As I mentioned in my last message, if the support line of your mutual fund or your stock is broken, beware! This is a very clear signal you should be hedging your position, and perhaps consider selling a portion (or maybe even the entire) position. Breaking the support line is the ultimate sign that supply is now clearly in command. Your principal is now at risk. Too much supply, and not enough demand, will bring lower prices. That is not my theory. That is an economic law. Summer 2003: Krispy Kreme is on the cover of a major financial magazine as the hottest brand in America and the only Krispy Kreme store in New Jersey opened. People had lined up overnight to buy their doughnuts at this store! But sell signals began to appear. Do you remember the very first time the company missed their quarterly earnings forecast? They explained it away on the low-carb diet fad! By the time the real story broke the next year, about some very real accounting issues, the stock had already been sliced in half. The support line had been broken back in March 2004, at 34. This week, as they closed the New Jersey shop and carried away all the signs and equipment, the stock is just $6.00. Maybe this is too dramatic an example. Take a look at a big blue chip, widely held stock. Merck broke through its support line in August 2003 at $52. Since then, it has dropped to the mid 20s. It now flirts with $30. Regarding Merck, keep in mind that Vioxx was withdrawn in September 2004. But the stock broke support a year earlier in August, 2003. How did the market know? Maybe it did, maybe it didnt. But by the time the Vioxx story broke, in late summer 2004, supply was firmly in control. No demand whatsoever to prop it up. The stock dropped even further, from $44 to the mid 30s on the Vioxx withdrawal. Hey, Merck is a fine company with GREAT fundamentals. The stock has struggled for lots of reasons. All of which is unimportant. Remember, Wall Street is a huge voting machine. Crowds are often wiser than individuals and their opinions. So stocks like Merck can have terrific fundamentals...and yet their stock can be sliced in half. And we can see it, LIVE, when stocks break the support line. From my perspective, as your advisor, I have a tough job. Ill call you, seemingly out of the blue, and tell you we need to get defensive with (or maybe even sell) company XYZs stock. It could be a stock youve owned for years. It might be the single biggest investment you hold. Maybe you inherited the stock from your parents, or perhaps you even worked there, or know someone who works there. Regardless, when a stock breaks through the support line, it is a major red flag and should not be ignored. We often dont know the reason for the decline, and may not know for some time. There may not even be a news story about it. But we know that supply has taken over and lower prices often follow. And since it is my job to protect what youve worked hard to get, we sometimes have to make tough decisions. Without all the answers. If we waited for the news with stocks like Krispy Kreme and Merck, wed be in serious trouble. |
