Friday, July 23, 2010

Rule #1

Don't argue with the market. If it wants to go up it's going to go up. We've got some new cards it looks never know for sure though.

Thursday, July 22, 2010

Stocks and Bridge

A few months ago I was talking to a friend of mine after Church and he was telling me that he enjoyed playing Bridge. We talked about it for a while and I remembered that Jesse Livermore, in his book "How to Trade in Stocks", wrote about how he used to play Bridge on a weekly basis with a few of his business associates. I mentioned this and was subsequently invited to learn the game.

It takes a while to memorize all the rules and conventions, but once you get them down it begins to make sense. The game works like this: There are four players. Each player has a partner. 13 cards are dealt to each person. The idea is to get as many "tricks" as possible. When you look at your hand, you have to decide if you are able to "bid". If you don't have 13 points (Ace = 4, King = 3, Queen = 2, Jack = 1) you can't start bidding. You work with your partner to figure out which suit is the strongest in your combined hands. There are a lot of aspects to the game, but essentially it comes down to this: if you don't have the odds in your favor, then you don't bid, otherwise you will get "set" and lose points.

I like the game because it is very similar to market speculation: if you don't have the odds in your favor, then don't bid, or else you will lose money.

In Bridge, as in most card games, the aces are the strongest. And in the market the most powerful stocks are the strongest. However, in Bridge there is also the concept of "trump". Let's say a person bids 3 spades. That means that between the two partners there are a lot of spades. If spades are "trump", then even a lowly 2 of spades will beat an ace of hearts.

In stock speculation, the market itself is the "trump". So even if a person has the very best, most powerful stocks, the market environment can "trump" them...and they will lose.

In order to make a play in the stock market it is important to have all the odds in your favor. You need a market that is amenable and you also need the strong, powerful stocks. It's a game of numbers and statistics.

If you have a good market and powerful stocks, you can play the game. If you have a bad market, you don't play the game no matter how good your stocks look. You will most likely lose.

Right now, the market is choppy and trending down. This is not a good market for our type of speculation. So, we're not playing. We are sitting on the sidelines waiting for the next hand to be dealt.

Successful card players are patient and they don't get rattled when they aren't being dealt good hands. They don't try to force the issue. They know from experience that, in time, good hands will come their way. Until then they have to just sit at the table and watch. Successful stock speculators follow the same course of action: they do nothing until they are dealt a good hand...and every day a new hand is dealt.

"There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move." ~ Jesse Livermore

Friday, July 16, 2010

The Market

Today the market is once again doing what it does best: Confusing people and separating them from their money.

For the last eight days the market has gone almost straight up. Eight days is a long time. On day one or two people notice that the market has stopped going down for a while. Then they watch it go up a lot more over the next couple days. After a while it's too much to take. They know they're missing a rally. It's obvious. And since the recent rallies have been of such short duration, time is of the essence. On day six or seven they get back in, only to have the market roll over again in a decidedly nasty fashion.

"What happened?" They ask. "Just a few days ago everything was rosy. The economy was getting better. Earnings season was going to be great. Stocks were upgraded. Europe was putting its troubles behind."

The market does this over and over and over. Yet, the "reasons" it manages to do it over and over and over are always different. Today the headlines ring out, "Consumer Sentiment Drives Stocks Down." So, the market sells off, a little at first, and then fear sets in and it sells off a lot more.

The fact is, the "reasons" for a shorter-term rally or correction usually aren't all that important. Often they are the result of the never-ending cycles through which the markets are continually moving.

For those who live near the ocean, high tides and low tides are understood. The stock market also has high and low tides. Once the market gets "overbought" to a certain degree, it sells off. Once the "sell-off" (oversold condition) becomes too extreme, it rallies.

As you can see by the photos (You can click on them for a better look), the market was getting to an overbought level. It had to correct and it did. Chances are it will continue correcting until it gets oversold again, at which point it will rally (stochastics and oscillators measure those levels).

