Wednesday, December 24, 2008
Tuesday, December 23, 2008
Don't Build Your House (or your portfolio) On Sand
http://finance.yahoo.com/expert/article/yourlife/130751
Please read the above article by Ben Stein, otherwise the commentary below probably won't make much sense.............
It is exactly because of articles like Ben just wrote that I'm so grateful that I began my investing career under the right mentorship of people like Bill O'Neil.
The long bull market from 1982 to 2000 lulled a lot of people into a false sense of security about the market. That's human nature. When a city on the coast hasn't experienced a hurricane for many years, they start to forget just how bad hurricanes can be.
Most of you reading this know that the "efficient market hypothesis" that Ben refers to is extemely flawed ~ flawed, because even if all information is known, it is not known by the same people with the same experience, wisdom, capital, and skill. Moreover, those of us who have studied the market at length have seen that often times, what passes for valid information is simply "misinformation". This "misinformation" comes in many forms and from many places: the Government, Ratings Agencies, Company CEOs and CFOs, Analysts, Brokers, News Outlets, and the list goes on.
"Buy and Hold" is the one salvation for people who can't devote many hours to the market. Very often "TIME" covers up an investors's faulty stock choices. Just as "time heals all wounds"; "time heals many a broken stock". However, that's not always the case. Investing is never easy. "Buy and Hold" proponents have tried to make it seem so....but, unfortunately, it isn't so (GM, F, BSC, GE, LEH, FRE, FNM, YHOO, the list goes on and on and on).
Most of us reading this also know, from our past studies, that human nature never changes...and we should not expect it to. Individuals seem to learn from the past, but society as a whole seems to have a hard time in that regard, probably because experience moves into the grave at the same time naiveté is being born.
Finally, in the above article, Ben makes the following point which I simply can't believe:
"In the meantime, please don't blame yourself for your losses."
That is some of the worst advice I have ever heard. Don't blame yourself for your losses? Who else are you going to blame? The one thing that anyone who lost money this year needs to do is to take responsibility for their losses so that they don't make the same mistakes five years from now. How are Ben's readers going to learn if they don't take responsibility? That'd be like you telling your son who just failed a math test: "Oh, son, don't worry about it, it wasn't your fault; don't blame yourself. That test was probably just too hard. I bet a lot of other kids failed too, right?" We would never say that (at least I hope we would never say that). We would probably tell our son to study harder and to take school more seriously.
Avoiding responsibility for failures might make us feel better about ourselves - but it very well might make us feel bitter towards others. Taking responsibility for profits and losses is one of the primary keys to successful investing.
(By the way, anyone reading this who hasn't done so, please, take the time to read Bill O'Neil's book How to Make Money in Stocks. It will save you a fortune over the rest of your investing life.)
So the main lesson we can learn from the above article is this:
Don't build your financial future on "sophisms", no matter how culturally accepted they might be.
Listen only to the market. It communicates primarily through price and volume action. Invest from the top down. Is the market trending up? Good. Is the sector trending up? Good. Is the stock trending up? Good. Is the stock a leader and does it have solid earnings, revenues, return on equity? Good. Is it moving up on solid volume? Good. Are you purchasing as it moves out of a consolidation in order to limit your risk? Good....... Well, you might just have a winner. However, because human nature never changes, and because someone might be "cooking the books", and because there is no reason to hold a stock that is going down; make sure you have some form of a stop-loss in place close to where you bought ~ because you should know better than to just trust that it will go up.
All stocks are bad ~ except for the ones that go up.
Please read the above article by Ben Stein, otherwise the commentary below probably won't make much sense.............
It is exactly because of articles like Ben just wrote that I'm so grateful that I began my investing career under the right mentorship of people like Bill O'Neil.
The long bull market from 1982 to 2000 lulled a lot of people into a false sense of security about the market. That's human nature. When a city on the coast hasn't experienced a hurricane for many years, they start to forget just how bad hurricanes can be.
Most of you reading this know that the "efficient market hypothesis" that Ben refers to is extemely flawed ~ flawed, because even if all information is known, it is not known by the same people with the same experience, wisdom, capital, and skill. Moreover, those of us who have studied the market at length have seen that often times, what passes for valid information is simply "misinformation". This "misinformation" comes in many forms and from many places: the Government, Ratings Agencies, Company CEOs and CFOs, Analysts, Brokers, News Outlets, and the list goes on.
"Buy and Hold" is the one salvation for people who can't devote many hours to the market. Very often "TIME" covers up an investors's faulty stock choices. Just as "time heals all wounds"; "time heals many a broken stock". However, that's not always the case. Investing is never easy. "Buy and Hold" proponents have tried to make it seem so....but, unfortunately, it isn't so (GM, F, BSC, GE, LEH, FRE, FNM, YHOO, the list goes on and on and on).
Most of us reading this also know, from our past studies, that human nature never changes...and we should not expect it to. Individuals seem to learn from the past, but society as a whole seems to have a hard time in that regard, probably because experience moves into the grave at the same time naiveté is being born.
Finally, in the above article, Ben makes the following point which I simply can't believe:
"In the meantime, please don't blame yourself for your losses."
