Stockscores.com Perspectives
For the week ending July 2, 2004
In this week's issue:
You would think that a rational, intelligent person would be good at predicting and trading the stock market. After all, stock prices are based on a company's ability to make money and it can't be that hard to determine who will make the most. Yet, so often, apparently good news is met with selling pressure, and bad news finds the interest of buyers. Some days, good news really is good news and is met with a favorable market response, but the same sort of news some time later will bring the opposite reaction by investors. If your personal pastime is trying to figure all that out and make money from it, well, you may soon believe that digging ditches is a more enjoyable profession.
Those who intend to pursue market profits need to straighten something out very early in their trading career; we can not try to figure out what the market should do, only react to what it is doing. What it is doing is what is always right, no matter how wrong it may seem.
Interest rates went up in the US this week, something that in theory should be bad for stock prices. Stock prices went up too, despite the fact that, in theory, they should not. Would stock prices have gone down had interest rates not been raised? That would make even less sense.
The truth is, the market usually knows how it will react to news before the news comes out. The market predicts news, and does not react to it. When the expectation of news culminates in its announcement, the market has already forgotten about the freshly announced news and is now looking forward to the next important price moving catalyst.
There are two types of investors in the stock market. Those who look ahead to make their decisions, and those who look to the past. The former group is much smaller than the latter, yet it is comprised of the investors who make the most money.
Membership to the money making group of investors, those who look ahead to make their trade calls, can be achieved in one of two ways. The first is based on the privilege of being in the know, to be part of the inner circle of a company's information machine that will ultimately determine future price. The second is to be a member of the lower class information scavengers who simply try to figure out what the privileged investors are doing.
The stock market is not fair, there are some investors that have better information than the general public, and have a money making advantage when they can act upon it. However, those who learn to read what they are doing can achieve the same sort of market beating returns without really knowing what the inner circle knows.
There is actually an advantage to being a scavenger of private information. While it may seem to be more difficult to follow the smart money than it is to be the smart money, the truth is, the profit potential is even greater if you are a follower. Those with private information typically possess it only occasionally and on a specific company that they are close to. Scavengers can follow the smart money on any stock, and always be busy taking advantage of their advantage.
Abnormal trading activity is the greatest hint that an information scavenger can use to figure out what tomorrow holds for price movement. Stocks whose price changes abnormally, volume changes abnormally or whose price moves through important levels often do so because of significant fundamental change. The kind that is priced in to stocks before the news is announced.
The wisdom of an intelligent person would suggest that investment decisions should be made on what we know; the fundamentals of a company's business that has been recorded in the official record. If you want membership in the money making club, forget about taking this approach. The stock market is not fair, and it often makes no sense because most of us don't have the information to make sense of it. Unless you are part of the privileged group, you success will be based on your ability to figure out what the privileged are doing in anticipation of the future. Trust what the market tells you.
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With North America celebrating a long holiday weekend, I thought I would do some analysis on the major market indexes and where they are likely heading rather than try to pick individual stocks. This is the slow time of the summer, but I think we may be building toward a little summer rally that should provide some opportunities.Back To Top
1. QQQ
This is the chart of the QQQ, which is the Exchange Traded Fund that paces the Nasdaq 100 index. From this chart, we can see that the Nasdaq market has been stuck in a trading range between R2 (long term resistance) and S2 (long term support). It has been this sideways trading pattern that has frustrated traders, who have little in the way of a sustained trend to thrive off of.
This week, the Nasdaq market came up and tested short term resistance at R1. Going in to the long weekend, few investors were willing to bid stocks higher, so we remain below resistance. However, I think that we may see stocks come back to test this resistance level soon and ultimately make a break through it to begin a move toward long term resistance at R2. This would be the beginning of a summer rally.
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2. DIA
The Dow does not have as much potential as the Nasdaq, but the chart does look slightly positive. Large cap stocks recently broke their downward trend line and are now trying to decide if the optimism is warranted. If the Nasdaq can make a break through resistance, expect the Dow (DIA) stocks to be pulled higher as well and test resistance from February.
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3. T.XIU
The TSX 60 index is shown here through the T.XIU ETF, which looks weaker than its American counterparts. Short term rising bottoms are a positive, but this market needs to shake the longer term falling tops to reall[y have a hope for a sustained up trend. While TSX stocks have shown weakness for a couple of weeks, look for a bounce back soon as this market is approaching some short term support levels. Since the overall market does not look very strong, focusing on story stocks that do not have a heavy correlation to the overall market will likely yield the best results.
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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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