Looked at from this perspective, it should be fairly easy to make money in the stock market. Nevertheless, that's not the case, because the cycles occur at all time intervals. There are 1 minute cycles, 1 hour cycles, daily cycles, weekly cycles, monthly cycles, yearly cycles, generational cycles, and so on. A trader or investor has to choose which cycles are important to him/her (long term, intermediate term, short term) and do his/her best to get in tune with them. It's never easy because the market never does the exact same thing twice. Sometimes "oversold" can get even more "oversold" and "overbought" can get even more "overbought". There is never certainty in the market. However, if you understand how the cycles work, then you can at least put the odds a little more in your favor.

Right now we appear to be in an intermediate term (or possibly long term) correction. The trend is down. The 50 day moving average (red line) is headed down. The trend line is down too. So, we may have just finished a short term rally which was set up eight days ago from a fairly oversold condition.

So, we are in a secular bear market (14 to 20 years), the intermediate term trend looks down and the shorter-term trend also looks down. Moreover, the action of individual stocks seems to confirm this. Therefore, it's probably not a good idea to be long or to be initiating long positions at this time.

The year 2010 looks very similar to 2004. Both of those years were preceded by strong rallies. The market corrected and bottomed out in August of 2004. I wouldn't be surprised to see the same thing happen here in 2010.

Tuesday, June 8, 2010

On Fly fishing and Investing

Investing in the stock market is a lot like fly fishing.

First, you need some decent tackle, flies, etc. for various types of conditions. Secondly, you need to know what type of conditions you will encounter. Is the weather conducive to catching fish? Is the river or stream flooded? Is it storming? Does the place have any fish? Where are you fishing? Is it a pond, lake, stream, coastline, open water? What time of year is it? How windy is it? What type of fish are you looking for? What size? After you’ve got all that figured out and you’re ready to go, you start looking for fish. Sometimes you find them with your eyes. Sometimes you find them by casting into likely looking places. It takes effort, a lot of time, and many, many false casts. Often you come home empty-handed; but every once in a while you hook into a big fish and that’s all you really need. Now, you have to play it properly. Some fish are like logs; pretty easy to bring to the net. Others are volatile and they try with all their might to throw the hook. Those are the most difficult to play, but also the most valuable. They’ll use the current to fight against you. They’ll swim under brush piles to break your line. They’ll jump and twist and somersault through the air. Eventually though, if you’ve played them right, you’ll bring them to the net. It’s a very satisfying feeling.

Fishing for stocks is very similar; although, instead of having one fish and one pole, you’ve got a few fish on a few poles. That makes things more interesting. You’re not going to catch them all, but if you have the conditions right, and if you have spotted the fish you want, and if you are patient and persevering, and if you don’t mind making a lot of casts, and if you have some basic rules on how to “play them out”, then overall you should do alright.

The important and mostly overlooked aspect of fishing and investing is this: you need to enjoy the process. Fly-fishermen don’t fish just to catch fish. They go fishing for many reasons: to see the fog lifting on an early morning stream, to hear the earth wake up, to feel the cool water as it flows over waders, to spot a blue heron doing a little fishing of his own, to admire the clarity of a beautiful stream, to enjoy the challenge of doing something most will never do. It’s the same with investing; you can’t just go into the stock market with the goal of getting rich. That’s crude. It takes too long and the sheer difficulties you’ll encounter will overwhelm you eventually. You have to have a deeper purpose. You have to enjoy the investing process itself. You have to see the intricacy of the market and your relation to it. You have to marvel at how the market works. You have to be thankful for the opportunity to participate in it. You have to love the challenge.

If you go fishing simply to catch fish, then you will never understand what it means to be a true fisherman. In the same way, if you invest only to make money, then you will never truly understand the market or what it means to be an investor.

Monday, June 7, 2010

Market in Difficulty

The market finds itself in the midst of another difficult stretch. It's not surprising. We are still in the middle of a long term secular bear market. These secular bears last from 14 to 20 years. The good news is that we have already gone through 10 years of it (it began in March 2000). So, no matter how you look at it, we are more than halfway through. The bad news ~ we have a few more years to go.

Based on lessons from the past, we have seen the worst of this long term bear. The 50%+ drop in 2008 and 2009 is similar to the 50%+ drop we saw in 1973 and 1974, the middle of that long term bear market that lasted from 1966 to 1982. Nevertheless, we are going to see very choppy action for the next few years and this is going to demand short-term to intermediate term trading tactics. The market isn't strong enough to put on any kind of sustained upward momentum. In this market you need to be fast in and fast out. You need to go long at the precise time and you need to go short at the precise time. There is little room for error. For those who just decide to invest for the long haul, you may experience a gut-wrenching roller-coaster ride.