That is some of the worst advice I have ever heard. Don't blame yourself for your losses? Who else are you going to blame? The one thing that anyone who lost money this year needs to do is to take responsibility for their losses so that they don't make the same mistakes five years from now. How are Ben's readers going to learn if they don't take responsibility? That'd be like you telling your son who just failed a math test: "Oh, son, don't worry about it, it wasn't your fault; don't blame yourself. That test was probably just too hard. I bet a lot of other kids failed too, right?" We would never say that (at least I hope we would never say that). We would probably tell our son to study harder and to take school more seriously.
Avoiding responsibility for failures might make us feel better about ourselves - but it very well might make us feel bitter towards others. Taking responsibility for profits and losses is one of the primary keys to successful investing.
(By the way, anyone reading this who hasn't done so, please, take the time to read Bill O'Neil's book How to Make Money in Stocks. It will save you a fortune over the rest of your investing life.)
So the main lesson we can learn from the above article is this:
Don't build your financial future on "sophisms", no matter how culturally accepted they might be.
Listen only to the market. It communicates primarily through price and volume action. Invest from the top down. Is the market trending up? Good. Is the sector trending up? Good. Is the stock trending up? Good. Is the stock a leader and does it have solid earnings, revenues, return on equity? Good. Is it moving up on solid volume? Good. Are you purchasing as it moves out of a consolidation in order to limit your risk? Good....... Well, you might just have a winner. However, because human nature never changes, and because someone might be "cooking the books", and because there is no reason to hold a stock that is going down; make sure you have some form of a stop-loss in place close to where you bought ~ because you should know better than to just trust that it will go up.
All stocks are bad ~ except for the ones that go up.
Saturday, December 20, 2008
Question about viability of CAN SLIM
ST,
I have a question. I have thought about it for a long time but could not get an answer, so I would like to ask for your opinion.
Question: if many people are using the same CANSLIM method, will the method be discounted and not going to work?
I have a few observations:
1). H. Neill in his book clearly said that if too many people are using the same method, the market will discount the method and it will NOT work.
2). Several wizards, Marcus, Covner and especially Lescarbeau, mentioned clearly from their extensive experience that if so many people are using the same method, the method will not be effective.
3). Our favorite, Darvas, also said that once he published his book and his buying breakout-out-of-box method, he found he was whipsawed back and forth since suddenly so many people were using the same technique and he had to alter his method.
4). Back to reality in 2007. Big winners, FSLR/BIDU/RIMM/CHL/CROX/GOOG/AAPL/VMW, all had a number of faults in the bases before breaking out.
5). Bill's PMs, all, round-tripped the two picture perfect cup with handle bases, SPWR and NYX, recently.
6). Look at the breakout of MR and MPWR in 2008 and how they failed.
Don't you think the reason why MR and MPWR's failure were caused by the same type of investors with the same philosophy using the same resources buying the same breakout at the same time? Bill always said that his CANSLIM will ALWAYS work because it is how the market worked in the past 50 years. But, what if so many investors are using the same method? Look at the number of level I, II and III workshops, and I am very concerned that all of my hard work eventually end up not working for me. Thanks in advance.
Ge
-------------------------------------------------------------------
GE,
There's some truth to what you are saying, but only as it relates to one area - the entry. At times we need to get creative with that...it's true. Other than the entry though, the principles that have come down to us from the likes of Livermore, Loeb, Neill, Wycoff, Dreyfus, Darvas, O'Neil, etc., are universal. That is, they are timeless...they don't change.
Fundamentally and technically sound stocks with innovative products that are the leaders in strong industries are the stocks to own when the overall market is sound (CANSLIM).
I can tell you personally, that between 2003 and today, I am up close to 300% in my own accounts...and that starting point occurred a few years before I really started to actually "get it"...it takes a while for everything to sink in, to acquire "experience", to find your own niche. That averages out to about 25% per year. If I had been investing in an S&P 500 Index fund, do you know how much I'd be up? About 2% over the same time period. That averages out to ~ well, nothing per year basically.
Now, if a fellow can average 25%/year in wretched markets like we've seen over the past few years, how much more is he going to average during the good ones?
Take a long term view. Let's just say you have $500,000. If you average 25%/year for 20 years, do you know what that turns into? $43,368,086.96 (and again that's an average that includes the time before you really knew anything ~ and it also includes a really wretched market ~ and it doesn't include the years where you are up 100%+ because you absolutely nailed 3 big winners). By the way, I'm assuming this is a retirement account. Sure, no taxes, but no margin either...in the end they probably cancel each other out.
Assuming you now "get it" and markets get a little better (we should be entering a long term secular bull market again in 6 to 8 years) and you average 30%/year, do you know what that amounts to in 20 years? $95,024,818.
CANSLIM works. It will always work. You might not always make money every quarter or every year though, because a large part of the success comes from staying out of the market when it is correcting.
The main secret to successful investing is 1) staying out of poor markets; and 2) cutting losses quickly.
A good poker player doesn't play a weak hand; nor should a good investor. And if the market isn't in your favor, no matter how great your other cards, you have a very weak hand.
I have a question. I have thought about it for a long time but could not get an answer, so I would like to ask for your opinion.
