Be Brave When Others are Afraid and Be Afraid When Others are Overconfident
Be Brave When Others are Afraid and Be Afraid When Others are Overconfident
The market, especially the junior commodities companies, have been devastated recently. Stocks have fallen since the second week of March 2012 and the drops in trading price have been dramatic. Some stocks have fallen far more than 50% in value.
Liquidation Events
Normally companies expect that their stock price will rise when they make a positive announcement. For example, the increase in value of a mineral deposit, or some excellent drill results, normally means that a stock will escalate in price as the information is disseminated.
For the last 2 months, companies making positive announcements have experienced either an immediate rise followed by a dramatic drop in stock price, of just an immediate drop in stock price. This is counter-intuitive and was hard to explain until companies started realizing what was happening.
Essentially, over the Spring, a level of fear has been rising, and the number of buyers in the market has decreased as the number of sellers increases. For sellers, the increasing level of fear meant that if they wished to sell a position, there were few buyers, and so the market (as in all falling markets) was too thin for them to sell any appreciable amount of stock.
A positive announcement by a company brought people’s attention to a stock and some buying of that stock, which allowed the sellers waiting in the wings the opportunity to sell some stock – as much as possible before they drove the stock too low.
Hence the term – a “Liquidation Event”.
Margin Calls
Add to this that when the market falls, there are an increasing number of people who have borrowed money from their brokers to buy stock. A falling market means that the value of the stock holdings falls resulting in the broker asking that either some more cash be put up or some stock be sold.
All of this means more downward pressure on the stock price.
October 2008 and March 2009
Remember when stocks fell so far that everyone thought that stocks were valueless, and everyone liquidated what they could?
Then you will remember that following this precipitous drop, stocks rebounded with a vengeance. Those with sufficient courage made their fortunes on this rebound.
Those most fearful lost the most.
So a similar cycle has been repeatedly as long as records have been kept on the stock market.
So I leave you with an obvious statement that is self-explanatory. Be Brave When Others are Afraid and Be Afraid When Others are Overconfident
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
Categories: Commodities • Economic Cycles • Market Meltdown • Stock market
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