Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: tradermike_1999 who started this subject	6/11/2001 11:33:18 AM
From: tradermike_1999	Read Replies (2) of 74559

Early last week the NYSE stock exchange announced that its profits dropped 5% last quarter because it spent a lot of money to upgrade its trading software. Then on Friday it had to shut down for 85 minutes because of a glitch in its new software. Nowhere else have we seen such an apt metaphor for the miracles of technology and the "new economy." While the NYSE was closed the big money on the Nasdaq sold. Juniper gave an earnings warning and crashed. But the little money bought. The Ameritrade index(http://ameritradeindex.com) tells us that 40% of all buy orders that went through Ameritrade were for Juniper. On Monday an analyst downgraded Juniper and the stock continued its decline in early morning trading as the rest of the Nasdaq fell along with it. I shorted TLAB and CKFR on Friday. Before the market opened an analyst on Bloomberg predicted that TLAB would soon announce a revenue shortfall. The stock traded lower, but once the market opened a slew of small lot buy orders appeared on Level II and took it up about 80 cents. I thought to myself - there we go - stock announces bad news and the small fish want to buy. After quickly topping out the stock dropped over 3% in the next half hour. I glanced over to the Yaho message boards for JNPR and TLAB and saw postings from people claiming that they bought on the bad news because they thought the companies and stocks would boom within a year. They gave no real reasons for thinking this, but they were adamant in expressing their hopes. Most small players invest like this. They think that if a stock drops or announces bad news it is time to buy because things have to get better. Like Pavlovian dogs they have been trained by the 1990's bull market to buy on any pullback. You would think that the Nasdaq crash would have caused them to lose this reflex, but it hasn't. They still read George Gilder and Michael Murphy and listen to Lawrence Kudlow and Joey B. They believe in the new economy and no one is going to tell them that the computer is nothing more than another appliance. They have their egos invested in it and too much is at stake. I have never read of a successful investing strategy that centered around buying falling stocks or stocks that announce bad news. I know that there are contrarians that buy stocks that have fallen from peaks, but they look for value plays and carefully study balance sheets. They think of themselves as disciples of Benjamin Graham and Warren Buffett and look for true turnaround stories. They do their homework. They don't run out and buy former fad growth stocks that are suddenly experiencing sharp declines in revenues and profits. They don't buy a CSCO that once had a P/E over 50 and now has no P/E because it has no earnings. In fact it just lost $1.02 billion dollars in the last 32 weeks. The only reason why people buy these high flyers is because their stocks prices are much lower than they once were. And eveyone assumes this is the bottom because Greenspan has cut rates so many times and everyone else says it is. But you need more of a reason than that. You need a real reason to think that a stock is valued cheap or that the company is going to turn around soon. You need a chart that gives you reasons to think it has bottomed. You have none of these with these technology stocks that come out and drop on earnings warnings. Don't buy them. Keep the money you might drop into them on the sidelines until real investment opportunities materialize. I will be YEARS before the fundamentals in these stocks really improve. Different stocks will lead the next bull run.

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