|
| Upcoming Events |
Toronto Stockscores Club Meeting
Thursday May 27, 2004 7 - 10 pm
Humber College
203 Humber College Blvd.
Guelph Humber Building
Room - GH122 Ground Floor
Join this group of Toronto area stock traders and learn more about the Stockscores Approach to trading the market.
|
|
Stockscores.com Perspectives
For the week ending May 22, 2004
In this week's issue:
Most investors make the mistake of trying to be smart. They analyze companies, study the overall economy and gauge political conditions to arrive at an intelligent investment decision. Many times I have listened to a well thought out argument for why a particular stock represents a great investment opportunity. Many times I have wondered why so many individual investors spend so much time trying to be smart.
The market does not care how smart you are, it will always be smarter.
The stock market is a mechanism for people to cast their opinions on what stocks are worth. If you think a stock is undervalued, then you buy. If you think that a stock is overvalued, you sell. Every time you enter a trade, there is another person on the other side of the transaction that disagrees with you. You may buy because you think the stock is going to go up, but someone has to sell that stock and they are doing so because they believe the stock is going to go down. Kind of humbling, isn't it?
Since there are thousands of investors all trying to be smart, the market has become very efficient at effectively evaluating a stock's worth. Are you smarter than thousands of investors? If you were to compete in a quiz game against a team of thousands, would you be able to win?
Probably not.
In a quiz game, you could be on the side of truth. If a question is asked about who won the 1975 Indianapolis 500, you know that providing the correct answer will win you the point, even if everyone on the opposing team all agrees in an answer that is wrong. In the stock market, it does not really work that way.
The entire investment community could believe that a stock is worth $10 a share and nothing more. You could do detailed analysis utilizing the very best methods and calculate the true value to be $15 and be, as far as the stock market gods are concerned, completely correct. But, will that make you a winner?
No, because until the market agrees with you, the stock will not go above $10 a share. The thousands of investors that believe in the wrong answer will sell the stock if goes above $10, effectively keeping it below that price level. It does not matter if you are right, because the power of the crowd will ensure that you are proven wrong.
Stocks don't jump from one price to another, they instead move in trends where price gradually changes from minute to minute, day to day. It takes time to change the opinion of a large crowd, and new information is what motivates change. Individual investors do not have access to the information of tomorrow that will motivate the opinion of the crowd, which is why it is so ineffective to try and be smart when making investment decisions.
Be a follower, not a leader.
There are some investors who get better information than the general public. This group of investors has the power to predict future stock prices and change the opinion of the crowd. We as individual investors and traders can only follow their lead. If you can learn how to read stock charts, you can learn to read what the smart people are doing.
We as individual investors can not outsmart the market because we do not have the same depth of information as some investors have and, more importantly, because it does not matter whether the market is right or wrong in its evaluation of information, it is the determinant of price and is therefore always right.
If you have a smart investment idea, you must then test to see if the market is going to agree with you in the future. For example, you might say that the political uncertainty of the Middle East, combined with rising inflation in the West will ensure that Gold prices go up in the next few months. Therefore, buy Gold stocks.
This is a good idea, but when you go look at the chart of Gold stocks, you see that pessimism currently dominates the mood of gold investors (as shown by the falling tops on most of the gold stock charts). While the Gold market has made a bounce back over the past couple of weeks, there remains a good deal of pessimism which will likely limit the upside potential of Gold stocks in the near term. No matter how smart and well thought out your argument for buying Gold stocks is, it won't succeed until the general market starts to agree with you.
The stock market is a tough place. Don't try to be outsmart the thousands of investors what cast their opinion on a stock's value every day. Keep it simply by learning to read what the market believes, and the cues that it provides for where it will go in the future. That is the smartest thing you can do.
Back To Top
For this week's strategy, I thought I would look for stocks that have been in strong, long term up trends, but appear to be breaking in to downtrends. These stocks can present good long term short selling opportunities, that can be played through the stock or with Put options that have some time value for the trade to develop.
I ran the Long Term Breakdowns Market Scan and it found 39 candidates. Of the 39, the following stocks have chart pattern set ups that I like for longer term weakness.Back To Top
1. SYY
This stock is showing a breakdown through the neck line of a Head and Shoulder topping pattern that is good at predicting future downtrends. After a nice run higher over the past year, it looks like the sellers are starting to win in the market.
Back To Top
2. DLM
DLM recently came close to the highs it set in 2002, but could not break through that overhead resistance and is now breaking down from a pattern of falling tops on the daily chart. After a nice up trend that began last fall, it looks like investors are prepared to push this stock lower in the months to come.
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.com Weekly Perspectives or change the format of email you are receiving please visit here. Copyright 2003 Market Perspectives Inc.
|
