Market Always Knows Best

February 10, 2009 — 1,368 views  
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Have you ever wondered why a stock rallied after reporting their worst earnings ever? Have you ever seen a stock drop like a rock after reporting blockbuster earnings? I'm sure the answer to both of these questions is a simple, yes. This happens endlessly in the market on a daily basis. By now you are asking why does that happen? The answer is the market always knows and is never wrong. Recently Apple Computer has been under pressure and the stock price was declining on a daily basis. The rumor on Wall Street was that the CEO Steve Jobs was very ill and that was the reason for the decline. Then Steve Jobs released a statement saying he had a hormone imbalance condition that could be easily treated and cured shortly. Upon that press release the Apple Computer stock price jumped higher for a day. The very next day AAPL began to decline again. What was the market sensing about AAPL if the CEO Steve Jobs was going to be fine? How did the market know a week later that Steve Jobs would be taking a medical leave of absence and make a statement that his condition was worst than originally stated. Perhaps it is the insiders that know and the news trickles down to the street. I personally do not know the absolute answer for this, however, I do know that the market knows and it shows in the charts.

Have you ever noticed that stocks always seem to get multiple upgrades and downgrades at all time highs and all time lows? It seems like the brokerage firms are trying to out bid each other with a higher or lower upgrade or downgrade. I recall when Google was trading at $700 a share and brokerage firms were stumbling over each other upgrading the stock to $1000 to $2000 a share. Are they popping it to drop it? Perhaps they really believe it is going to that price and simply just don't understand the laws of supply and demand.The same goes for stocks that have been pounded into the ground. Countless times I have seen stocks get downgraded at 52 week lows. Then a short time after the downgrade the stock rallies off the lows and becomes in favor again. Are the institutions banging them to buy them, which is trader lingo for buying a downgrade. In 2005 I recall Frontier Oil getting downgraded by multiple firms at a low. That low turned out to be a wonderful buying opportunity as the stock doubled within a few months.

In June 2005 the cover of Time magazine had a cartoon portrayal picture of a man hugging and kissing his home. At this time the housing boom was at the peak and everyone that had a pulse wanted to get into the house flipping business. As we all know now this was nothing more than a game of musical chairs and eventually would come to an end. As it turned out this would be the start of the worst financial crisis since the 1929 Great Depression.

It still amazes me to this very day that most people have very little interest in understanding the mechanics of the markets. So few in the public understand market sentiment. I really should say so few even in the financial world understand market sentiment and the market mechanics. Just take a look at Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia, Washington Mutual, Indy Mac Bank, Countrywide Financial, Citi Bank, Goldman Sachs, and countless others.

Most people have a retirement account and have lost 10 years worth of savings in one year and many have lost even more. Take the time to learn the market mechanics. Perhaps a simple magazine cover could have prevented many from losing a good chunk of their net worth.

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