What moves the stock market

As much as i hate to say this, no one can predict the next price movement of the stock market. Even technical analysis will not be able to assist you with a 100% accuracy in prediction. The real factors that move the stock market are money flow, greed and fear. There are lots of big players in the market such as hedge funds, institution traders, the rich and affluent and syndicate. We as retail traders are consider as 'small fish' since we do not have sufficient money to move the stock market. In order to profit from our trading, we need to leverage on the movement of these 'big fish'.

When money flows into the stock market, it will inflate the price of the stock. Thereby creating a paper demand for that stock. As retail investors and traders begin to be attracted by the price appreciation of the stock, they will enter into the market. This will in turn further aid the appreciation on the stock price. On first sight, this is an idea situation whereby everyone is a clear winner as long as they buy the stock. However, problem will set in when greed comes into play. Stock price on theory should not be worth more than its earning potential. In order to justify the price appreciation, there must be growing anticipation on the potential of earnings. More often than not, stock price appreciate much more than it's potential earning power. This is what i would describe as overbought condition. As a result, 'big fish' will begin to take profit and exit the market which in turn causes the stock price to fall.

The irony with stock market is that it has very serious mood swing problem. Always swinging between extreme greed and extreme fear. When the 'big fish' starts to sell their stocks holding, it create massive market fear which results in retail investors and traders to dump their stock. This action creates panic selling pressure and causes stock price to fall sharply.

As a trader, we need to understand the basic mechanism on why stock price moves. This is important because it help us to understand the stage that we are in. If market is fearful, study the long term trend of the chart (usually the daily chart) using moving average and determine whether is this a temporary drop in share price. However, when market has been rising too much, make use of the moving average to identify potential reversal in uptrend as stock prices might start to plunge. There is a saying for traders, when the public are fearful, we long the stocks (buy the stock and hope price will rise). When the public is greedy, it is time to sell your stock and get out. If you notice, i use the word public and not 'big fish'. The reason is because 'big fish' are the trend starter whereas the public will always follow after them. The irony is that the public are usually the 'lamb' waiting to be slaughter as they enter the stock market last...

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Reading a rally cycle

Based on my experience in trading, i have observe the following 'sympton' of Singapore market. The local market follows a pattern that resembles sector rotation during a bull rally. (Prices keep going upward) The first in the market to move would usually be the blue chip counters. And it will usually rally for a few days before it pause for consolidation. While the blue chip is consolidating, the mid cap company will have its turn to rally, stock priced above 0.2 will usually take this opportunity to rally. Once the blue chip and mid cap companies get over priced, it will be the penny stock turn to rally. The rationale is simple, when there's no further up side to the blue chip and mid cap counters, speculators turn their attention to small cap in a bid to ride on the bullish sentiment and attract more retail investors to invest in them. During a bull rally retail investors will usually be blinded by greed and jump into these penny stock without doing due dilligence.

There's two important point for my explaination on the above scenario. First and foremost, once you see penny stock in play, it is about time to take profit and exit the market for awhile. During these period of time, watch out for any positive news that will carry the rally further, if not, it might be time to stay away from buying any new stocks because the market might plunge anytime. So how do you see whether penny stocks are in play? The warning sign comes when penny stocks are in play (more than 80% of top 30 volume are make up of penny counters), blue chip and mid cap counters are no longer dominating the top 30 volume.

The second important point is that penny stock is worth investing when you have spare cash that you do not need. The rationale on investing in these companies is that you are simply buying a hope that these penny counters will get their chance to rally due to speculative play. And it usually will when the market sentiment is very bullish. However, please do not use contra trading for penny stocks as the liquidity is not there and you would not be holding the stock any time soon. You might not be able to find a buyer at the price that you are looking to sell. And the bid spread would usually be very wide. Example will be, buyer willing to pay only 0.05 whereas seller only willing to sell at 0.1. In this example, seller will incur 50% loss on capital if he/ she were to sell the stock to the buyer.

Penny stocks do not have any fundamentals in place and they are cheap for a reason. So do trade with care, exercise caution and trade with spare cash only.

To add to your bonus for reading my blog so far, i have listed a few penny stock below for your reference and study. These counters are not listed in order of popularity.

1. Ellipsiz
2. Centillion - Price usually move together with Centillion (related company)
3. Penguin
4. MediaRing
5. Equation - Price usually move together with Centillion (related company)
6. Digiland - Price usually move up one bid only so got to queue early to sell everyday
7. Unifiber
8. Sunmoon - Price usually move up one bid only so got to queue early to sell everyday