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Stock market logic

I have a small retirement account in a brokerage firm in my hometown. My portfolio is weighed heavily in common stocks. Naturally, some of my investment is in agricultural firms. I own shares of a large chemical company, a large seed company, and one of the large food processors. Last October, I added a large machinery manufacturer to the list. 

The timing of the purchase was good because the stock market has gone up in general since last fall. The stock of the company that I own has been gradually grinding higher since I bought it. On January 2, the price jumped higher, leaving a gap on the price charts of that company.


The company released a report of the fourth quarter earnings on Monday of this week. Much to my surprise, the earnings of the company were down 55% from fourth quarter of 2011. So much for the price rally, right? Wrong. Instead of dropping like a rock, the price continued to go higher this week. The net gain for the four days since the report is 2%. Overall, the price has risen 15% since I bought the stock.


I am delighted with my good fortune in the stock market, at least for this particular company. The fact that the price performed so well in the face of a negative report is reassuring. It is also puzzling. 

The explanation I hear most often is that even though the earnings were down from a year earlier, they were higher than experts had predicted. There are other possible explanations. It could just be that the price was too low to start with a year ago, in the last quarter. In which case, the gradual move higher for the year was logical. It could be that the stock price will turn and go back down once the euphoria of the gap higher wears off. More than likely the positive reaction is simply the market doing what it does, evaluating the true value and acting on what it sees.


I frequently get asked why the grain markets move in a certain direction. More often than not, my answer will be, “Because it was time”. At the meeting I was at in Albion, Nebraska, on Wednesday of this week, I was asked why soybean futures were 25 cents higher that day. I was tempted to reply with my usual comment. The reason for a price move in grains is frequently a reaction to some fundamental factor that is not apparent at the time. The current move in the soybean market is one that is not unusual after the New Year. Some times it is short-lived because of the "John Deere low" in February. In years since 2007, the rally has sometimes lasted into the spring. 

Factors weighing on the soybean market now include weather concerns in South America. Just as weather problems in this country in the summer are very difficult to understand, so they are in Brazil and Argentina. Farmers with soybeans to sell should realize that using logic to pick a time to sell will not necessarily result in the highest price of the year. Just as the market for the stock in my IRA makes some illogical moves, so will the price of soybeans as the outlook for weather in South America is evaluated. 

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