TO ALL:
I have received PM requests from lurkers as well as regular distinguished thread contributors asking me to elucidate further on some of my market theories as pertaining to market direction. Apparently more than one are interested in the topic as expressed in the thread header vs. mindless off-topic discussion. Rather than answer each of you personally, I will try to expain here for all.
Several readers are interested in how stock prices can possibly be unrelated to underlying fundamentals. After all, in the 'real world' ie capitalist societies, aren't companies ultimate fates directly connected to the earnings and future earnings expectations? If so, then why should the stock price not be so as well?
Several readers have raised examples which contradict the above. Examples are:
1. A book was released and reported as showing CSCO as a company was worth $10 / share. Why then is the stock up over $1.20 to over $20 today? If it is 'worth' $10, why pay $20?
2. Cypress Semiconductor warns that sales are 50% of what they were before, the CEO says things are really bad and no way are they ever going to get any better (note this is not my observation but rather that of an anonymous poster, also known as CYA) and the stock price goes up. Should it not go down?
3. A leading analyst reports that business is very bad and is going to get worse, however he is certain he saw a bottom and expects stock prices to increase for the foreseeable future. Does this make sense?
4. Chairman Greenspan stated that there is no inflation, there is no pricing pressure at the retail level while underlying costs are increasing. This should cause corporate profits to decrease. Why then were there several bottom sightings today, an up market, along with optimistic expectations? Should it not be the opposite?
5. As to my personal 'moonjune' theory, why should June be any different than any other month? and why should rhyming have anything to do with market direction?
I will try to answer some of these questions:
Au contraire mes freres!, you have forgotten to take into account psychology into market direction!
1. Perhaps you have heard of a very popular theory known as 'greater fool'. It goes something like this: No matter how dumb you are, you can always find somebody more dumb. There was a not so popular movie released regarding this theory called 'Dumb and Dumber' which might make you feel 'Numb and Number'. So you should not worry about buying any listed security, because no matter what you pay, you can always find somebody who is not so bright and will give you more than you paid. Zeev practices this on a daily basis, if you note he will tell you that he expects a certain stock to be lower later in the year, yet he is not afraid to buy it at todays price, for he invariably finds someone else seconds or minutes later willing to pay a much higher price. Patience plays a large part in this trading strategy, however don't wait too long!
2. The answer to this one is popular this quarter. It's called the 'It cant get any worse theory'. If things are really, really bad, then you should buy the stock, because it cant get any worse, therefore is must get better. This requires some modicum of suspension of disbelief, for things can always get worse, see 'Candide' by Voltaire (the frenchman from a previous century, fluent French required for comprehension) for a reference. However, in todays environment, all that is required is an optimistic attitude.
3. Here you must understand where the subject is coming from. Analysts are in the stock selling business and like any business you don't badmouth the product, no matter how bad it is. CNBC realized this earlier in the year when they started cautioning viewers as regarding some tech stocks, they saw their ratings plummet. This is why the commercials with blooming idiots scoring big on junk internet companies using worthless trading tools have been replaced with ads for viagra substitutes, breast enlargers, and potty putters. Thankfully, they have learned their lesson, bottoms abound, and you will never hear anything bad about any company anymore, notice the quick cut to commercial should this occur!
4. You may have heard of the 'Greenspan PUT'. Essentially, this means that the chairman has guaranteed your investment. Remember, the fact that there is no inflation allows him to keep cutting interest rates ad infinitum. He has stated that he is concerned about the 'wealth effect' or rather the lack thereof, especially as it affects consumer spending which comprises the majority of our economy. His job is to keep the economy tooling along in good shape and he has vowed to do so no matter what it takes. He is on your side. Expect a call in the near future, with an offer of virtually free money, which you may use to purchase securities to fulfill your wildest dreams. Remember, he has stated that he doesn't know how much money there is out there nor even what money is, therefore expect a big flood of it coming your way, so what does he care as long as the wealth effect starts back in the right direction. But you must use it to buy tech stocks, otherwise the plan wont work.
5. This is my own personal theory gleaned from perusing various forms of information include our very own SI! It doesn't have anything to do with June per se, nor the moon, but it sounds good and feels good. After all, you do want to feel good about your portfolio, don't you? This was promulgated several years ago in a song called 'Dont worry, be happy'. It basically means it really helps to be optimistic and gung ho about your portfolio no matter what. Expect it to go sky high in the very near future. This also seems to work in the opposite direction. Earlier this year I tested this theory when I was shorting stocks, if I should notice the stock rising in price, I would start screaming at the TV, 'Go down you POS, go DOWN'. Invariably, the price would plummet. If it didn't, I would just scream that much louder and more often until I achieved the desired effect. On a negative note, my spouse would ask 'What in the hell is going on in there?' Once she found I was short she understood. Now when I go long a stock, I pray and whisper 'Cmon you can do it, you know you can'. After all it cant hurt! Part of the impetus for this theory and credit therefore goes to many SI posters also including Yahoo!s site where huge upside success was achieved through posting rocket ships, hugely optimistic target calls, comments like 'WOW look at XXXX go' etc. I have been accused of confusing cause and effect, but obviously they go hand-in-hand and I think a necessary prerequisite for a big bull market is the return unbounded optimism as well as what the chairman loves to call 'irrational exuberance'. After all, isn't this what is known world wide as the 'American Spirit'? Remember the memorable quote from Field of Dreams : 'If you build it, they will come? ' Please note that in order for this strategy to work you must do more than just mouth the words, you must truly believe, anything less will not be successful.
Hope this helps! |
