Sentiment is Potent Factor in Stock Market Fluctuations
BUSINESS & INVESTMENTS
A. W. BLUE
Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste—
“BEFORE YOU INVEST—INVESTIGATE"
ANYONE who has followed the speculative markets at all is familiar with the notorious instability of security prices. Stocks fluctuate up and down in a disconcerting and inexplicable fashion. Like the sea the market is never at rest. Here and there the surface is rippled as sporadic waves of speculative buying or selling appear, and at times it is subject to violent agitation, as the speculation for the rise or fall is swelled to major proportions by economic or business developments that may affect industry or business as a whole. Whether this influence is good or bad it will be immediately reflected by the market in diverse fashion.
To most of us who at some time or other have held stocks it seems particularly easy for the stocks in which we are interested to sell down, while it requires a singularly laborious effort to move them forward. However, no matter what the trend, there are price adjustments from day to day, which measured in terms of months or years materially add to, or detract from, the value of a stock bought at a given time.
It may be observed that all classes of securities are not given over to this shifting tendency, at least not to any particularly noteworthy degree. Bonds and preferred stocks fluctuate to some extent, it is true, but their movements on the whole are confined within comparatively narrow limits, and no material change in value is effected from year to year. The explanation is that the rate of interest or dividend on securities of this type is fixed, and there is no incentive by way of prospective dividend increases to invite speculative attention.
Common stocks are the popular speculative vehicles. They are the junior issues, the equities, which reap the final rewards of a company’s prosperity, and in a period of general business expansion such as the present, these may be very considerable. It is this hope of ultimate advances in dividend rates, or cash or stock bonuses in lieu of actual increases, that imparts to common stocks the speculative appeal which has been so effectively emphasized in the rising trend of the markets for the past four or five years.
Why Do Stocks Fluctuate
"DUT disregarding the major trends, what is it that causes stocks to fluctuate from day to day? One stock may advance five points in a week, and another of equal merit may decline as much in the same interval.
To generalize, one may say with truth that stocks go up when there are more buyers than sellers, and when stocks go down the reverse situation applies. What the public thinks of a stock is perhaps the most important item in the ‘bundle of causes” that influence price movements. But that is not all, for if the public has rather definite opinions about a stock and does not back its opinion by either buying or selling it, then the price is unaffected, no matter whether this opinion is overwhelmingly favorable or distinctly bearish. « It is the actual orders executed in the market that affect the price of a stock.
If the public becomes convinced that a stock has a brilliant future and buys it, the stock is bound to advance. Take International Nickel, for example. For a number of years the shares of International Nickel were a drug on the market. Immediately after the war they sold as low as $15, and when the disarmament conference at Washington decreed that the powers must reduce their naval armaments, it seemed that Nickel had lost its main market. The stock was out of favor, nobody wanted it apparently at any price. But finally, some years after, it got noised abroad that new commercial uses had been found for nickel, which promised to broaden the markets to a point where it would be difficult for the producers to keep pace. At last the news trickled through that sensational finds were being made on the Frood mine. This attracted the attention of certain astute financiers, who after examining the mine, visualized its money-making possibilities, and lent their support to the market for the shares. Public buying in increasing volume steadily lifted the price of the stock to higher levels, until International Nickel became one of the market sensations of this generation. Nickel has reached a point where it is obviously discounting the future some distance ahead, but the public believes in the mine and in its potentialities and is prepared to wait. The influence of public opinion supporting the Nickel market has worked spectacular results.
But to revert again from the broad movements, which after all are built upon a foundation of economic development, there are the lesser, day-to-day movements, the sharp advances in a selected stock, followed by an equally abrupt decline. What causes these minor or incidental movements which cause the speculative element in the market so much concern, in their endeavor to “catch the turns?”
It may be said that good or bad news affects a market. Naturally, one would suppose that on the appearance of good news the stock concerned would advance, and on bad news the stock would tend to decline. But in this, as well as in its every action, the market displays its waywardness, for it is just as likely to sell down on good news as it is to advance.
The Ticker Never Lies
Y\7"E HAVE often heard of the unW canny ability of the market to read or discount the future; “the ticker never lies.” But after all, this introspective power is not so uncanny as it seems. It arises from the fact that there is usually some group or other of individuals who are advised of constructive developments in advance of the public’s sources of information and they take steps to exploit this “inside” information to their own advantage by buying up all the stock in sight, advancing the price, hoping that the trading public will become sufficiently enthused when the news is announced, to take their stocks at higher prices. In other words, the insiders take advantage of the news to pass on their stocks, and this usually brings a reaction, just the reverse of what the ordinary speculator anticipates. But usually after an immediate decline of this character investment buying is attracted, bringing an early rebound.
It usually pays to be one step ahead of the crowd in stock speculation, but half a dozen steps may spell disaster. In other words one can be too clever. A keen foresighted investor may detect a situation which is going to have a radical influence upon individual stocks or upon the market as a whole. He buys or sells as his judgment directs. But the situation has not yet been sensed out by the general public, and it requires their mass buying or selling to move the stock. The lone trader may have been perfectly sound in his diagnosis, but before the foreseen materializes he may become tired of waiting, or is burdened with carrying charges, and in annoyance sells out on the eve of the anticipated move. It is not enough that a stock is worth buying; that fact must be generally recognized by a large number of speculators before it will move very far. And effective buying power is usually marshalled when some constructive development is near at hand.
