s I mentioned in my last Do you remember the very first
message, if the support time the company missed their
line of your mutual fund or quarterly earnings forecast? They
your stock is broken, beware! explained it away on the
This is a very clear signal you "low-carb diet" fad!
should be hedging your position,
and perhaps consider selling a By the time the real story broke
portion (or maybe even the the next year, about some very
entire) position. Breaking the real accounting issues, the stock
support line is the ultimate sign had already been sliced in half.
that supply is now clearly in
command. Your principal is now at The support line had been broken
risk. back in March 2004, at 34. This
week, as they closed the New
Too much supply, and not enough Jersey shop and carried away all
demand, will bring lower prices. the signs and equipment, the
That is not my theory. stock is just $6.00.
That is an economic law. Maybe this is too dramatic an
example.
Summer 2003: Krispy Kreme is on
the cover of a major financial Take a look at a big blue chip,
magazine as "the hottest brand in widely held stock. Merck broke
America" and the only Krispy through it's support line in
Kreme store in New Jersey opened. August 2003 at $52. Since then,
People had lined up overnight to it has dropped to the mid 20's.
buy their doughnuts at this It now flirts with $30.
store! But sell signals began to
appear. Regarding Merck, keep in mind
that Vioxx was withdrawn in
September 2004. But the stock call you, seemingly out of the
broke support a year earlier in blue, and tell you we need to get
August, 2003. How did the market defensive with (or maybe even
know? Maybe it did, maybe it sell) company XYZ's stock.
didn't. But by the time the Vioxx
story broke, in late summer 2004, It could be a stock you've owned
supply was firmly in control. No for years. It might be the single
demand whatsoever to prop it up. biggest investment you hold.
The stock dropped even further, Maybe you inherited the stock
from $44 to the mid 30's on the from your parents, or perhaps you
Vioxx withdrawal. even worked there, or know
someone who works there.
Hey, Merck is a fine company with
GREAT fundamentals. The stock has Regardless, when a stock breaks
struggled for lots of reasons. through the support line, it is a
All of which is unimportant. major red flag and should not be
ignored.
Remember, Wall Street is a huge
voting machine. Crowds are often We often don't know the reason
wiser than individuals and their for the decline, and may not know
opinions. So stocks like Merck for some time. There may not even
can have terrific be a news story about it. But we
fundamentals...and yet their know that supply has taken over
stock can be sliced in half. and lower prices often follow.
And since it is my job to protect
And we can see it, LIVE, when what you've worked hard to get,
stocks break the support line. we sometimes have to make tough
decisions. Without all the
From my perspective, as your answers. If we waited for the
advisor, I have a tough job. I'll news with stocks like Krispy
Kreme and Merck, we'd be in
serious trouble.
About the Author:
Thomas P. Mullooly, President of Mullooly Asset Management, LLC (http://www.mullooly.net) has spent over twenty years in the investment industry, as a broker and as an investment advisor. Feel free to contact us to check out the relative strength of your portfolio by sending an email to tom@mullooly.net or visiting http://www.mullooly.net/403b-plan.html
Source: www.isnare.com
