Stock Trading Psychology Tips

Remember just a few short weeks ago, when the media were speculating about how high gasoline prices could go?

I know, I wrote a story like that myself.

In early March, gasoline prices hit $3.94 a gallon and topped the magic $4 mark in California and other states. That was based on a jump in Brent crude oil prices to $128 a barrel.

Some of it was due to a growing US economy and some logistical issues. But the main reason was fear of either an Israeli air strike to destroy Iran’s nuclear facilities or Iranian military action to break sanctions from the international community.

Now, as negotiations with Iran have resumed and war talk has quieted, investors and speculators have realized how weak the fundamentals in the energy market are. Their response: sell. On Wednesday, Brent traded on the spot market just below $118 a barrel, an 8% drop from the peak.

That’s why Ben Brockwell, director of data, pricing, and information services at Oil Price Information Service, told me he thinks gasoline prices have likely peaked for the year. This year’s high was below last year’s top of $3.98, and “we’re now 12 cents a gallon cheaper than we were a year ago.”

On Wednesday, gasoline prices averaged just over $3.80 a gallon, according to AAA’s Daily Fuel Gauge Report. They were cheapest in the South and Midwest and priciest on the West Coast and in the Northeast. And prices could fall to $3.50 or lower if demand languishes, Brockwell said.

Even slightly lower gasoline prices would be a relief for an economy that lately has hit some bumps. That could be why the S&P 500 and the Dow Jones Transportation Average have both moved up from their early-April lows.

Here’s why I think oil and gas prices will head lower, with one important caveat.

First, there’s really no supply crunch. “Fundamentally, the psychology changed in April because we got less concerned about supply disruptions,” Brockwell said.

Right now, the oil market is well supplied. Saudi Arabia has pledged to boost production, if necessary, as it did last year when Libyan oil was off the market. And in March, President Obama and British Prime Minister David Cameron vowed to tap into their Strategic Petroleum Reserve if they needed to stabilize prices.

“They never did it, but just the threat of it had a calming influence on the market,” Brockwell said. That option will remain on the table if fear returns and prices surge again.

Meanwhile, gasoline demand in the US continues to be lackluster, he said. It’s off 6.6% from last year, a huge drop.

“People have adjusted” to higher gas prices, he said. They’re driving less, have more fuel-efficient vehicles, and use gasoline with more ethanol. Auto sales are robust, and car dealers say buyers are trading in their old clunkers for vehicles that get much better mileage.

All in all, that’s made US gasoline supply “plentiful,” in Brockwell’s words, as fuel stocks at the key storage hub of Cushing, Oklahoma exceed their five-year average. In fact, said Brockwell, the US has become a net exporter of gasoline, with over half of that going to Mexico.

So can less demand and more supply drive prices up? Not in any economy I know of.

Of course, a lot of this depends on what happens in the Middle East. The price of crude comprises 72% of the price of gasoline.

And for the last few months, as Brockwell said, “the international crude oil market was in a state of fear” as Israeli leaders warned they might attack Iran to halt its nuclear program, while Iranian leaders threatened to cut off supplies if countries embargoed their oil.

That “fear premium” may have been as high as $20 a barrel, and Brockwell estimates Brent crude was trading at a $20 to $22 a barrel premium to West Texas Intermediate. “I think some of that fear premium is out of the market,” he told me.

And more air may go out of the fear balloon if things remain relatively peaceful in the Gulf. Here’s what’s going on.

In March, Israeli President Benjamin Netanyahu visited Washington, and President Obama said the US would not tolerate Iran getting a nuclear weapon, bringing US policy much closer to Israel’s.

Just days before, Iran’s Supreme Leader, Ayatollah Khamenei—who had just won a power struggle over loudmouthed President Mahmoud Ahmadinejad—declared​<!– that “the Iranian nation has never pursued and will never pursue nuclear weapons,” whose possession he called “a grave sin.”

Whether you believe him or not—and count me as very skeptical—soon afterward, Iran agreed to talks with Western countries about resolving the nuclear issue.

Even tougher EU sanctions against importing Iranian crude start July 1. We’ll soon find out if the talks are a ploy or a delaying tactic, as they have been in the past…but for now the heat from that side is off.

It’s also cooling off in Israel. All winter, Prime Minister Netanyahu and Defense Minister Ehud Barak have warned that Iran’s nuclear facilities would soon enter a “zone of immunity” where they’d be invulnerable to an attack, and that time was running out.

But for the last few weeks, a parade of former top Israeli military and intelligence officials have publicly cautioned Netanyahu and Barak against attacking Iran prematurely, explicitly rejecting the timelines the two leaders laid out.

At a conference in New York last Sunday held by The Jerusalem Post, former Prime Minister Ehud Olmert said, “I think there is enough time to try different areas of pressure…without direct military intervention…”

And Gabi Ashkenazi, former chief of staff of the Israel Defense Forces, added: “I think we still have time. It’s not tomorrow morning.” Former domestic and foreign intelligence chiefs agreed. Even the current IDF chief of staff told an Israeli newspaper that Iran “hasn’t yet decided to go the extra mile.”

This is extraordinary. It’s as if President Clinton, the former and current chairmen of the Joint Chiefs of Staff, and the former heads of the FBI and CIA publicly urged President Bush and Defense Secretary Rumsfeld to wait before attacking Iraq in 2003. If only they had!

