It's an old post - republishing the same
The PE that Counts.
Science of Stock Price Action: New Chapter
The PE matters. Not the Price to Earnings ratio but the Perception about the stock. When market participants do not see a great future/prospect, they tend to ignore the stock/sector. People can talk all they want about Valuations but stocks rarely rally purely on Valuation argument. The stock/sector can suffer big time because of bad Perception. But then nothing lasts forever. Things do change and sometimes all it takes is a Big Fundamental News flow- and it changes the way traders look at the stock or sector. That Change is the change in PE(perception) which results in a dramatic big size opportunity.
The News flow does not change anything on the ground immediately for the stock to make a big move but just the change in PE perception or the way people look at the stock/sector results in dramatic up move. Why this happens - Here's the logic
The Market makes a violent move in the direction of the surprise
We can call it a Fundoo Turnaround or a phase where stock transitions from a bad PE stock to a Good PE stock. There are situations where reverse can also happen and stock from a good PE stock can become a bad PE stock
The Big question:
- How should one spot change in PE?
- How can one play the opportunity?
- Which Price Action concepts work to spot the change in PE
Now, theories do matter but when you see theory in action, that’s when you get the conviction on how to act in such situations again. I have discussed the above theory with four major sectoral case studies and how it opened floodgates of opportunities.
It is not a low PE or high PE stock that matters. What matters: Good PE or Bad PE.
What’s amazing – The Big Newsflow happens. It gets widely discussed in the press. The Opportunity then comes few weeks later and the change in PE results in a dramatic upmove. I am hopeful that once you read the whole process and the case study – you will be better prepared to play new Fundoo Turnarounds opportunity with more conviction.
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers