6. Image evolutions:
Let us watch the horizon to detect signals and factors preceding (or showing)
either in fundamentals (evolution of the business, of the economy...)
or in the image category (migration to another box = change of bracket,
either because of the stock "life cycle" as seen in stock categories, or of
a sudden shock).
Among other market watch tools, there are charts and technical analysis,
which look at price moves to try to spot market mood orientations.
Those techniques try to spot uptrends or downtrends in stock prices, and to find
signals that would show if those trends are going to persist or change in the next
Those tools might be useful but they are not foolproof. Better use it only as a
complement of other analysis tools.
This site will not elaborate on those techniques, as the current fashion is such that
there is an infinite quantity of sites on that topic, some of them verging on the esoteric.
Thus, let us focus on other signals of trend evolutions (or more precisely
on image evolutions).
Factors of variation pertaining to the stock
What plays a part here is our knowledge of:
the stock's fundamentals (estimated economic value),
every stock family,
the image variation potentials inside the bracket attributed to its family,
even the possibilities that a stock migrates from one family to another.
Atypically, some stocks change dresses at each scene of the play.
Their image steps up or down a box and/or their volatility gets wild or calms down.
Example: the image of an "emerging stock":
* may take various orientations:
zigzag on endlessly, stabilize, upgrade, or trip and decline.
* can even, taking into account the evolution of its fundamentals,
mutate into a "steadily emerging stock", or a "shooting star", or
Anyway, a "natural" strategy is to prefer underpriced stocks ("value
stocks", thus stocks with low images) to overpriced ones ("growth stocks"
with high images), the ideal thing of course being ...to find growth stocks
that are still not overpriced.
Obviously, whatever the strategy, any selection must start on a valuation that
rests on a serious financial analysis.
Studies seems to show that on the long term, the first ones tend to
outperform (*) the second ones.That could be attributed:
* to fundamentals (a growth stocks risks a decline of fortune while an
unattractive stock might experience a recovery)
* also to social behavioral aspects (fashions change, thus images change
(*) taking into account the total shareholder return or at least the return /
Evolution of the stock market as a whole
Rises and falls in prices generally affect a whole country, a region of the planet,
or the whole world.
Those moves contaminate, in a small or big way:
- Most EEVs. This "natural" contagion comes from the current
information and the whole economy's prospects
- Most images, and altogether, the general trend, which aggregate
- the evolutions of the average EEVs and average images of all listed
Here some findings of behavioral finance can be quite helpful.
For example, the phenomena of underreaction - adjustment -
overreaction (see this site's behavioral finance glossary) might
explain the existence of trends / momentums.
Evolution of each business sector
It is hard, for the stock market,
to walk and chew its gum at the same time.
There are, one after another, kinds of rotation of market fads on such or
such business sector(s), forgetting others that are appealing all the same.
When an industry such as electronics or pharmaceuticals is fashionable,
often agribusiness or petroleum is a bit neglected, and vice versa.
Also when growth stocks are the craze, value stocks are ignored.
The stocks belonging to a given economic or financial category tend to rise
or fall in unison, faster or slower than the rest of the market.
Their image's evolution may either exaggerate or contradict the (estimated)
evolution of the sector's fundamentals.
These "affinity driven" rises and falls may last months or years.
Often, the best known firms, or those most specialized in the sector,
start the dance. The others follow after a delay
We may note that the Liège University made researches that refine
the spotting and utilization of such correlated evolutions at:
Management clarity and information quality
Every firm is responsible for the clarity (readability / transparency) of what
Unless they smell hidden prodigies, investors avoid firms on which they:
feel badly informed,
find their policy obscure
judge their activities too diversified or complex to figure out their
Distrust takes place also
if there is often a wide margin between prior announcements and
or if problems are reported with delays.
As much as some firms are secretive, others play the star system.
Their image may climb in audiometer ratings, then collapse if the market
discovers that, behind the shop front, things are less rosy.
Market mood, expectations, events interpretation
The market interprets more or less positively or negatively the current news
concerning - or seeming to concern - the firm.
At times also, it ignores the information, shows no interest, or gets mesmerized
by it without reacting.
This rosy, black, "ostrichy" or dazed attitude, that change the perception
of the real situation and of the events affecting it, is a component of the current
Thus, how to take into account events affecting not only the EEV (a matter
of financial analysis), but also the image?
Here, let us be wary of market's expectations (hopes or fears). Let us wonder
if they are fuelled by collective emotions, the market betting already too much
on them (under-pricing, overpricing).
Let us feel if they are getting fragile: then the new events risk to be not strong
enoughto fit these optimistic or pessimistic views.
1. If the events contradict the expectations (or the trend),
image variations depend on
The event's importance,
The degree of surprise in respect with these expectations,
The strength of these investors' preconceptions and beliefs.
So, beware of the so-called "market consensus".
Paradoxically, the more enthusiastic or depressed it is, the highest
the probability of a turnaround from that direction.
They might be used as "contrarian" tools: some say that when the
"bulls / bears" or "bears / bulls" ratio reaches 4, a reversal is highly
probable in a short time, after a final burst of optimism / pessimism.
2. If the events fit the expectations, or the trend,
a way to "sense" a reversal is to see how a
Northbound market or stock reacts to some fortuitous good news (or,
inverting the reasoning, when fortuitous bad news "falls" on a Southbound
- If the week (don't trust the sole first day technical / gut / trial and
errorreaction) experiences a new rise, it shows that the number of
adepts and their conviction build strength.
- But if, after a week, prices changed little, or went back to the pre-news
level or, worse, went down, some rats left the boat!
They dropped part of their holding, taking advantage of the swollen
stocks' demand due to this "happy" news.
- Beware not to mix up these defections with some benign profit-takings
- following some expected good news, even if there was some uncertainty.
3. An important thing, already seen above, is that the main cause
of stock price trends seem to be that,
when the current situation or the future prospects, are changing, investors often
1) at first under-react,
2) then adjust progressively,
3) and at the end overreact.
See in our behavioral glossary the definitions of underreaction,
adjustment, overreaction to information.