This means that, for now at least, the heat is off. We don’t know what will happen tomorrow, but I think talks would have to break down completely for Israel’s military option to be on the table again before the fall.

The stakes are high for the economy—and the president, whose approval ratings dipped when gas prices rose.

A study by the Milken Institute showed that for every $10 a barrel increase in oil prices, consumer spending declines by 0.4% and GDP drops by 0.2%. Conversely, declines in oil and gasoline prices are like tax cuts and can have a stimulative effect on the economy.

I realize that we’re dealing with probabilities and big uncertainties here. But it looks to me as if higher oil and gas prices won’t be a big worry when we head for the beach in a few weeks.

By Suzanne McGee

Not all earnings surprises are created equal.

Better-than-expected​<!– earnings reports have been contributing to stock price gains for much of the last two weeks. And then there’s Netflix (NFLX), which on Monday reported a much narrower loss than Wall Street analysts had forecast, in spite of first-quarter revenue — $870 million — that was right in line with what investors had been told to expect.

As soon as the results hit the wire, however, traders and investors scrambled to dump their holdings in the online media company as if it had suddenly become toxic.

Within minutes, Netflix’s stock plunged 14% in after-hours trading to around $88 a share, and it continued its descent Wednesday, where late morning it was around $82.

Why wouldn’t investors want to celebrate Netflix’s “beat”? After all, the company has also made progress in getting its customers to download content onto a host of mobile devices, from tablets to iPhones. And its international expansion — into Canada, Mexico and the U.K., among other destinations, is going well.

But those successes simply aren’t enough to offset the company’s first quarterly loss in seven years — not with questions about the company’s future subscriber growth and profits getting louder quarter by quarter.

When it launched, in the days of the first dotcom boom, DVD players were still new; the business of mail-order rental DVDs was one of those “killer apps” developed in the first wave of Internet innovation. But then came Web 2.0, and an entirely new landscape. Suddenly, it wasn’t about getting physical DVDs into the hands of consumers, but about convincing them to fork over a monthly subscription to stream content onto a range of digital devices.

Not only had the delivery mechanism for content changed, but so had the competitive landscape. Providers ranging from behemoths like Amazon (AMZN) to upstarts like Hulu.com all began offering similar content; Netflix was no longer dominant.

True, the company is adapting. At the end of the first quarter, it had 23.41 million subscribers paying a flat fee to download content from the “cloud,” up from 21.67 million at the end of the fourth quarter of 2011. But some analysts had hoped subscriber growth would be more robust; that Netflix would show more clearly that it is no longer as dependent as before on snail-mail home delivery of DVDs to drive profit margins.

Netflix still seems to be struggling to recover from its misstep of last year, when it briefly planned to separate and spin off the physical DVD rental business, forcing customers to set up two separate accounts and pay two separate subscription fees. Before the plan was announced, Netflix’s stock traded as high as $304 a share; its fall from grace since then has been rapid. When consumers rebelled and began seeking out alternatives, Netflix quickly retreated and went back to business as usual. But, CEO Reed Hastings admitted, the company is only six months into a three-year process of rebuilding trust and its reputation with actual and potential customers.

Staying in business and staying competitive isn’t going to be cheap. These days, Netflix has to battle for access to movies and shows — and sometimes it loses, as has happened with offerings from Sony (SNE) and Walt Disney (DIS). And it will need to continue expanding to meet consumer interest in streaming video in new markets, or risk losing those potential customers to rivals. That expansion won’t come cheap, either.

In the broader context, delivering a narrower-than-expect​<!–ed loss for a single three-month period is an underwhelming achievement. More important than today’s profits are signs that consumers — increasingly insatiable consumers of streamed content — are willing to sign up in droves for Netflix’s services. But Netflix no longer is a “must have” for cinephiles and TV junkies; it no longer has the reputation of being hyper-innovative, but rather of responding to technological change that it didn’t anticipate and that it can’t control.

When even the pros — the analysts on Wall Street who have been tracking this stock since its birth in the early days of the Internet — can’t figure out how it will manage to generate both growth in subscribers and higher profits, then it’s time to moderate expectations not just for the company’s earnings potential but also its share price. And that is just what happened in the aftermath of the earnings announcement, as investors looked past the immediate good news and into the future — and decided that they didn’t like what they saw.

Expect to see similar patterns take shape at other companies that have been market darlings of late, from yoga gear retailer Lululemon Athletica (LULU) to online retailer Amazon. Both command premium valuations; both face questions about how sustainable outsize earnings-growth rates have become.

In the wake of the stock market’s impressive gains over the last six or seven months, investors are hyper-aware that all it will take to trim 10% or 20% off the value of a stock is a shift in psychology. So they’ll be extra vigilant, and prepare to pull the trigger ahead of the rest of the market. In that kind of environment it makes sense to at least dig deeply looking for any vulnerability, decide ahead of time whether a favorite high-flyer would still look appealing priced 20% below current levels — and if the answer is no, maybe it’s time to head for the exits before the panicky stampede begins.

More from The Fiscal Times

• Netflix: The Qwikster and the Dead
• Amazon Kindles Investor Outrage
• Is the Apple Bubble Ready to Pop?

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times’ free newsletter.