<<so the less volatile a stock is, the more volatile it will be?>>
Nothing to do with volatility. In this case, the idea is, that good news will be discounted, because of the fears about DOJ etc. Ordinarily, good news about a company's business is reflected in the stock price, (the price goes up). However, if there is a powerful reason not to buy the stock because of some uncertainty, the good news will be discounted. The longer it bases... the more good news accumulates and is dismissed. The more anxious and desperate the potential buyers become "let me in on all that good stuff". But they don't buy because they are scared. This results in a stock that is undervalued relative to the market. When the source of uncertainty is removed, or lessened, the resulting explosion in buyer demand will rocket the price - the more accumulated good news, the longer it based, the more undervalued it became, the higher it shot up.
Think of the following analogy. You have a helium baloon chained to the bottom of the ocean. The baloon is MSFT price. The chain is the source of uncertainty, the factor(s) keeping the price (baloon) down. Now you keep pumping helium (good news) into the baloon, but because of the chain, it cannot rise. The longer you pump good news in - the more helium you pump in - the longer it bases - the more you are increasing the pressure inside the baloon. Now, if either the chain is released, or it snaps from too much pressure - the baloon will rocket up to the surface. The more pressure there was, the stronger and faster the explosive move up.
<<"the longer [microsoft bases], the stronger the rise will be">>
That is why I think it safer to be in MSFT than out of it. Because it's been basing for awhile - and when it rises, it will rise very fast - you'll pay much more to get in once it shoots up. However, the basing process is unpleasant. And sometimes, the chain is shortened (DOJ case gets worse or some other reason) - thus it actually declines. So, it is best IMO, to have such a low cost of acquisition of MSFT, that the basing effect (or even a small decline) doesn't hurt you. Bottom line IMO, the risks of being out, are greater than being in, *provided* you have a low cost of acquisition.
Morgan |
