NOVICE TRADER
by Peter Desnoyers
Here's why you should track both fundamentals and technicals for trading stocks.
The financial storm arrived in New York on October 19, 1987, following a volatile week in the markets. Weekend news of the Federal Reserve's desire for a weaker dollar set the stage for investor skittishness. The selling began in Japan and gained strength in London, giving early warning of unprecedented weakness in New York. By 10 a.m. on October 19, only a few of the Dow Jones Industrial Average (DJIA) components had opened, and it became clear that the day was going to be an extraordinary one.
That was Monday. By the end of the week, the DJIA had lost 13% of its value and was 800 points below its level of two months before. As the October 26th issue of Newsweek reported, "The cascading Dow and record trading volume marked a major shift in psychology and sent a powerful shiver across the country."
Nearly a century before that day, Gustave Le Bon was one of the first to detail the unique characteristics of crowd behavior compared with the actions of individuals in The Crowd. Le Bon wrote: "The sentiments and ideas of all persons in a gathering take one ... direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. The gathering has then become ... a psychological crowd."
INVESTOR PSYCHOLOGY
To ascertain the effect of individual and group psychology on stock prices, we must first look at how investors make investment decisions. Most research from Wall Street today is in the form of fundamental analysis; research departments utilize an army of MBAs and CFAs to produce volumes of detailed accounting, earnings analysis, projections, industry outlooks, bookings and inventory analysis to determine if the company is under- or overvalued. Although these examinations provide a clear picture as to where the business is today, determining future revenue and earnings trends are critical to estimate present value of a future cash flow.
FIGURE 3: BAY NETWORKS. The trendline extends from the high in September 1996 to the following high at least one month later and having fallen below the 50-day moving average before making the second high.
