OVERBOUGHT/OVERSOLD

THE ALCHEMIST by AL THOMAS

OVERBOUGHT/OVERSOLD

Has your broker ever told you that a stock is
“overbought” or “oversold”? He probably went on
to explain that the stock you own (I hope you
didn’t) had gone down so far that it now was
oversold and due for a rally. He might also have
encouraged you to buy an equal amount to “dollar
cost average” your position so that when (“if”- he
didn’t say that, I did)) it did go back up you
could “get out even”. He might even say you “could
make a fortune”.
Waiting to get out even is the great trap that
is preached by all the big Maul Street brokerage
houses. What is even worse is most brokers and
financial planners believe it. What happened to
all those beautiful company reports sent to you
telling how wonderful this stock was before you
bought it. Maybe you better read those back to
him. Brokerage companies do not want you to sell.
When any stock is going either up or down for
any extended period of time it does seem logical
that it can become overbought or oversold, but
let’s examine what that means to your ownership.
The reason a stock started up is because the
underlying profit projection is going to produce
substantial profits that will make the stock more
valuable. At some point it is going to reach a
true valuation and should stop advancing. What
usually happens is it goes beyond true valuation
to what could be called overbought (over valued)
and then starts down. You may be encouraged to buy
when a particular stock becomes “hot” and everyone
is buying it. When all the sheep are buying you
want to be a seller or you will also be sheared.
Suppose all this was in anticipation of future
profits that did not materialize? Then the rise
would turn over and head down. This would be more
likely for a smaller company than one of the
giants, but giants have been toppled. If any fraud
was involved the company might even go bankrupt.
Think back to WorldCom that went to the moon and
was finally flushed down the sewer. Did it EVER
while it was tanking become oversold for a rally?
Not hardly because there was no value. Unless you
truly understand how to trade overbought and
oversold situations the best thing to do is keep
your hands in your pockets.
Beauty is in the eye of the beholder. Overbought
and oversold is in the mind of the buyer/seller.