According to the efficient market hypothesis, there’s nothing insane going on in the stock market. Stock prices reflect all of the currently available information and investors’ analysis of that information.
In the long term, I’ll agree that markets are efficient. Investors are rational. And stock prices generally end up where they are logically supposed to.
In the short term, though, the market is nuts.
In the short term, stock prices react to emotion, not logic. Fear and greed are more powerful in the short term than a thoughtful analysis of balance sheets and income statements. That’s why crazy things sometimes happen in the stock market.
Back in 2000, for example, any rational person could see the dot-com bubble inflating. Stocks with no earnings, no revenue, and no hope of either were pressing higher nearly every day. Meanwhile, traditional businesses – with long track records of earnings growth, stable dividends, and long-term business prospects – couldn’t catch a bid.
In 2000, I did not own a single dot-com stock. Instead, my largest holding was Cooper Tire & Rubber (CTB). At the time, CTB was an 87-year-old company. When I started buying the stock in early 2000 at $9 per share, CTB traded at six times earnings and paid a better than 5% dividend.
CTB promptly dropped to $6 per share.
The stock lost 33% of its value in early 2000, at a time when the average dot-com stock was racing to the moon.
As you might imagine, the clients at my brokerage firm were frustrated. Their friends and neighbors were bragging about the piles of money they were making in this.com and that.com. Meanwhile, my clients were stuck in a dusty, old, tire and rubber stock that just seemed to fall every…single…day.
All I could do to console my customers was to tell them that sometimes the markets do screwy things. Sometimes, logic takes a vacation. Stocks that shouldn’t go up, do. Stocks that should rally, don’t.
And it is during those times that investors who have the ability to curtail their emotions also have the ability to make outsized gains. But, you can only make those gains by going against the emotions of fear and greed… and betting on logic instead.
I lost several clients in early 2000. I refused to buy the dot-com stocks. I stuck with buying old, time-tested companies trading at steep discounts to their historic valuations.
By early 2002, most of the dot-com stocks had crashed and burned. The customers who stuck with me were cashing out their Cooper Tire & Rubber trade for a 150% gain.
Here’s my point…
While the focus in my Delta Report trading service is on shorter-term trading – where we attempt to get into a position one day and get out of it a few days later – there are times in the market where it can be far more profitable to take a slightly longer-term view.
Investors’ short-term emotions have decoupled from longer-term logic. So, asset prices have, for lack of a more sophisticated term, gotten out of whack.
It is during these times that it can be HUGELY profitable to take a BIG SWING.
Find a stock that is grossly undervalued by almost every fundamental metric. Find a stock that just can’t seem to get off the mat. Find a stock that nobody likes… a stock that if you mention it at a cocktail party, you end up drinking alone.
Then, buy that stock and hold it for a few months.
You won’t be disappointed.
Best regards and good trading,
P.S. Like I mentioned above, the focus in my Delta Report trading service is on shorter-term trading. It’s all about how to maximize your profits while still reducing risk.
The Wall Street players lose a lot of money because they’re always looking for that big swing moment. Though those moments do exist, they aren’t common. My risk-reducing methods have proven that you can make a lot of money while not betting the farm on every trade.
You can read more about my proven trading philosophy right here.
In today’s mailbag, a Delta Report subscriber shares their market insight for the rest of the year…
Hi Jeff, it looks like your “wish” for yesterday’s close was merely postponed until today (10/24). Looking at the one-year daily chart of $SPX (S&P 500 Index), it’s uncanny how nearly identical the past 20 days resemble the period January 26 – February 8.
If history “rhymes,” we should get a rebound rally lasting until about Christmas week, then start the new year at about 2655 on $SPX. Whatcha think?
What do you see happening in the market for the rest of the year? Are you bearish or bullish?
And as always, send in any other trading questions, stories, or suggestions to [email protected].