What Drive The Cycles? Stock Trading Analysis (21)
Every stock moves in up-and-down cycles unless the company goes bankrupt. This involves recurrent risks and opportunities. When you buy a stock, you should ask two basic questions: Am I buying at the top, middle or bottom of the cycle? Is this the right time to go in?
External Factors
Many powerful external factors affect the stock price, such as:
• Uncertainties due to war, terrorism, natural disasters (prices down).
• Fear of shortage, recession, inflation (down).
• Economic growth, boom, euphoria leading to a bubble (up).
• New industries replacing old ones (new up, old down).
• News and rumors, real or made-up (up or down).
• Scams and conspiracies (up or down).
• Other factors explained in my video #19 (up or down).
Up Cycle
Company performance seldom drives the stock. More accurately, it sustains the price rise because it provides the good news. A stock rises for the simple reason that the big players plan for it and invest in it.
Once they have set sight on a stock, the big players start to accumulate quietly at a low price without provoking a significant price rise. How much they buy depends on the outstanding shares of the company and how responsive is the price to the volume of transaction. The accumulation phase may last for several weeks.
Once the accumulation is over, the herd seduction phase begins. It requires further investment by the big players. First, they will continuously buy up the stock to let the herd see, and make them think that they can no longer sit on the sideline. Second, the analysts employed by the big players will start to generate good news about the company to persuade the herd to buy. The seduction phase has to last several weeks or months for good effects.
Peak or Plateau
Who determines the peak or plateau? When the big guys decide to cash out, we will see the peak. If they want to hold a little longer, we will have a plateau. At this stage, the urge to cash out is very strong. Any small unfavorable development can trigger a sell off.
The big players are likely to short sell the stock at this high price. Why? Since they plan to cash out soon, they know that their action will precipitate a price decline. The short sale placed before an imminent decline will result in a sure win! So you see the big guys win by playing two hands: one to cash out, the other to short sell.
Down Cycle
The down cycle occurs quietly at first while the analysts continue to trumpet the stock. The reason is simple. The big players have plenty of stocks to unload. If they do it too fast, it will make their remaining holdings worthless.
After the stock price has fallen significantly, the herd takes notice and starts to panic. A stampede will follow. By this time, the big players are mostly out of their stock holdings except their short sales. Their analysts are now free to say whatever they want about the company. After the stock is finally beaten down, the big guys may start buying at lower prices to initiate an up cycle again, provided the company remains solid and shows signs of rebounding sales. Thus the cards are reshuffled and the game begins all over again.
Conclusion
The big players have all the critical insider information supplied by the top executives of the company. They generate and lead the cycle movements. The herd only follows.
Try to be an enlightened member of the herd. A stock does not rise simply because the company performs better. The big players must be convinced to invest in the company and make use of its good performance as a reason to sustain a continuous price surge.
The best time to buy a stock is when you see a long bottom period coming to an end. There will be plenty of time for an upsurge if the company remains solid and shows signs of rebound. The best time to sell is when you think the profit is reasonable. By the time you see the peak, it may already be too late.
For further information, please email to stockfessor@comcast.net
<< Back to article
