The Planner...Two schools of thought on the moving...

The Planner...

Two schools of thought on the moving average...either we have a short-term aberation that needs to be corrected, or we have a fundamental value shift that requires the MA catch up.

Aberations away from the MA, up or down, usually see a correction back towards it. In the case of a stock that has spiked above it, it either needs to retrace back down, or trade in holding pattern while the MA moves up to the price.

In significant value shift equations however, such as that seen with MPO's China upgrade...and indeed options underwriting...it is not uncommon for a stock to jump way ahead of the MA and not only stay there, but keep rising a significant margin ahead of it for long periods before coming to rest at it's new "perceived" forward valuation!

In such cases, the MA can lag for some time before the stock eventually comes to rest on it!

A good example is CQT during their re-rating from the market...firstly on the run from 13c-50c...the MA struggled to keep up all the way before eventually touching base near 36c...then again during the run from 44c to 97c, with the MA on that occasion touching base at 79c!

We need to remember the MA is a function of the share price...not the other way around...and whilst it is a fair indicator of whether the stock may be running a little hot (or cold) in an environment of gradual fundamental value shifts, it becomes less relavent during periods of rapid value transition so typical of small caps.

Cheers!