There are no smooth movements in the stock market. On the contrary, the market seems to move in fits and starts. It drops precipitously, from time to time. Then, even as it recovers, it fluctuates up and down. Bad news often results in a sudden drop. Good news or, more likely, sudden purchases or supportive opinion (such as in the case of AAPL last week) causes sudden increases.
Mathematical models of the stock market often don’t work because they smooth the progression of stock prices. Traders often use trends to try and filter the noise from the movement of stock prices. But the noise represents actual trades and real opportunities, as well as stresses and pressures.
Patience is a virtue, and it usually benefits stock traders (on the way up, not on the way down), as is evidenced by the axiom: Cut your losses, let your winners run. Emotionally, it’s extremely difficult advice to follow.
I’ve owned Apple for quite a few months. I watched it fall from $700 to $525, where I bought. I bought more at $393 to average down my price to $459. I waited a long time to break even, at which point I started feeling good about owning them at all. Then, just a few days later, the share price jumped over $500. What should I do?
In my experience, jumps like this are one time events. Stock prices tend to overshoot (in both directions), and it is most likely to slide back to something more representative of its fundamental value. Unless Carl Icahn was right and the stock would be fairly priced around $600.
The same tendency to overshoot exists on the way down. Buying opportunities usually don’t last long, as the stock will likely begin to recover relatively quickly. The difficulty, again, is knowing if the new price represents some true shift in fundamental value.
Since the market moves in fits and starts, there are plenty of opportunities to profit. There are also plenty of chances to be shaken out of the market by the bumpy ride and miss out on profits or to accumulate losses. That’s what makes it exciting, and impossible to know for sure the best choice. For now, I’m going to continue to own Apple and hope for the best.