I think you're very right in that stocks over react or go through emotional buying and selling. That is certainly what is going on with cjr at the moment. More simply, the farther a stock departs from its trend line the more likely it is to return to it. But I also know that simply buying under valued stocks is not a good strategy. Investor perception of value is what matters, not the actual value. I used to generate a list of the most under valued stocks and follow their returns and it never worked out. I've done the same for the year's biggest losers several times and there is never a return to be found there. It did teach me that stocks can and do go to zero all the time and that breaking downward trend lines is very very difficult.
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