James,
I call the Max-Pain™ effect a 'second order' effect, ie the Max-Pain attactor gets swamped out easily by momentum generating events eg earnings reports, breaking news, up/down grades, Greenspan, etc.
In IBM's case, I think that the past couple of months have definitely been momentum driven (I'm personally not complaining mind you, IBM pays the pension check here, and the momentum may be justified) by a series of events. Better than expected earnings, better than expected conference call spin, good reviews from the press to company statements and contract announcements, Lou G. making positive 'sound bites' at the various shows, conferences, and government technology panels. Some of the momentum is also from the 'rediscovery' of IBM by analysts on Wall Street; Actions/statements like IBM has 'turned the corner', 'delivered' on the five year old promise to turn the ship around, being given a p/e ratio that is more in line with the rest of the industries IBM operates within, flight to a quality/ Y2K proof issue, etc.
But as I observed on friday night, to the Max-Pain Point™ update subscribers, the stock/index prices of a vast majority of the issues tracked in the Max-Pain™ study are significantly higher than their calculated July'99 Max-Pain Point™'s. This isn't just restricted to just IBM. This upside bias could be caused by several factors. 1)Everyone got surprised by the FMOC's raise but then hold stance, and a buying frenzy is setting in. This could be a short term effect if someone says something to 'clairify' the FMOC's position. 2)The market has put in a real bottom and the overall market is now beginning to gain momentum to the upside or 3)The MM's still believe there may be earning disappointments ahead that will bring the prices down closer to the Max-Pain™ points.
I agree that there is a point where the calculated Max-Pain Point™ loses it's ability to attract the stock price back, but I attribute that to the momentum forces at work. The MM's have to adjust their profit/loss points, but more often than not it is the 'buyers' who take it in the neck ;-)
This is all JMHO, and not investment advice
Ben A. |
