The best performing stocks in any given year are usually the ones that surprise the most frequently and by the highest margin. Powerful price trends are sustained by a sequence of catalysts. Under the surface, all catalysts are earnings related.
In the previous post, I pointed out that a big number of the best performing stocks are neglected price-wise and volume-wise in the beginning of their trend. Most market participants miss the first stage of the move by focusing only on highly liquid stocks, without understanding that liquidity often follows price when there is a catalyst involved.
There are different type of buyers at the various stages in the price cycle of one stock. Earnings related catalysts (earnings reports, new contract, move in the underlying commodity…) have the potential to change perceptions of value and to start a process of major repricing – the beginning of a new trend or the acceleration of an already existing one. The first buyers believe that their expectations for strong earnings growth will one day materialize into strong price growth. This is why they are not afraid to buy low liquid stocks.
After the initial run, a typical stock will consolidate and form what many call a bullish flag or wedge. This is the stage when this stock will be caught by the scans of technical traders and they will get involved, further exacerbating the liquidity. Technical traders assume that someone knows something about the company and this is why the underlying stock is accumulated. They might not be right, but when enough market participants act on their beliefs, their expectations turn into a self-fulfilling prophecy and the stock breaks out from the bullish pattern, further attracting fresh capital. At some point, the enthusiasm of the buyers will fade out. This is the make or break moment for the stock. If another fundamental catalyst does not appear, the trend is short-lived and the price turns south. This is why in the beginning of this post, I highlighted that strong price trends are sustained by a sequence of catalysts.
In the middle of their price trend, most of the future best performing stocks look overextended. Most market participants will ignore such stocks because they are up “too much, too fast”. In capital markets, what feels irrational is often the right thing to do.
Let’s take a look at the weekly charts of another five stocks that shined during the year:
