Stockscores.com Perspectives
For the week ending August 7, 2004
In this week's issue:
Have you looked at purchasing a Plasma television lately? If you have, then you will know that prices are a lot lower than they were five years ago. As I browsed through the electronics flyer that came with my Friday newspaper, I started to think about the adoption cycle of new products, and how it compares to the adoption cycle of stocks. There are a lot of similarities, consider the types of consumers that take a new product like a Plasma television through its product life cycle:
Innovators - these are the people that created the Plasma screen and had one hanging in their house at an enormous cost. I remember hearing that Bill Gates had them all over his newly built home before you could really even buy them in the store. He has a little better access to upcoming technology than the rest of us.
Early Adopters - Plasma screens show up in boutique electronic stores and the guy who has everything (and lets everyone know that he has everything) rushes down to buy one, despite the very high cost. He has thoroughly studied the technology and believes that it is the next great thing.
The Astute - this group catches on to trends early and waits for prices to get a little more reasonable before purchasing. The increasing consumer buzz convinces this person to get the Plasma.
Majority - as Plasma prices approach the prices paid for an old style television, mainstream consumers start to buy them and soon it is not cool if you don't have one. We are not there yet on Plasma TVs, but getting closer.
Reactors - some people hold out on purchasing a Plasma, citing the technological weaknesses of the product. Finally, the prices are so low that they too must have it because they would never pay the astronomical prices for the new TV technology that will one day replace the Plasma.
Holdouts - those who do not care about the innovation, they buy a Plasma screen because they simply can't find someone who will fix their old Zenith.
Garage Sale Buyers - on a Sunday morning, those who find sorting through some one else's old stuff cathartic are out looking for deals on a discarded Plasma screen. When they find one, they buy it cheap and brag how they got a Plasma for $100 that used to sell for $10,000. Now, does it work?
You are probably wondering what the heck all this discussion of Plasma TVs has to do with the stock market? Well, just as new products go through an adoption cycle, so too do stocks. We can think of stocks like products, and the companies have to convince the investment community to buy them. However, unlike a new product whose price drops as it goes through the product adoption cycle, stock prices will ascend as investors accept their positive fundamental change.
Consider a similar adoption cycle:
Insiders - these people know that the company is doing good things because they run the company. With the benefit of better information than anyone else, they can own stocks destined to go higher and actually guide the company to justify higher prices. While it is illegal to trade on inside information, it is not illegal to do nothing. Most insiders hold massive amounts of their company stock, and if good things are coming, they choose not to sell. That creates an imbalance between buyers and sellers in the market, and the stock begins to move up.
Early Adopters - this group either knows an insider or are particularly astute at reading market activity. They see signs that something is going on, and accumulate a position without really knowing why. They never buy at the bottom, but are good at getting in to uptrend early.
Aspiring Traders - as volume picks up, technical indicators tell them that the buyers are winning, and they accumulate the stock. As buzz about the company begins to circulate in the media, the big funds begin to take positions wishing they had known about it sooner.
The Momentum Players - the stock is now well in to its up trend and the media begins to talk about the success of the stock somewhere outside the headlines. Investors are calling their brokers about the stock, and investors with some experience are taking positions because the company is obviously good. Trading volumes are getting very heavy and the Insiders and Early Adopters are selling in to the strength.
The Greedy - after the last bear market, these investors swore they would never buy another stock. However, they have been watching this one climb for some time and feel they are missing out on a great opportunity to get rich the easy way. They buy at the top as the insiders sell the last shares he can without getting too much heat from his shareholders. Meanwhile, the hot stock makes front page news because the media are very good stock pickers.
The Uninitiated - your grandmother that does not know the difference between a bid and an ask opens an account and relieves the mattress of its bulge by putting money in to those "hot shares" that she heard about at Bridge club. The grandchildren won't get put through college with this one, the stock is on the decline.
The Bargain Hunters - "Hey, Nortel used to $100 and now it is only $50, I am going to buy it because I know it will go back to at least $75 again". Uhh huhhh, still waiting for the turnaround?
So what are the lessons to be learned from this? First, most of us don't know enough about any company to get in to the stock in the early stage of an up trend, so we have to trust market activity to tell us when an up trend may be starting. Second, the higher a stock goes, the riskier it gets. Third, when you are reading about it on the front page of the newspaper, a trend reversal is probably not far away.
I have seen at least five headlines in the last two weeks calling for higher oil prices …
I hope this helps.
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The stock market is not always the same. Stocks behave very differently in a down trend as opposed to an up trend. For that reason, you can not apply the same strategy all of the time. The overall market condition should determine your approach to the market.
This week, the major indexes suffered an important technical breakdown. Concerns over oil prices, terrorism and rising interest rates have dissuaded buyers from acting enthusiastically, and the sellers are winning in the stock market.
Over the next six weeks, I expect that stocks will move lower through the Olympic games as investors have heightened concerns over a terrorist attack in Athens or later, at the Republican convention. Provided there is no act of terrorism, stocks should start to bottom and oil prices should top out. Interest rates will be raised a quarter of a point, but the US Federal Reserve may indicate that a further rate increase will not be likely. As we move through September and toward October, stocks should bottom and start to firm up in anticipation of the stock trader's money making season, November till May.
Therefore, there is a good opportunity to short sell stocks showing weak technical charts, with an anticipated hold period of 2 to 6 weeks. With that in mind, I went through the Nasdaq 100 and Dow 30 using the Stockscores Sector Watch, and found the following stocks that I think are likely to go lower, making them good short sell candidates.
Keep in mind that the hypothesis about where stocks are going is only valid so long as resistance is not violated on the major market indexes. Good stock traders never get married to an idea, don't be committed to it if the market begins to tell us something different.
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1. COST
COST broke down on Friday through support, from a consolidation pattern that had a pessimistic falling top. The next level of support is in the $37 - $38 range.
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2. EXPD
The uptrend on EXPD was broken in July, and now the stock has broken down from a short falling top consolidation. After a lengthy up trend, that is a sign that investors are looking for the exit door, and willing to accept lower prices. The next level of support is at $40.
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References
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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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