Continuation from Friday…….One of the first things we have to realize in our attempt to anticipate and to time such large moves in the underlying stocks is the fact that the fundamental analysis will not be very useful. We cannot rely on such an analysis due to a simple fact that the stock market or individual stock movements lead the fundamentals at least 95% of the time. In other words, by the time the actual numbers filter through onto financial statements or into press releases the corrections we are trying to identify are likely to be over. Or nearly over. The only fundamental metric that would be useful in our case is the general overvaluation of an underlying security.
For instance, if company’s stock price had appreciated so much over a relatively short period of time that it now sells above any reasonable valuation level, even if the future is otherwise bright, it is highly probable that the underlying stock price might correct fairly soon. Once we understand such fundamental shortcomings, it leaves us no choice but to concentrate on the technical and mathematical/timing side of the equation.
Our first 60% drop in Keurig’s stock price had occurred between 2001 and 2002. To be exact, the company’s stock price topped out in July of 2001 at around $2.90 a share and then proceeded to collapse into October of 2002 bottom of $1.00 a share. A 65% decline. 
Once we look at the chart a number of things become immediately apparent.
- From the fundamental perspective alone , by the time 2001 top had arrived the company’s stock price had already zoomed up 1,100% from our 1999 proposed $0.25 entry point. Going parabolic on a number of occasions. In other words, while Keurig coffee systems were starting to get traction, there was no way for the fundamentals to keep up with a rise in the stock price. The stock was overpriced and overextended.
- An investor applying mathematical and timing work to the overall market would be aware that the overall stock market is going through its initial bear leg and that this bear leg was not scheduled to bottom out until October of 2002. Rendering 2001-2002 period as a high risk one.
Given the setup above, any investor in the GMCR stock should have shifted in a highly defensive mode in 2001 by watching the technical side of the stock extremely closely for any sign of a technical breakdown. As a technical breakdown at this juncture would have likely yielded a substantial decline in the company’s stock price.
That is exactly what happened in August of 2001 when Keurig’s stock broke below its lower low at around $2.50 and continued to head lower. At that point, any investor who was watching the stock should have A. Sold his holding and B. Gone short. The overall probability of a significant stock decline at that juncture was too great not to do so. Particularly when the technical analysis was confirming the move.
To Be Continued Tomorrow……
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