Influence of Uninformed Buying
A STOCK may be greatly overvalued, but that does not necessarily indidicate that it will have a sharp decline immediately. There may be sufficient buying power remaining to push it still higher. The public is made up of many thousands of average humans, who are wont to do as the other fellow does. They do not enquire too closely into fundamentals; indeed they have no special interest in diagnosing an investment situation. They do not argue whether a stock is overvalued or not. It is sufficient for them that it is going up, and is likely to advance still farther. Buying of this uninformed character is always a potent factor in a speculative market, and often confounds the most studied and intelligent opinions regarding a given security. In fact, its influence is even broader. The present bull market on the New York Stock Exchange has assumed proportions which have reduced all former bullish demonstrations into insignificance. Old time traders who had been accustomed to the conventional markets of the past, when the rises and falls followed each other in an ordered manner, are aghast at the dizzy heights to which security prices have attained, and at the unpredecented extent to which public participation has expanded. Two or three years ago, traders of this type closed out their speculative accounts, believing that the market was dangerously overextended and was due for a resounding crash. But they had not bargained with the new trading element, whose experience did not date back half a dozen years at the outside. This contingent, numerically much superior to the old line guard, merrily bought stocks, wholly ignorant of precedent or experiences of the past, and has reaped the major profits. Thus the market has continued to move forward.
Market Capitalizes the Future
'“THERE is no set of rules by which the value of a security may be measured. It is true that some general formulae have been arranged, but they are of approximate application only. In general, a speculative security is worth what the public is willing to pay for it, but that measure of worth is dependent upon a variety of factors, not the least of which are the other fellow’s opinions. The market is busily engaged in capitalizing the future, and the higher a stock goes, the more it is likely to whet the speculative appetite. Mass psychology is a powerful market influence. The public is as a rule either buoyantly bullish or decidedly bearish. It seldom observes half-way measures. The ordinary trader buys when everybody else is buying, and he sells when his neighbor is selling. If he reversed his position, and bought when the public was selling and sold when the public was bidding prices sky-high, he would make a great deal more money; but he is not built that way, and so he goes on, forcing prices to unreasonable levels when he is bullish, and knocking them down to the cellar when he is bearish. The sentiment of the public, apart altogether from fundamentals, is a powerful factor in price movements.
As the vast majority of market speculators trade “on margin,” speculative stocks are particularly sensitive in a falling market. So long as the advance continues, the speculator’s mind is serene, but when the turn of the tide comes, he is at once agitated, and fearing a call for further margin which may embarrass him, he is prepared to sell. Thus it is that stocks usually decline with greater facility than they advance, and it is selling of this type that forces prices down farther than conditions warrant. But the public is temperamental, and it is only the sober minority which realize the possibilities in these recurring situations, and lend buying support on any sizeable reaction.
There is another factor, too, of great importance, the short interest in the market. This is not so potent in Canadian markets as in New York, but is always present in varying degree. A great many people have a strong antipathy toward playing the short side of the market, and toward the individual who makes a practice of “selling what isn’t his’n.” They have a sentiment that to buy a stock is quite a respectable act of ordinary business, but to sell short entails something not quite respectable or even immoral. Perhaps this is born of a prejudice against the individual who is inclined to look upon the dark side of life in general. But in the final analysis there is nothing more unsavory in selling a stock that one does not own, than in buying stocks that one does not intend to pay for. And the presence of a short element in a market is a very direct and positive help in time of market difficulties, for as the bull will hesitate to buy on a falling market, the bear is ready and anxious to cover his commitments, and thus lends support at a time when needed. Indeed, the combined influence of the buying in of short accounts has on numerous occasions not only steadied a market, but has even induced a rally of impressive proportions. Without the sustaining influence of the shorts, the long interests in the market would often find other positions precarious indeed. And so the bear has his uses just as much as the bull.
The Inventor Determines the Major Trend
THROUGHOUT this article we have discussed the respective influences of the trader whose primary object is quick profits, whether on the long or short side of the market. There is a trading element, known as professionals, who devote most of their time to the market, and endeavor to make a livelihood following its fluxing moods. Speculators of this type have no set position. They would sell short as quickly as they would establish a “long” line, if they believed that the road to quick returns lay in that direction. Then we have seen the influence of mass buying and selling in sending prices forward, or in hastening their decline. But these influences after all are superficial. They do not direct or control the major price trend. That important function is left to the real investor. The bulls and bears may stir up a great deal of confusion, but it is the real investor—who, after all, supplies the bulk of the buying power in the market and whose opinion is formed after careful study of all factors likely to influence the price of stocks—who directs and deter mines the main flow of the stream. In other words, in the long run the opinion of the investor has greater influence in shaping the trend of the market than has the “in and outer” whose primary object is to ride with the tide for a spell, and then pass on his stocks to some one else who likewise hopes for a fast and profitable journey.
The real investor is usually an individual who has a good deal of money to invest; in the aggregate a great deal of money to invest. He is primarily interested in adding to his fortune by the safest route. He has an assured financial position already, so that he does not care to take speculative risks for the sake of a quick gain. He buys deliberately, and usually wisely. He weighs all factors. He will not buy at the crest of a sharp market move, but will wait for a sizeable reaction. He is a supporting influence. Moreover, he is prepared to hold his stocks for an indefinite period. He is not concerned with incidental fluctuations, but is looking for the broad appreciation that he believes his stock is entitled to obtain over a period of years.
The public is at a disadvantage in the game of frenzied speculation. The individual who, though his means be limited, shapes his course in the manner of the true investor, will have the most profitable experience in the long run. With the markets progressively mounting to higher levels it is more and more obvious that the way of the speculator is becoming increasingly difficult, especially as the current tightness of the money market imposes additional hazards.