emotion. When fear and greed push stock prices away from their fair value, the astute fundamental investor can step in and act, taking advantage of the opportunity that emotion creates. Warren Buffett is renowned for his ability to take advantage of panic and make market-beating investments when few investors are willing to buy.
Trading on information that is not public and therefore not already priced in to the stock is the second opportunity for the use of fundamental analysis. Analysts with industry knowledge, contacts and resources can extrapolate public information to predict the headlines of tomorrow. Sometimes just having the resources to do the extra work can make the difference.
Some Investors Find Private Information
If you wanted to buy shares in a retailer, how would you do research? You could start by reading the company news releases and annual reports, but we know now that this public information has little value. What if you sat in a shopping mall and watched how many people went into the store and how much they bought? With enough time spent in the mall, you could at least figure out how much business that store was doing.
Of course, you would get a very narrow picture of the company's overall business if you only looked at one store in one mall. To really get a good feel for how well the company was doing overall you would need to survey many stores in many different regions of the country. You would have to analyze whether people were buying regular-priced merchandise or discounted products. You would need to know enough about the retail business to understand costs so you could estimate the margins the company was enjoying. With a lot of retail knowledge, hard work and time you could get a sense of whether earnings would be better or worse than expected. Would you do this?
As an individual investor managing your personal portfolio, you would probably not apply these sorts of research methods. The cost of doing so would be prohibitive and unless you had a team of people helping you it would be impossible to do it in a timely way. There are, however, investors with sufficient capital under management to do this kind of work. There are firms who complete this work and then sell their research to deep-pocketed institutional investors. Is it legal? Absolutely. Is it fair to the little guy?
Not really.
Don't despair, I will later show you how we can use these large investor tactics to our advantage.
Who should use fundamental analysis? Ignoring the opportunities created by emotion for a moment, large institutional investors with the resources necessary to uncover private information benefit the most from this analytical method. They are able to work in the grey area between inside information and knowledge in the public realm. They can uncover information that gives them an edge over the average investor making decisions based on information they gather in the mainstream.
Do you feel ripped off, that the odds are stacked against you, that it is not possible to compete against the big money players? If so, don't worry. What appears to be their advantage is outweighed by the disadvantages that come with size and, with some simple techniques; the advantages that come with size won't even matter.
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Chart patterns that predict upward trends are often characterized by abnormal breaks through resistance from periods of low price volatility, typically from a period of rising bottoms. The Stockscores Simple Strategy and Market Scan combines the Sentiment and Signal Stockscores with other Market Scan filters to find these chart pattern set ups. The result is a scan that will generate a good number of high probability position trading opportunities each week.Back To Top
1. HGT
After getting punished lower this past Spring, HGT has been stabilizing and starting to build optimism. It broke higher from a rising bottom on Monday with abnormal volume. Support at $6.90.
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2. T.VET
The historical yield on T.VET is 4.86% and the stock is breaking to new highs for the year indicating investors are optimistic about the company's future. Support at $47.
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3. T.DOL
Already a big winner over the past few years but it looks like it wants to continue higher as it breaks to new highs with an increase in volume over the past few days. Support at $62.50.
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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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