More contagious than Ebola

OK, Ebola isn't very easily transmissible, but as it is on everyone's mind, I thought it was time to put things in perspective. You'll almost certainly never be exposed to Ebola, but compared to the general public, stock traders and analysts have an elevated risk of contracting two potentially serious contagions. While both of these can be passed by person to person contact, they also appear to be transmissible through the vector of stock price. Consider the online retailer (sort of) Alibaba (BABA), which released a somewhat problematic earnings report yesterday. As expected, American investors didn't really get a look at the numbers driving the company's success, but Jack Ma and the Alibaba fun bunch keep reporting that the company's sales are increasing by 50% annually and that their profit margin is greater than 50%.

The Street doesn't like to see upstarts like Ma get so insanely rich so insanely fast – unless of course, it gets a piece of the action. To get that piece, investors are willing to overlook a great many things, such as the inevitable transparency issues that arise when companies do business in China, a society where the government strictly controls the media. BABA trades in the US, though, so investors can get a piece – but a piece of what?

The stock has been ticking up, and in the inextinguishable opinion of the Street, a rising stock price means that good things are happening to a company, and that its price will certainly go higher, which makes more people buy. Look at the ten-day chart of BABA stock, below, and you'll see what technical analysts call a “J curve.” What it shows is that buying has piled upon buying, that the underlying business now matters little, and that a high percentage of the market is convinced that they can't afford to miss this opportunity: all the classic symptoms, in other words, of greed.

This is not a bullish indicator; it is a disease, and as long as you remember that and trade accordingly, you'll make better decisions than most.

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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