How to Trade on Hype
by Jeff Clark
July 13, 2006
Sometimes intelligent speculation is less about common sense and more about understanding the habits of the casual investor.
The stem cell sector is about to give us a terrific example of this.
Let’s face it - the companies involved in stem cell research are absolutely horrible stocks. It’s not surprising since none of them have even the slightest prayer of ever turning a profit. So they’re lousy investments.
But they can be really great trades given the right set of circumstances.
And those circumstances look really good right now…
The Senate is mulling over a bill that will raise the limit for federal funding of stem cell research. The U.S. House of Representatives already passed such a bill, and all indications are that it will pass in the Senate as well, despite a veto threat from the President.
Whether the bill eventually becomes law or not isn’t important to us as traders. What’s important is that we have an impending news event which is likely to gather a lot of attention as the vote draws near.
Impending news events are wonderful at sucking in money from the casual investor.
As the date draws closer, we’ll see more and more press releases about the issue. Popular television “news” shows like Dateline, 20/20 and Primetime Live will run feature stories on the pros and cons of stem cell research. And you can bet the subject will be a big conversation topic on the cocktail party circuit.
All of this hype will convince the casual investor that he absolutely must own the sector prior to the event. As the date draws closer, the urgency to “get in” will increase and the casual investor will pay up to own the shares. This will likely result in a rapid surge in share prices.
Of course, once the vote is out of the way; demand for the shares will disappear, the hyped-up gains will evaporate as the stocks tumble back down to “pre-event” levels; and the casual investor will once again be left holding the bag.
A few of the stocks in this space include StemCells Inc. (STEM) and Aastrom Biosciences Inc. (ASTM).
I’m keeping these stocks and several others on my radar. The intelligent speculator can profit handsomely by getting into this sector before the hype, and getting out (or better yet, getting short) just before the vote.
I’ll keep you updated on how it plays out…
Best Regards & Good Trading,
Jeff Clark
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