Sunday, March 15, 2009

This Week Crucial to Investor Emotion

Though I'm currently being taught that many scholars and businesspeople believe that stock market prices represent the entirety of all available information, I disagree. I see the stock market as a much less rational creature; along with true facts and information, fear, emotion, rumors, and expectations share responsibility for driving prices and creating price swings.

The major markets (S&P 500, Dow, NASDAQ, and most international markets too) have endured wild fluctuations over the past year and a half as they shed 50% of their value. Below is a chart of the S&P 500 over just the past six months, after the index had already lost a significant portion of its value.

After establishing a new multi-year low late last week, the S&P 500 had a spectacular rebound, rising roughly 80 points - adding more than 10% to the index's value.

I was on spring break this past week, which allowed me to waste plenty of time lounging around watching CNBC. While I don't take too much from that channel to heart, watching the various personalities, traders, and interviewees provides a good sense of sentiment on the street. At the end of the week, the depressing fog certainly seemed to be clearing and some people seemed downright cheerful. A few actually resented the steep rise as they had hoped to initiate some long positions at better prices.

The week was kind to the general markets, but certain beaten-up stocks did even more exceptionally well. GE bottomed at $5.87 last week, but recovered to nearly $10 by Friday's close. General Motors (GM) more than doubled from an intraday low of $1.27 last week to close at $2.72 on Friday. PNC, a bank of national (and moreso local, due to my Pittsburgh roots) significance, began the week under $18 and closed at $28.

Last week's rally may have been caused by any different number of factors. Some scary unknowns became known; both GE and Berkshire lost their AAA ratings, but credit outlooks were reset to stable, allowing investors to feel a little relieved and reassured. Mark-to-market rules are under review, and any suspension or alteration of them would likely lead to writeups and increased capital cushions at virtually every financial institution. Other commentators think that some sidelined money may have flowed into the market, and after the gains began early in the week, additional investors threw even more tinder on the financial fire.

Some people are less optimistic. Considering the depressed, pathetic pre-rally prices of stocks like GE, GM, and many others, some people argue that much of the reason for the rally this week was short covering.

No matter the reason for what is now history, the market action this week may stifle and reverse, or enhance, the movements of this past week. The S&P 500 now sits at approximately its November low; it may not be able to cross that resistance level, but if it does, it should have a new level of support. (Note: I'm not a technician and I don't believe too deeply in technical trading, but because enough investors do, it sort of becomes a self-fulfilling prophecy).

Disregarding any technical indicators, simple emotional sentiment is hinging on the first few trading days of this week. After a 10% gain, many people want to believe that the market has turned a corner; they may be willing to commit more capital or cover any outstanding shorts if they see a little more proof that the markets will continue skyward. On the contrary, the good feelings of this week will be forgotten if markets stutter early in the week, as investors are inches away from writing off any gains as a bear-market rally in a formerly-undersold market.

Various nuggets of news will likely drive sentiment this week. FedEx (FDX) reports earnings, and they are often considered to represent the general economic environment; a positive report will reassure jittery investors, while a bleak one may estinguish existing goodwill. Nike (NKE) and Oracle (ORCL) also report earnings, while GE will provide some information about their financing arm. A spattering of other economic news and company reports will augment the aforementioned ones.

I don't have any fresh capital to invest at this point, but I'm eager to see how the markets will move. On one hand, I too share the opinion that I don't want things to go up too far, too fast - I'd like to buy some good companies at the current firesale prices! However, I think many stocks are currently oversold, and an extention of last week's rally doesn't seem irrational to me. Only time will tell...

Buy a Kindle 2


Adsense said...

What is it you are trying to say ??
it is a critcle week ?? if that is the case why cause you never explained it .
next you dont beleive in technical analysis and yet you show a chart with several indicators on it ??
what is the point if you dont use them why show them . your words dont say much other then you want to buy stocks and yet you dont have a clue about the market and to add to that you dont even know or have an option about the direction of the market and you dont use any technical analysis so in truth you really dont know anything abou the stock market
then you add in the regurgitated
reasons for why the market did what it did . such as the stock market rallied 10 percent last week because berkshire and ge lost there aaa credit rating ?
dude if you want to write a newsletter then first you should write about something you understand otherwise you will be just writing for your own eyes to read
good luck

Stephen Frankola said...

I understand your point... and my point is that I don't know WTF is going to happen in the market this week.

Search StudentStocks or the web. Thanks for your support!