The Puke Effect
By Jeff Clark
July 1, 2008
"The cruise was going along just fine."
Captain Bill was describing the worst sailing trip he had ever chartered. "We were about halfway to the island when one of the passengers started to get sick...
"He didn't quite make it all the way to the railing and he threw up on a bunch of the passengers who were sitting right there on the starboard side of the boat."
Captain Bill then went on to describe how the passengers who had been puked upon started vomiting as well. Some of them managed to vomit over the side of the boat. But they were throwing up into the wind, and a good portion of "breakfast shrapnel" blew back into the boat, soaking the clothes, hair, and faces of anyone standing nearby.
"Pretty soon," Bill continued, "everyone was puking. The stench was so bad, even my crew members were blowing chow."
I first heard this story about 15 years ago, when I was learning to sail. I now recall it at the end of just about every quarter. On Wall Street, they call it "portfolio window dressing." I call it the puke effect.
At the end of every quarter, portfolio managers dress up their accounts by purging stocks that haven't performed well. After all, who wants to show shareholders they've been hanging on to the worst-performing stocks in the market?
So, one by one, the portfolio managers jettison the equities overboard. As the selling pressure mounts and the losses deepen, more and more managers feel the need to purge. Eventually, even the most experienced money managers are throwing up stocks at bargain-basement prices.
It happens every quarter. But this time, it seems more pronounced.
I can't recall ever seeing so many high-quality, blue-chip names trading at such depressed levels. That is the nature of a bear market. And prices will likely fall even farther over the course of the year.
But just as stocks don't go straight up in a bull market, they don't go straight down when the bear is in charge. Last week's puke effect has created a lot of genuine bargains that will bounce back sharply once the end of the quarter "window dressing" is out of the way.
Take a look at a list of all the stocks making new lows over the past week. You're bound to find a few bargains that will generate fast gains over the next several days.
Best regards and good trading,
Jeff Clark
