Go Public, or Consider Private?
Stockscores.com Perspectives for the week ending January 30, 2005
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In this week's issue:
This past week, at a Stockscores seminar, a few people asked me what I thought about Sierra Wireless (T.SW, SWIR). When asked about stocks, I always try to give an honest answer, even if the answer is not what the person asking it wants to hear. After looking at the chart, I replied that the stock looked more likely to go lower than higher, and that it was best avoided or sold if owned. I also felt an opportunity existed to short sell the stock.
One of the people disagreed with me, citing the company's strong sales and profitable business. He felt that the chart was not accurate and that the company would reverse its downtrend soon, as the fundamentals warranted higher prices.
Two days later, the stock gapped down $5 on the announcement of the company's disappointing quarterly earnings and business outlook.
The mistake made by these people who predicted strength for the stock was in trusting public information over private information. Reading the news releases, annual reports and analyst recommendations might have told a good story with a rosy outlook for the company. Yet, despite the very logical argument why the stock deserved to be higher, this information made the wrong prediction.
It is important to remember that all publicly available information is priced in to a stock. There is no value in using public information to gauge a stock's worth because so many people have access to this information that any opportunity inherent in it will be adjusted in to the stock price.
Future stock price movement is based on future changes in the perception of fundamentals. The market is pricing in tomorrows fundamentals today meaning that predicting where a stock will go in the future is a matter of privilege.
Every stock has a group of investors who can better predict future fundamentals because they follow the company so closely or have access to private information. With this private information, they have an advantage.
With Sierra Wireless, this group of investors had been showing a willingness to accept less for the stock early this past week than had been acceptable for a very long time (a break through long term support on the stock chart). Investors were generally pessimistic about the company's prospects (falling tops on the chart). These two simple impressions that one can read from the stock chart told the story. Sierra Wireless was more likely to go lower than higher in the future.
Rather than listen to the old news about a company, listen to what the market is saying about the new fundamentals that are not yet in the public realm. Learn to read a chart and learn to stay out of weak stocks and focus on those that the market likes. Keep it simple when analyzing a chart and you can be on your way to better investing.
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Rolling Over
Pessimism is best represented on a stock chart by falling tops. Falling tops indicate that, over time, sellers are gaining strength and buyers are losing their motivation. When stocks consolidate with falling tops, the pessimism is complemented by growing consensus on what the stock is worth. As a market comes to consensus above a support price, a potential trading opportunity takes shape.
We get a signal that the bears have taken hold of a stock when three phases have run their course.
The upward trend line has been broken
A price consolidation has evolved, preferably with a falling top signaling pessimism.
A penetration of support occurs.
A good short selling opportunity occurs when these three criteria appear, particularly on stocks that have made considerable price gains in the most recent three to six months. As traders take profits off of the table, and fear begins to build among owners of the stock, the downward momentum in the stock can increase, creating a profitable trade for the short seller that established a position on the breakdown.
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1. T.MX
MEOH, T.MX has recently broken its upward trend line and is now breaking down through short term support from a falling top pattern, a sign of investor pessimism about the company. The Sentiment Stockscores is sliding lower to reflect this change of outlook, and the stock appears more likely to go lower than higher. Short sellers may take advantage of an opportunity provided the stock does not bounce back to close above resistance at $18 ($22 on the Canadian listing).
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2. RPM
RPM broke its upward trendline about three weeks ago, and has no broken down through support at $18. It looks like the trend may be reversing, creating an opportunity for the short seller. Since this stock is optionable, consideration of a Put option can also leverage the trading opportunity. The stock's sector group is also weakening.
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3. YUM
The Sentiment Stockscore on YUM is breaking below 60 and falling because the chart is breaking its upward trend line and beginning to roll over in to a trend reversal. There is still support at $45 that I would like to see broken before considering a short sale trade, and this stock is optionable so a Put option is another way to play a possible future downtrend.
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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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