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Price Anticipates Fundamental Changes

Most fundamental changes do not happen overnight, they take time. Because price is indeed the result of all that is known in the public and non-public domains, it is reasonable to expect that some buyers and sellers are informed, the so-called smart money. Though not always foolproof, the smart money seeks unbiased, market moving information not yet in the public domain. In most cases this information is the result of high priced, independent fundamental research. It is this informed buying and/or selling that anticipates fundamental changes and creates price trends.

It may seem as though the "smart money" has an unfair advantage over the general market and to a great extent, this is true. Information is a commodity like all others and those with greater resources have better access. We need to keep this in mind when stocks appear to be rising or falling in the absence of information in the public domain.

Consider the case of one time stock market darling Sun Microsystems (SUNW) in the last quarter of 2000.

In the first half of 2000 Sun Microsystems (SUNW) and other stocks championing the "wired world" were among the hottest momentum stocks. Despite rising earnings and nothing but good cheer among Wall Street analysts momentum clearly began to slow by September.

After reaching $65 the stock began to move lower, falling all the way to $48 in the middle of October. Just weeks ahead of the third quarter earnings report several Wall Street firms began previewing the quarter and issuing bullish recommendations. Slowly the stock rallied back to $61 by late October. When the third quarter earnings report was released the news could not have been better. The company reported record revenues and earnings and was wildly optimistic about the future but after a brief rally, the stock slumped, retreating all the way to $38 by late November. Three weeks later Sun Microsystems (SUNW) executives met at a technology conference and suggested that the outlook was considerably poorer.

In the case of Sun Microsystems the share price accurately forecast the peak in fundamental prospects long before corporate executives issued bad news.

The Sun Microsystems price chart should be a clue as to the relationship between time and price but let's break it down so it is crystal clear. The relationship between price and time is linear and it is also our next section.

price is not random relationship between price and time