Thursday, May 14, 2009

Why Stock Prices Go Up or Down?

Among the reasons given by market commentators are as below:

Dow falls 184 on weak retail sales
Asian Stocks Decline on U.S. Retail Sales, Commodity Prices
Stocks drop on economy worries
Dow inches up on energy; but Nasdaq, S&P off
Dow up 50 as investors wait for key data (what a lousy headline!)
Dow up on Apple results
Retail, foreclosure reports drive down Dow
Dow drops 778 as bailout bill fails
US stocks down on swine flu worries (LOL)

So, do you agree with them? These guys are paid to write interesting headlines to attract readers. You cannot blame them. Here's why! Stock prices go up or down simply because of changes in supply and demand. Stock prices go up because demand is more than supply. And stock prices go down because supply is more than demand. Well, you cannot expect the same headlines on every trading days: Dow up on higher demand for stocks! Dow drops as supply exceeds demand. Are you interested in these headlines? Hence, you need to be able to interpret and understand the logic behind the interesting headlines.

Moving to the next topic. Stocks on the bull run in April (started in March)! Why investors are buying?? Most investors are, in my opinion, impatience (if you are a patience guy, you have some advantage over the rest). They are among the first to enter the market (only after the big funds started buying and dump to them) and the last to stay in the market (the last fools theory?). They certainly can make money in the market during bull runs. But in the long run, most of them suffer big losses. Why? These retail investors are very emotional (You simply cannot get emotional with stock. It doesnt know you own it, and how much u pay for it!!). I think it is hard for them to make big money, but only small profit for every transaction.

I give you an example here. A bought 100 lots of ABC at 20sen. The stock goes up to 21sen. A is happy. He is thinking to sell the stock, afraid that it will go down. But he decided to hold on after listening to some "pro advice" from his broker. The next day, ABC goes to 19sen, A was afraid (that it will go down further) and blamed his broker. But he thought, at 21sen, he didnt sell, why need to sell at 19sen?. The following day, ABC goes to 22sen, A immediately ask his broker to sell the stock! A made a net profit of about rm 150. The following days, ABC gradually move up to as high as 40sen. A was damn sad (emotionally disturbed) watching the stock he sold at 22sen few days ago, thinking he made a loss of 1800 in additional profit!! Lesson: You cannot watch your stocks like a HAWK! Set your target price and dont look at it every single minute or hour of the day!

A has another stock in his portfolio, lets call it DEF. He bought 100 lots of DEF at 40sen. He is thinking to sell at 44sen, or a profit of 10%. The first week, DEF didnt move a lot, trading within 38-43sen, and ended at 42sen. A keeps monitoring every single day (ask yourself what can you learn by monitoring every day?). The second week, DEF started to move to 44sen, but seeing high volumes, A decided to hold on for larger profit! (Greedy?? Disciplined?) DEF managed to trade as high as 48sen in the morning session and A said to himself "I will sell at 50sen and told his broker to q at 50sen." When the evening session started, A continues what he does best, looking at his computer screen on the movements of his now beloved stock DEF.

DEF started strong at 49sen, A is very happy and get excited like watching a horse race and shouting repeatedly at his lucky number! (if d normal heart beat is 120, it goes to 200!! getting emotional again..) On that day, DEF goes as high as 49.5sen, before closed at 47sen. As a result, A was not able to sell it. The next day, thinking the day before DEF went up 5sen, A thought it could at least match that increase. A woke up at 7am (too excited, cant sleep well) and getting well prepared for his next round of "stock monitoring session". At first, DEF did not dissappoint him. It managed to open at 48sen. As time goes by, DEF started to decline (why? demand is less than supply - people like A is not buying, but waiting to sell. that is why the market needs to correct sometimes.) and closed at 44sen. A blamed himself for not selling at 49.5sen. Now at 44sen, do you think he will sell? The following days, DEF slowly decline to as low as 20sen. A, without doubt, is still holding his once beloved stock. His unrealised loss is around rm2,000!!

Back to the question. Why investors are buying when the economy is still in bad shape? Many stocks have dropped to very low levels, mostly down between 40% and 80% (at record low levels, investors are sitting on enormous unrealised losses, then who wants to sell? But when investors see their holdings, once declined over 50%, making a comeback now, who wouldnt sell at a small loss or profit?). During the bear market period, these stocks decline substantially due to the massive selldown especially by foreign investors. Other possible reason: institutional investor selling their underperforming stocks at the end of the year - known as window dressing.

Why the comeback? This round of bull market (or bear market rally) is possibly caused by the injection of money into the stock market by institutional investors especially PNB and Khazanah. Remember the issuance of a total of 5.33 billion new units of ASM and ASW 2020 recently?? And the stimulus package of RM 10 billion to Khazanah for equity investment in 2009-2010??

When the market is hot, you dont need to be a magician like David Copperfield to know that the retail investors will make a return (read here: Higher retail participation in stock market in April). Are they the last fools to stay in the market?? I dont know. What I do know is that when somebody buys, someotherbody must sell (So do you think you know what others dont know?). Thats the equation. Is the worst over for Malaysia? I dont think so. BNM will announce the 1Q 2009 GDP on May 27, expect the unexpected!


1 comment:

Mizz-Em - said...

Good piece. Makes a lot of sense :)

"There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play." - Jesse Livermore