On 10/30/1995 a jury awarded a $10 million judgment against Dow Chemical to a 45-year-old woman who claimed severe physical problems resulted because of Dow's silicone breast implants. While many might claim that the recent selloff was a result of this news, the chart clearly demonstrates that this is only partially true. In fact, the price had already declined over 10% and had rendered a SELL Signal a month below the Zero line, warning us that the stock was weaker than the market.

Of course it would be fair to say that the price deterioration that occurred prior to the news was a result of the market anticipating a negative verdict. Had the verdict been favorable it is probable that a strong rally would have ensued. But the market, although it couldn't know the verdict in advance, probably factored in the current bias that juries have against "deep pockets" defendants. Beyond this ingle verdict, there is the potential for many other similiar suits being filed, eventually affecting the profitability or even the viability of the company.

There are at least two things to be learned from the Raytheon chart above:

(1) Earnings estimates are estimates, not statements of fact that can be relied upon; and

(2) the price chart often reflects news well in advance of its release.

On 10/12/99 Raytheon announced that 1999 earnings would be about 60% less than estimates and that 2000 earnings would fall short by 40%. While some stocks are punished for such disappointments, Raytheon was wrapped in a cement overcoat and dropped into the ocean -- the stock dropped 47% in one day in reaction to the announcement.

But look at the chart. It is obvious somebody knew something weeks before the company actually announced that it was having problems. To begin, between April and September a rounded top formed, the right side of which I have encased within a descending triangle -- this was the first sign of trouble. When price broke below the bottom of the triangle and the 200-day EMA a SELL Signal was given loud and clear. Continued price deterioration up to the time of the announcement shows that many investors were getting out of town in a hurry. One wonders if the announcement was news to anyone. The 47% one-day loss caps a total loss of 70% in a little more than three months.