You Get What You Pay For…And Other Wall Street Axioms

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One of the more difficult aspects about “trading the trend” is when you encounter a situation like the current one. We know that trends can go on for much longer than most think possible, yet no one wants to get caught holding the bag at the top, especially in this day and age of in-your-face, call-you-out, real-time social trading. On the one hand, we have high momentum standouts like GMCR and NFLX clearly breaking down from late-stage bases. That does not necessarily mean those stocks are done forever, but rather that they need plenty of time to at least reset their base count before sustaining another powerful uptrend. On the flip side of the coin, growth leaders like AMZN AZO (chart below) CMG LULU PCLN are holding up remarkably well considering how much ground they have covered since 2009, and all of the broad market volatility in recent quarters.

Note that all of the stocks mentioned above have, or currently still are, been priced with three digits. Unfortunately, the overwhelming majority of low-priced issues never amount to the elusive ten-bagger. In fact, as the axiom goes, you get what you pay for. More often than not, high-priced stocks become even more so, while single-digit midgets often become extinct, rendering their beloved penny stock holders’ equity worthless. Notice how I used the phrases ‘high-priced,” and “low-priced,” instead of “expensive” and “cheap.” A high-priced stock can be very, very “cheap” fundamentally, whereas a low-priced stock can easily be “expensive.” Despite that, many investors and traders still have an aversion for buying a stock priced over $100.

Currently, we are in a market environment where the previous view of either ‘”risk on” or “risk off” is being trumped by more nebulous action. The S&P 500 has broken out from its summer trading range, but as we know it has categorically not been an off to the races scenario like last year at this time. This time around, you may or may not get what you pay for with high-priced winning stocks–A more rigorous approach is going to be required to find the winners, regardless of whether you focus on technicals or fundamentals.

With all of the old Wall Street axioms that fly around the financial media on a daily basis, such as “Just dollar cost-average down when your holdings plummet instead of panic selling,” “Buy low and sell high in order to get rich,” or “I know old traders and bold traders, but no old AND bold traders,” etc., it is very easy to see the market in black and white terms. Given the current predicament, though, I suspect shades of gray are more appropriate.

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