…I think one of the most useful things for us as investors to do in a drifting market–or at a time like the present where I don’t have especially strong convictions about near-term prospects is to let the market speak to us. Put a different way, it’s to watch carefully the price action of stocks we either own or are interested in.
Stocks almost always take a zig-zag path toward their ultimate goal. So day-to-day volatility is a fact of life. In particular, stocks that have gone up a lot tend to have periods where some investors decide to take profits–and the stock goes down. Similarly, stocks that have been going down a lot tend to have periods when they stabilize, or even go up a little. Maybe short-sellers closing out their short positions, maybe value investors deciding the stock–however ugly–is, to them anyway, too cheap to ignore.
So that’s typically just noise.
I find two situations potentially more informative. They’re both more pieces of the puzzle than sure-fire indicators, though, but they’re enough, I think, to give one pause for thought:
–on a down day, a stock that has been in a downtrend goes sideways or up, This may be an early sign that the market thinks the stock is cheap enough. Maybe it will never be a buy for us, but if nothing else it might be a place to hide in a storm
–on an up day, a recent star goes down. I find this to be a much iffier event than a downtrending stock stopping declining. What it may say, though, is that the crowd is no longer just along for the ride and is actively selling into strength. This can be driven by position size or a trading bot that’s lost its bearings. But it can also be a sign that the market know something we don’t. Again, not enough by itself to do anything. But if you were seriously contemplating trimming the position–and essentially looking for reasons to sell a part of the position, this should put you on high alert.