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Friday September 03, 2010 |
Price
Anticipates Fundamental Changes
Most fundamental changes do not happen overnight, they take time. Because
price is indeed the result of all that is known in the public and non-public domains,
it is reasonable to expect that some buyers and sellers are informed,
the so-called smart money. Though not always foolproof, the smart money
seeks unbiased, market moving information not yet in the public domain. In
most cases this information is the result of high priced, independent
fundamental research. It is this informed buying and/or selling
that anticipates fundamental changes and creates price trends.
It may seem as though the "smart money"
has an unfair advantage over the general market and to a great extent, this is
true. Information is a commodity like all others and those
with greater resources have better access. We need to keep this
in mind when stocks appear to be rising or falling in the absence of information
in the public domain.
Consider the case of one time stock market
darling Sun Microsystems (SUNW) in the last quarter of 2000.
fig. 1b
In the first half of 2000 Sun Microsystems
(SUNW) and other stocks championing the "wired world" were among the
hottest momentum stocks. Despite rising earnings and nothing but good
cheer among Wall Street analysts momentum clearly began to slow by
September. After reaching $65 the stock began to move lower, falling all
the way to $48 in the middle of October. Just weeks ahead of the third
quarter earnings report several Wall Street firms began previewing the quarter
and issuing bullish recommendations. Slowly the stock rallied back to $61
by late October. When the third quarter earnings report was released the
news could not have been better. The company reported record revenues and
earnings and was wildly optimistic about the future but after a brief rally, the
stock slumped, retreating all the way to $38 by late November. Three weeks
later Sun Microsystems (SUNW) executives met at a technology conference and
suggested that the outlook was considerably poorer.
In the case of Sun Microsystems the share
price accurately forecast the peak in fundamental prospects long before
corporate executives issued bad news.
The Sun Microsystems price chart
should be a clue as to the relationship between time and price but let's break
it down so it is crystal clear. The relationship between price and time is
linear and it is also our next section.
price
is not random 
relationship
between price and time
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Anticipates Fundamental Changes 
