An Interesting Debate I had With Someone
May 8, 2009
Posted by Jody Eisenman | Filed under Uncategorized
I’m of the belief of two things in this market:
1. The market is virtually never in equilibrium. It’s either undervalued or overvalued at any given point in time. This is true for individual stocks as well. There are many reasons for this, but the main one is that stocks trade on emotions rather than fundamentals.
2. The day and swing traders run this market. This has led, as we all know, to a very high level of volatility on a daily basis.
Anyway, someone I spoke to disagreed with premise number one and felt that stocks were always trading at their true value. My proof against him was this:
Lets take a look at a very heavily traded stock. The reason I chose a heavily traded stock was because thinly traded stocks can move dramatically on above average volume. However, a widely traded stock should, in theory, trade in a relatively “normal” pattern without wide daily swings. The stock I chose was Citi. Citi normally trades over 500 million shares/day. Well, today Citi traded over a billion shares (the total volume equaled roughly 20% of the total market cap), and the range was between 3.50 and 4.41. That 91 cent range was equal to about 30% of the low price of the day. My question was, “If Citi is always fairly valued, please explain how the company was worth 25% less over the span of a few hours? On top of that, there was no real news inter-day of any substance.” Needless to say, he had no response.
The market finally took a breather today, as the Dow closed down about 100 points. It is clear that market sentiment has now changed 180 degrees since March 9. Lets see if this can continue.
