Basic Principles Of Stock Price Forecasting

Beginning early in 1962, most stocks declined steadily and selling reached near-panic proportions at the end of May. A sharp recovery followed. According to Louis H. Whitehead, people are now trying to decide whether this is merely a "normal" technical rally in a bear market or the beginning of a more significant advance.

As far as the writer has been able to learn, proved, long-term, consistently successful forecasting of the general market level is as scarce as hens' teeth.

As to why the task of forecasting is so difficult, here is an explanation offered with some diffidence. Stock prices are partly the result of facts, such as:

1. The volume of sales by corporations, this in turn being affected by such things as change in size of population and in average income, primarily in the United States but also in the rest of the world.

2. The corporation's expense of doing business, including labor, material, and taxes.

3. Profits or losses, the difference between corporate income and expense.

Other factors are psychological. Stock-market people guess at facts not yet revealed; and they form opinions on the effect of past facts, on probable future developments, and on what action other market people are going to take. A short-term trader in stocks is not the least interested in obtaining dividends. He centers his attention on guessing which stocks other people are going to be interested in buying or selling, and at what prices. Then he tries to outguess everybody else.

Finally, Wall Street opinions affect the future facts of business. A rise in the stock-market level tends to cause stockholders and business managers, and indirectly the general public, to spend money more freely. A drop in stock prices does the opposite. But the federal government, in the effort to avoid booms and busts, may make moves tending to contradict the stock market's forecasts. Obviously, it's a pretty complicated game.

Published discussions of stock market prices usually sound as if everyone were on one side of the market. "Heavy selling lasted all day." Such a statement misleads by telling only half of the story. A sale of stock is impossible unless someone buys. If selling is heavy, then so is buying. All of the people taking part in the stock market at one time, including brokers and dealers buying and selling on their own account, are always divided into two groups, one group believing this is the time to buy, the other group believing the exact opposite. The great majority of the people involved may be on one side, but in the number of shares moved, the buying must equal the selling.

This balance of opinion proves nothing as to whether today is actually the smart time to buy or sell. But to a cautious investor, the fact of the persistent disagreement may suggest that perhaps there rarely is a day when it is clearly wise to move a large portion of his capital either into or out of the stock market.

In investing, as in other affairs, a man naturally prefers to remember his successes, and conveniently to forget his mistakes. Whenever he happens to make good guesses in the stock market, in his memory this overbalances his bad guesses. If an investor believes he is a good forecaster, he might guard against the tricks his memory plays by making a careful record of every move he makes in the stock market, and checking back, months and years afterward, to see how often he was right.