Go to Baler; learn stock trading | BusinessMirror

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MOST investors and stock market traders actually do not understand what influences the price movement of the stock market. I know that I have expressed that same idea so many times but it bothers me to hear the misconceptions that people in the stock market hold.

People become confused because there are so many different ‘reasons’ that the experts give for price movement. Usually the books you read about investing either give a ‘menu’ of all the reasons for price movement or and hold on to one justification for price movement then tell you how to trade.

Often it is reduced to improbable and unsuccessfully simple sayings like “Buy on the rumor; sell on the news”. Investors tend to take a sentence or two from Warren Buffett and think that he became a billionaire that way. The favorite is “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. They never quote Buffett when he said, “I bought a company in the mid-‘90s called Dexter Shoe and paid $400 million for it. And it went to zero”.

If you have ever been to the beaches of Baler in Aurora province and watched the big waves hitting the beach, you could have learned something about stock price movement.

Small children are always excited about the surf coming up on the beach. There is the constant action of the waves which is thrilling in a stable world. Then there will be that big wave that comes crashing up the shoreline. The kids will squeal as it is totally unexpected.

A person that has observed the surf for a time knows that the big wave is expected and not unusual. Further, that wave could have almost been predicted. One day the waves are bigger; another day smaller. It could be a sunny day and the waves are large or rainy and smaller.

One thing you can depend on is that there is always going to be seawater coming up on the sand and then receding back into the ocean.

During any time frame-stock prices are moving up and down. There are three dynamics of stock price movement; company and macroeconomic fundamentals, the pattern of price movement or “technicals” and the cyclical flow of stock prices.

The ocean surface waves that roll onto the beach are caused by only one thing: wind. In the same sense, as long as a listed company is in business and there are current stock holders, the price is going to move. But the ‘fundamentals’ only give us an understanding of the price movement and can only be used to help explain after the movement has occurred. Stock prices do not necessarily move in conjunction with the fundamentals.

We might assume that a major sea storm hundreds of miles away should push waves higher on the beach and that might happen. But it might not the same way that prices can go higher on both good earnings and on bad earnings. If the price goes down, the ‘experts’ say something like the ‘sell on news’ or ‘The profits were in line with expectations”. We might have expected good profits but not that the company doubled its debt.

Technical analysis gives us a good idea of target objectives. You find a dry place on the sand a few meters above where the wave action is ending. Then all of a sudden a ‘normal’ wave pushes the water beyond that line into our laps. The technicals failed and it may be hard to predict what the next wave will do.

There are cycles that can help us with timing. Wind can often blow in a constant speed and direction for a prolonged period. You might find a cycle of three small waves followed by one large wave over and over.

Price movement can also follow cycles. The “Santa Claus” rally and ‘window dressing’ are an attempt to find a cycle. When it happens, you think you are a genius. When it does not, it is a glitch. In the 6/49 lotto, the cycle should be 1 in 13,983,816 draws. In the Bulgarian 6/49 lotto, the exact same numbers came up on September 6, 2009 and again four days later on September 10, 2009.

We think prices cannot go up (or down) forever and they won’t. But the Philippine stock market just had the longest consecutive number of up weeks in its history. Cycles are not always constant either.

Go sit on the beach in Baler. You might learn something about the market or not. Either way, you win.

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E-mail me at [email protected]. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

Author

John Mangun