A short -term to intermediate term trading plan could secure a lot of gains though. CAN SLIM (acronym) will still be successful:

C Current Quarterly Earnings per Share (EPS): The Higher the EPS, the Better

A Annual Earnings Increases: Growth over a period of time demonstrates strength

N New Industry, New Products, New Management, New Company, New Highs

S Supply and Demand: Be Attuned to Volume in Relation to Price Movement

L Leaders: Go with the Leading Stocks in the Leading Industries

I Institutional Sponsorship: Invest with the Best of the Professionals

M Market Direction: Don’t fight the Tides; Be Attentive to their Changes

However, your holding periods will have to me moderated. Instead of holding for six months to a year or longer, you will have to ratchet that holding period down considerably to days, weeks or months. Otherwise, the market will come back in and wipe out all your gains...and leave you with losses to show for all your hard work.

Wednesday, July 22, 2009


The market is humming along here and many stocks are breaking out to new highs. The difference between this quarter's moves and last quarter's moves is "quality". Last quarter very few stocks met CAN SLIM criteria. However, this quarter there are a good number of quality stocks with good earnings moving to new highs on heavy volume. A very positive sign for the market overall.

Saturday, March 28, 2009

The State of The Market

Daily Graphs Online has a database of 2,808 stock charts and ETFs that a person can access (Printed Product Reports -> Daily Graphs Company Index). I just finished viewing every single one of them.

It's a time consuming process that takes about four or five hours. I try to do it every weekend. You just sit down at your PC, pull up the list, and start hitting the space bar to scroll through, stopping to study company fundamentals in charts of interest, and add them to your watch lists. Once you have looked at all those charts, you will have just viewed the entire state of the market. It's something no one else can do for you. You have to do it yourself so that your conscious and unconscious mind can absorb and synthesize the vast amount of information the market is placing at your fingertips.

There is a quote from Jesse Livermore in his book, "How to Trade in Stocks", that I always try to remember:
"Before we go any further, let me warn you that the fruits of your success [in the market] will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions."

If a person were to take the time to look through all those 2,800 charts this weekend, they would see that the overall market is beginning to stabilize. More than 60% of the stocks I looked at were in stage 1 bases (Cycle 1 market phase). The 200 day moving average is still trending down for most though, so it might take a few more months for this market to truly take shape, but from the action of individual stocks, things are looking more positive. Many stocks are already being rewarded for good earnings and positive outlooks and a number of stocks are hitting new highs on heavy volume (all-time and 52 week highs). Moreover, quite a few stocks have risen 50% to 100% or even more since they bottomed out some time over the last few months

I placed about 82 stocks on a watch list that I'm going to keep an eye on. That's very positive. A few months ago there were only a handful of stocks that looked interesting. Restaurant stocks are really moving if you take a look. Many retail stocks are moving as well. Education stocks are a mess, though they were leaders just a short time ago. Technology and internet is strong and there are a number of leading and promising stocks in those groups. Obama's healthcare initiatives put the kibosh on many leading medical stocks a few weeks ago. Some are beginning to recover, but it might be a dicey area for a while. MYGN is a standout so far.

To tell you the truth, the stock market really does seem to be mirroring the current environment here in Cincinnati, Ohio. The Red Bud, Pear, Dogwood, and Magnolia trees are all in bloom. Daffodils are all over the place. Forsythia and Honeysuckle are just getting their leaves. However, the grass is still dormant and the big trees like the Oaks, Walnuts, and Sycamores are in no hurry to start the new growing season.

It's a promising time of year, but it's a dangerous time as well. Winter hasn't fully given up its ascendancy and all it takes is one frost to kill off a lot of life. I have a deformed Japanese Maple that can attest to that.

But don't let the negative press fool you into thinking the stock market is dead. Things are looking a lot more positive...there's new life out there.

That doesn't mean you have to jump in right away though. The farmers are eager to get their crops in too. Nevertheless, they don't start planting until the prospects of a killing frost are greatly diminished; around here, that's later April and May.