MLR - Chasing stocks after they have topped

Published : May 13 2011 at 16:54 ET

Since silver topped a couple of weeks ago, we have received many questions from members as to whether they should buy back into silver at cheaper prices. This reminds us of many investors who bought into the market after it topped in mid-March 2000, thinking they could get in at cheaper prices. Of course, overpaid analysts were touting a price of 1000/share on Qualcomm, Inc. (QCOM) and other valient stocks of the day, so this lent itself to the froth and mania that pervaded the popping of the bubble in 2000. And of course, many investors reversed their profits or even lost their shirts in the post-bubble months as the NASDAQ proceeded to lose 78% of its value from peak to trough, with many high flying stocks losing 90% or more of their value. Incidentally, Qualcomm lost 88.4% of its value from peak to trough.

Just because a stock is buyable at, say, a price of 52 does not necessarily mean it is just as attractive should it move to 58 then retrace back to 52. Perhaps in some cases, it may give a second chance to those who missed the buy, but in other cases, it is a sign of weakness such that the stock should not be bought, and those who did buy it at 52 should be on guard and obey their stop-loss points as the stock may have hit or be close to hitting such a stop-loss point.

What drives this "late to the party" mentality is nothing less than what we might call "envy in hindsight." Investors who just saw a particular security stage a massive upside parabolic move suffer from a type of envy where they experience anxiety over having just missed such a massive profit opportunity. Thus when this particular security doubles or triples and then blows up in spectacular fashion, dropping over over 33.9% from its peak as the SLV has done recently, they suddenly want to believe that they can now buy it "on the cheap" and that it will somehow magically rocket back up to its old highs. We would say that in 99.99999% of the cases these investors are setting themselves up for disappointment. Instead, they should understand that when such parabolic moves becomes obvious to all, then they are quite simply over and done with. It is time to abandon the greed that comes from chasing something after it has topped and focus instead on newer, fresher opportunities BEFORE they become parabolic.

The time to buy silver has passed, and it will take time for the white metal to consolidate the big parabolic run-up and subsequent blow-up off the peak. After a long period of healing and technical rebuilding, perhaps as long as several months or more, the "crowd" will have forgotten about silver and that may be when it is time to buy silver again.  

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