The stock market hates uncertainty. A stock will often drop for several days before a big announcement comes. When it finally does come, the stock will often shoot up in price, even if the news is bad like the company missed earnings.
You see, investors hate uncertainty. When they don’t know what is going to happen, they don’t know how to price things. This makes them tend to sit on the sidelines, and thus stock prices tend to drop. Bad news is better than uncertainty. Note that the whole market will often trade down when things like a tax cut is due to expire or a big public policy change is looming.
I’ve found that a lot of the stocks that are looking like good buys nowadays are, ironically enough, healthcare stocks. A couple of months ago I added Aetna (AET) to my account. This week, I picked up some shares of Community Health Systems (CYH). Some of the others look good as well.
I say “ironically” since you would think the uncertainty surrounding the healthcare market with Obamacare maybe coming into force over the last few years would be weighing on the healthcare stocks heavily. The trouble with Obamacare is that it creates a lot of uncertainty in the healthcare market because replaces normal market forces with bureaucratic decisions. No one knows what affect the various rules buried deep within the two thousand page health care bill will have.
Just within the last few days a few of the providers found out that they would need to send some of the premiums collected back to businesses and enrollees since the amount they spent on care didn’t match the government-specified ratios. As a result, some companies are pulling out of various markets. There can be no doubt that other surprises await.
Perhaps that is part of the reason the healthcare companies appear to have so much potential is that they have already been beaten down due to the uncertainty. In Wall Street lingo there is what is called “dead cat bounce.” The joke is that even a dead cat will bounce if it falls far enough. Another possibility is that it is not expected that the healthcare law will ever actually take effect.
In any case, I’m treading carefully into healthcare. It is when no one else wants to get into different sectors that the big money is made. I’m not going in with more than I am ready to lose, however, because the future is definitely uncertain.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Kurhan, Downloaded from stock.xchng