Trading Lesson of the Week

• December 11, 2023
• INVZ | INAB | CCCC

In This Week’s Issue:

• Market Outlook – Are Market Expectations Going Too Far?
• This Week’s Market Minutes video – How Can Every Stock Trade Have the Same Risk
• Trader Training – Price Moves Often Don’t Make Sense, Here’s Why
• Strategy – Stocks to Watch for Swing Trades

Market Outlook – Are Market Expectations Going Too Far?

The US Bond market has made strong gains over the past month, bringing interest rates down. This short term enthusiasm among bond buyers may be setting the market up for some short term failure as expectations are now quite high going into Wednesday’s meeting of the FOMC. While few expect the US Fed to lower interest rates, they are looking for signs that lower rates will come in 2024.

We may see a pullback in the stock market on the heels of the decision by the US Fed. Stocks have made good gains over the past 6 weeks and investors may take some short term profits.

My longer term outlook remains Bullish on stocks but don’t  be surprised if there is a pullback this week.

This Week’s Market Minutes video – How Can Every Stock Trade Have the Same Risk?

Many traders think some stocks are riskier than others. However, you can make every stock trade have the same risk using a simple technique. I discuss this week’s outlook for stocks, gold, oil, currencies, and interest rates. This week’s stock trade of the week on VTGN.

https://youtu.be/NOAFYpNbFFc

Click here to watch this week’s video

Trader Education – Price Moves Often Don’t Make Sense, Here’s Why

For as long as I have been a stock trader, there have been “head scratching” moments when the market did something that made little sense. Stocks that go up on bad news or down on good news happens often. Understanding a few simple lessons that I have learned the hard way will help to explain why.

The Market Does Not Care Much About the Past

The stock market predicts, it does not react. Investors consider all available information to predict the future earnings of companies. It is like a giant polling tool, taking in the opinions of millions of investors to determine what stocks are worth.

So, when a company announces something positive, and the stock goes down, it is not because investors are irrational. This happens because the market already predicted the positive news before it came out. Often, stocks go up before the news as some investors, with better access to information, anticipate what the news will be.

For example, it was announced Friday that Macy’s received a buyout offer of about $21 a share. That brought a nice jump in the price  of about $17.50 on Thursday but a quick look at the chart shows that M was trading at $11 just a few weeks ago. The market anticipated this deal before it was announced.

If you bought M on the good news, you are currently sitting with a loss as the stock is down today. Yes, there is still the potential for the stock to go higher if a better offer is announced but waiting for the official news for such an announcement will be too late.

How People Judge Information Depends on their Mood

The value that the market gives to information will depend on whether investors are feeling optimistic or pessimistic. Their mood is mostly influenced by the direction of the market.

This is why I always encourage investors to look at the chart of the market and the stock that they are considering. Are there rising bottoms on the chart or falling tops. Rising bottoms mean investors are optimistic and falling tops are a sign of pessimism. Buying pessimism is like trying to catch a falling knife.

If the stock is trending up and the company announces news, it is more likely that the market will judge the news favorably. At least until expectations are much higher than what the news justifies.

Parabolic Trends Are Bubbles Waiting to Burst

Investors buying on positive news and general optimism has a limit. Stocks in up trends can continue higher for some time, carried by the positive momentum. However, when the trend gets steeper and price runs up and away from the trend line, there is an increased chance that the stock, or market, will have a downward price correction.

This is because expectations get very high and a broad range of investors have bought the stock. Eventually, there are just not many more buyers to take ownership and the stock can quickly collapse, even when the story remains positive. Hold linear upward trends but get ready to exit when the trend goes parabolic.