Is Your Mutual Fund Or Stock Trying To Tell You Something?
As I mentioned in my last message, if the support line of your
mutual fund or your stock is broken, beware! This is a very
clear signal you should be hedging your position, and perhaps
consider selling a portion (or maybe even the entire) position.
Breaking the support line is the ultimate sign that supply is
now clearly in command. Your principal is now at risk.
Too much supply, and not enough demand, will bring lower prices.
That is not my theory.
That is an economic law.
Summer 2003: Krispy Kreme is on the cover of a major financial
magazine as "the hottest brand in America" and the only Krispy
Kreme store in New Jersey opened. People had lined up overnight
to buy their doughnuts at this store! But sell signals began to
appear.
Do you remember the very first time the company missed their
quarterly earnings forecast? They explained it away on the
"low-carb diet" fad!
By the time the real story broke the next year, about some very
real accounting issues, the stock had already been sliced in
half.
The support line had been broken back in March 2004, at 34. This
week, as they closed the New Jersey shop and carried away all
the signs and equipment, the stock is just $6.00.
Maybe this is too dramatic an example.
Take a look at a big blue chip, widely held stock. Merck broke
through it's support line in August 2003 at $52. Since then, it
has dropped to the mid 20's. It now flirts with $30.
Regarding Merck, keep in mind that Vioxx was withdrawn in
September 2004. But the stock broke support a year earlier in
August, 2003. How did the market know? Maybe it did, maybe it
didn't. But by the time the Vioxx story broke, in late summer
2004, supply was firmly in control. No demand whatsoever to prop
it up. The stock dropped even further, from $44 to the mid 30's
on the Vioxx withdrawal.
Hey, Merck is a fine company with GREAT fundamentals. The stock
has struggled for lots of reasons. All of which is unimportant.
Remember, Wall Street is a huge voting machine. Crowds are often
wiser than individuals and their opinions. So stocks like Merck
can have terrific fundamentals...and yet their stock can be
sliced in half.
And we can see it, LIVE, when stocks break the support line.
>From my perspective, as your advisor, I have a tough job. I'll
call you, seemingly out of the blue, and tell you we need to get
defensive with (or maybe even sell) company XYZ's stock.
It could be a stock you've owned for years. It might be the
single biggest investment you hold. Maybe you inherited the
stock from your parents, or perhaps you even worked there, or
know someone who works there.
Regardless, when a stock breaks through the support line, it is
a major red flag and should not be ignored.
We often don't know the reason for the decline, and may not know
for some time. There may not even be a news story about it. But
we know that supply has taken over and lower prices often
follow. And since it is my job to protect what you've worked
hard to get, we sometimes have to make tough decisions. Without
all the answers. If we waited for the news with stocks like
Krispy Kreme and Merck, we'd be in serious trouble.