Stock Market Truth Serum
Stockscores Foundation for the week ending December 16, 2024
In this week's issue:
In This Week’s Issue:
- Market Outlook – Small Caps Coming Out of Hibernation
- This Week’s Market Minutes video – Stock Market Crash or Santa Claus Rally
- Trader Training – Stock Market Truth Serum
- Strategy – In Play
Market Outlook – Small Caps Coming Out of Hibernation
Large cap stocks have been doing well while concerns about future US interest rates have hurt the small cap stocks over the past 3 weeks. This group started to show some life again today and could be good for a Santa Claus rally. Much will depend on what the US Federal Reserve does on Wednesday. The market expects a 0.25 point cut in rates but it will be their comments that the market pays attention to. Focus on Alpha stocks (those trading with abnormal price and volume activity) into the end of the eyar.
This Week’s Market Minutes Video – Stock Market Crash or Santa Claus Rally
Some weakness this past week may indicate that we are starting a more substantial stock market crash. Will we get a Santa Claus Rally or a correction, I will walk you through my analysis of the stock, commodity, currency and bond markets to get you ready for the week ahead. Plus, my trade of the week on IPHA.
Watch this week's video on YouTube
https://youtu.be/274cf4jAjVc
Commentary – Stock Market Truth Serum
The truth is hard to find. Everywhere you look, there are lies. Politicians are adept at telling stories to leverage our hopes and fears. Marketers sell us products that are bad for our health. Pharmaceutical companies push drugs on us that keep us sick and dependent. Investors push the companies that they are heavily invested in. Lies begin with words that take the focus off the facts.
The great thing about stock trading is that the truth always comes out. Emotion is punished. Lies are punished. Over time, not taking an unemotional look at the facts leads to losses. The market is the ultimate arbiter of the truth.
Admittedly, there are many big moves in the market that are based on lies. The “pump and dump” is all about a lie that is told to a crowd of the hopeful. Just as snake oil salesman leveraged people’s desire for the quick and easy cure, the stock promoter gives investors the story that they want to hear. These stocks rise quickly and then fall right back down to where they deserve to be. There is no court to pass judgement, just the efficiency of the market to find the truth.
Should we avoid these pump and dump stocks? The well promoted story that is often obviously full of, at best, a liberal and optimistic interpretation of the truth? No! The pump and dumps are great ways to profit.
What we must not do is believe in the story. We must trade these stocks fully aware that they are a bubble ready to burst. When the upward trend is broken, when the truth is coming out, take your profit and move on to the next opportunity. Never fall in love, never believe. Trust only the message of the market because it always tells the truth. It can take some time, but eventually the market figures it out.
Wouldn’t it be great if we had a market for the truth in all areas of life?
Hot stocks start market beating moves with abnormal activity. Strong price gains with higher-than-normal volume are the signs that investors are focused on some new information. If enough people believe, the stock goes up as more investors pile on. This market activity shows up in a chart and gives us a message. The buyers are in control and motivated. At that moment, the truth is that investors like the stock. It is a good time to buy.
The stock goes into an upward trend, defined by short pullbacks. The truth through this upward trend is that investors believe in the company story and the stock should be held. Pullbacks to the trend line are often good opportunities to buy more.
Eventually, the company fails to live up to expectations. The upward trend line is broken, often after the formation of a falling top. People listening to the story rarely see anything wrong because the lies that the story was built on remain believable. The most well-informed investors are the ones who are selling, causing the break of the upward trend line. Most others continue to believe.
These cycles of hot upward trends and bursting bubbles are not restricted to penny stock pump and dumps. These happen with big companies too. Go look at the charts of APRN, BYND, BBBY, PTN and GME, some of the hottest stocks of the past couple of years. Up on hype and optimism and down on the truth.
The market tells the truth. If you learn to understand the market’s message, you can capitalize and make market beating returns. Don’t believe what people say, trust what they do with their money.
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This week, I ran the abnormal breaks Market Scan in search of stocks that are making abnormal moves that surprise the market. Here are three stocks that have good potential:
1. T.ECNT.ECN broke out in early November, pulled back for a few weeks and is now starting to move up again. Position trade with support at $2.65.
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2. TNXPTNXP has come alive with big volume and strong gains. It is quite likely that it will pullback in the short term but watch for a break of the pullback as a place to consider the stock. Swing trade with support at $0.19 (but the reward for risk could improve with a pullback).
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3. SGMOSGMO rose well this Fall, cooled off as winter came and is now coming alive in anticipation of Santa Claus. Very strong volume, watch for a confirming signal on the 15 or 30 minute chart. Swing trade with support at $1.75.
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