Filter THIS! …a pre-open missive
Filter THIS! …a pre-open missive that tells you one thing, the most important thing, if you had to filter your view of today”s marijuana stocks price action through just one thing — okay, sometimes two — what would that one thing be?
Today”s one thing is…contrarian.
A stock”s price trend is the process of developments eventually convincing a majority of the company”s success, or its failure. When the vast majority is in agreement, then only a tiny minority remains that could yet be convinced of the same thing. Like a game of musical chairs, suddenly “the music stops” and price begins falling when the market discovers that demand (buyers) has shrunk.
Monitoring for these situations is contrarianism. Last week”s plethora of thee-day surge setups was exactly that. Many stocks had rallied sharply in a very brief time. More and more buyers were convinced that prices were significantly undervalued. Fundamentals weren”t being reported as improving so rapidly. Rather, rallies went into hyper-drive as buyers made their decisions based on direction instead of on future value.
Even without supply (sellers) increasing, the rallies peaked. And then they began reversing down. Contrarian analysis searches for setups that have become similarly lopsided. Last week”s buyers aren”t necessarily wrong about the future success of those marijuana stocks they drove sharply higher. They were wrong about the present value of that success.
On the way up, prices rose dramatically because rising prices began outweighing news as what convinced more and more to buy. Guess what: Contrarianism cuts both ways. On the way down, falling prices can become equally convincing to sell. And not just sellers, but reporters and analysts. Here are two stories that greeted the weekend:
http://www.fool.com/investing/general/2014/03/22/are-there-any-good-marijuana-stocks.aspx
http://www.usatoday.com/story/money/markets/2014/03/20/bloom-off-of-pot-stocks-on-wall-street/6662003/
Those “overbought” situations probably aren”t yet fully corrected. Some of those big performers might not recover, at all — not deserving to rally on their own merits, but swept up in the sector”s scattershot euphoria. Risk isn”t gone entirely, and never will be, but it”s less.
Get a few more stories like those, the perpetually nay-saying writers screaming “told-you-so” (ahemcodyahem). That contrarian scenario would be equally capable of lifting price back up. Just convince enough “weak-handed buyers” to sell, get negative opinions everywhere you turn, and then the bottom will be in.