Friday, 5 August 2011

Why stock prices move

Business Mirror

Most people are at least aware of the stock market. Every major media and press outlet covers the daily price fluctuations just as they do sports, reporting on winners and losers. Ask a person his/her opinion about the stock market and I am sure you will get a strong attitude, positive or negative, about the market. And virtually anyone who has bought some shares of stock has a story to tell.

One of the great mysteries of the universe is the movement of stock prices. Let me share with you the press comments about the Philippine Stock Exchange PHISIX index price movement over the last week.

Prior to President Aquino’s State of the Nation Address on Monday, July 25th, the stock market closed at 4,480. After the trading session on Tuesday, the market fell 0.3 percent, this was the reason given: Stocks fell due to prolonged debates on the US borrowing limit and lack of market-moving news from Mr. Aquino.

On Wednesday the market rose 0.4 percent. Local stocks rebounded as optimism about the upcoming corporate results overshadowed jitters over the US debt crisis.

On Thursday the PHISIX index was unchanged, 0.0 percent from the day before. Trading was cautious on Thursday following an overnight Wall Street bloodbath that was caused by the prolonged debates over the US borrowing.

The following day, Friday, prices went up 0.5 percent. Stock prices surged as investor optimism over prospective second-quarter corporate results prevailed over global jitters regarding the prolonged US debt crisis. No that was not a mistake. That language was almost identical to what was said two days before.

We began this current week on Monday with a 1-percent move to the upside. That was because investors cheered a US debt deal and a robust stream of local second-quarter corporate earnings.

Tuesday came leaving the index down 0.2 percent. The euphoria over a US debt accord that averted a US sovereign default was replaced by concerns over weak US manufacturing data.

And yesterday, Wednesday, the index fell by 1.2 percent because there was profit-taking, as rising concerns over the US economy sent stock prices on Wall Street plummeting overnight.

The PHISIX index began the first trading session after the President’s speech at 4,480. The market closed yesterday at 4,488. The price change from last Tuesday until yesterday’s close is virtually zero.

The last seven trading sessions on the PSE have been against the backdrop of the debt-ceiling debate in the US. Having said that, it was nothing more than a kabuki theater, full of drama and extravagant performers, but only a political show. There was not any chance whatsoever that the US would default on its debt payments. Yet, look at the words that were used to describe PSE trading over that period of the debt drama: “optimism,” “euphoria,” “concerns,” “cheered,” “surged,” “bloodbath,” “cautious,” and “jitters.”

My professional life consists of three parts; analyzing the general market trends and some 70 individual PSE stocks, presenting that analysis in a clear form to the subscribers of my Strategy Guide, and trading the market. That’s what I do to put food on the table for my family.

Yet, according to press and media commentary, following the markets is an emotional rollercoaster filled with euphoria and jitters. At my age, euphoria comes from getting up in the morning without a new ache or pain. And my jitters and concerns are worrying if both of my Internet providers are going to be working at the same time.

In fact, if a stock trader is feeling all those emotions, I guarantee they will lose money.

However, as a professional trader I do know that the amateurs make trading decisions using their emotional response to external factors. And if I think that there is going to be a trading response to something, I will watch to see if that response happens. I also know that emotional responses are inconsistent.

Stock prices move because there are either more sellers or more buyers. There is no “why” except that buyers (sellers) believe the price will go higher (lower) for whatever reason that you can never understand.

That is all you need to watch. If there are more buyers, prices rise; more sellers push the prices down. As a trader, you do not need to, nor is it a wise use of time and effort to try to figure out the psychological motivations behind investors accumulating or selling their shares.

Ultimately, buyers buy because they believe the price will never be any lower while they own the shares. But sellers sell for countless reasons, many unrelated to the stock market and financial events.

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