May 1, 2011

Overpaying for Shares in the Market

The notion that common stocks with a strong record of earnings and sales growth reported nearly if not every quarter, will continue to rise and lead the stock markets higher may be absolutely right in a general assessment and view. However, this does not change the reality that investors can pay in full or even overpay for a stock position in a certain company. When an investor is considering taking a position in a company's stock, he or she expects that the current prosperity and future prosperity of the company, will carry the stock price higher as well. This could prove to be true, except many investors enter at a time when the future prosperity expected in that particular company has become apparent to many investors, and is already reflected in the stock price. Recognizing that a stock's price and its calculated future increases in value may not be fully reflected in the price, is the art and skill that have made investors past and present, very wealthy individuals. Spotting a stock price that's deflated when it can be higher, requires research, wit, intellect, and lots of detective work identifying and monitoring it.

Investors need to realize something that I read early on but didn't fully comprehend until building hours of market trading under my belt. When a large company grows, companies that have been around for awhile and are well established, it is much harder to record rapid growth than a newer up and coming company. Investors need to acknowledge both for mid-size companies (the SP400 Mid-cap Stock Index defines Mid-cap as a company with a market capitalization somewhere between 2 and 10 Billion dollars) and also for large size companies (ones with market capitalization over $10 Billion) rapid growth can not continue forever. When large companies have experienced great expansions over the decades of being in business, that growth pace inevitably becomes harder and harder to achieve. I believe it's for this reason that when I watch my list of pre-selected stocks and also the performance in the trading day of the Three major U.S. Stock Indices: the Dow Jones Industrial Average, Nasdaq, and S&P500 Index, that I notice reoccurring patterns that have become predictable over time. The Nasdaq performance throughout a trading day, always seems to indicate what the Dow Jones and SP500 indices are going do. The Mid cap SP 400 index always seems to follow what the other major exchanges are doing. I have noticed recently however that for the year, the Mid Cap index is up 23% vs the Dow Jones Indusrial Average gain of 14%. I am actively looking and researching companies in the mid cap size because I know there are good possibilities for growth at this level for a company and could also mean a rising stock price.

Nasdaq Leads Dow Jones and SP 500

Generally rising markets, sends the Nasdaq higher than the other two exchanges at the end of that trading day. The reverse is also true. If the General market direction is down, the Nasdaq will typically fall by more than the other two Stock Indexes. On days however, when I see the Dow Jones trading in the green (a level above the previous day's closing level) and the Nasdaq trading in the rad (below the closing level of the previous day), I have observed that about 80% of the time, if the Nasdaq stays in the red, the Dow and SP500 will end up closing the day in the red as well. I have observed that the same is true in the reverse situation. If throughout the day I see the Dow in the red and the Nasdaq in the Green, 90% of the time, the Dow pulls up and ends the day in positive territory (in the green). This is not something you can find in books. I didn't, the way I learned this was sitting in front of my trading screen day in and day out until patterns began to emerge. As I observe these patterns, I realize they become useful tools to forecast future movements both in an individual stock, and in stock market levels in general in the U.S. and Globally.


Anonymous said...

Very interesting, thanx for pointing this out.

Stock Trading said...

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