Question: if many people are using the same CANSLIM method, will the method be discounted and not going to work?
I have a few observations:
1). H. Neill in his book clearly said that if too many people are using the same method, the market will discount the method and it will NOT work.
2). Several wizards, Marcus, Covner and especially Lescarbeau, mentioned clearly from their extensive experience that if so many people are using the same method, the method will not be effective.
3). Our favorite, Darvas, also said that once he published his book and his buying breakout-out-of-box method, he found he was whipsawed back and forth since suddenly so many people were using the same technique and he had to alter his method.
4). Back to reality in 2007. Big winners, FSLR/BIDU/RIMM/CHL/CROX/GOOG/AAPL/VMW, all had a number of faults in the bases before breaking out.
5). Bill's PMs, all, round-tripped the two picture perfect cup with handle bases, SPWR and NYX, recently.
6). Look at the breakout of MR and MPWR in 2008 and how they failed.
Don't you think the reason why MR and MPWR's failure were caused by the same type of investors with the same philosophy using the same resources buying the same breakout at the same time? Bill always said that his CANSLIM will ALWAYS work because it is how the market worked in the past 50 years. But, what if so many investors are using the same method? Look at the number of level I, II and III workshops, and I am very concerned that all of my hard work eventually end up not working for me. Thanks in advance.
Ge
-------------------------------------------------------------------
GE,
There's some truth to what you are saying, but only as it relates to one area - the entry. At times we need to get creative with that...it's true. Other than the entry though, the principles that have come down to us from the likes of Livermore, Loeb, Neill, Wycoff, Dreyfus, Darvas, O'Neil, etc., are universal. That is, they are timeless...they don't change.
Fundamentally and technically sound stocks with innovative products that are the leaders in strong industries are the stocks to own when the overall market is sound (CANSLIM).
I can tell you personally, that between 2003 and today, I am up close to 300% in my own accounts...and that starting point occurred a few years before I really started to actually "get it"...it takes a while for everything to sink in, to acquire "experience", to find your own niche. That averages out to about 25% per year. If I had been investing in an S&P 500 Index fund, do you know how much I'd be up? About 2% over the same time period. That averages out to ~ well, nothing per year basically.
Now, if a fellow can average 25%/year in wretched markets like we've seen over the past few years, how much more is he going to average during the good ones?
Take a long term view. Let's just say you have $500,000. If you average 25%/year for 20 years, do you know what that turns into? $43,368,086.96 (and again that's an average that includes the time before you really knew anything ~ and it also includes a really wretched market ~ and it doesn't include the years where you are up 100%+ because you absolutely nailed 3 big winners). By the way, I'm assuming this is a retirement account. Sure, no taxes, but no margin either...in the end they probably cancel each other out.
Assuming you now "get it" and markets get a little better (we should be entering a long term secular bull market again in 6 to 8 years) and you average 30%/year, do you know what that amounts to in 20 years? $95,024,818.
CANSLIM works. It will always work. You might not always make money every quarter or every year though, because a large part of the success comes from staying out of the market when it is correcting.
The main secret to successful investing is 1) staying out of poor markets; and 2) cutting losses quickly.
A good poker player doesn't play a weak hand; nor should a good investor. And if the market isn't in your favor, no matter how great your other cards, you have a very weak hand.
Friday, December 19, 2008
Chicken Feed
This morning I was talking to a fellow trader about the current market; I was thinking about how it is so news-driven and how all the powers that be want the market to stop correcting and start going up. As I was thinking about this, an image popped up in my mind:I envisioned a bunch of chickens being fed cornmeal. They are all running around in circles looking for any morsels they can find. As they do this, their unadulterated appetite and greed push them to fight and peck each other...it's brainless, chaotic activity; chickens running to and fro, in every direction, focused intently on where the farmer throws the next fistful of cornmeal.
Well, in the above image, I see most current market participants as those chickens, running around here and there trying to grab as much chicken feed as possible to fill their insatiable appetites. The only difference is that in this case the cornmeal is "news" (GM, TARP, Interest Rates, Stimulus Packages) and the dispenser is the government. It's kind of pathetic.
I don't know about you, but I have no desire to debase myself to the level of a chicken. I'm not in this business for chicken feed. Others can have it.
Thursday, December 18, 2008
What to Do
The market has definitely changed its tenor of late. It has been ignoring bad news by the boatload. That is a sign that the market is getting healthier. The GE news today was such that it couldn't be completely ignored~ but the DJIA could have fallen a lot more.
Many stocks are beginning to build the right sides of their bases and that too is positive.
But is it time to get back in? Well, I used to be a consultant, so I can answer that question very easily: It depends. What kind of speculator are you? Are you a short-term, intermediate term, or long-term trader? Or maybe you consider yourself as talented as Warren Buffett and are willing to risk all your money on a single throw of the dice and just hold a stock forever? Do you want to make a whole lot of money in the market or are you willing to settle for 5 to 8% a year? If you buy a stock and it falls from where you bought it, do you know where you will sell? Or is your plan to just hold it until it comes back up? And then what? Does it bother you to lose 50% in your portfolio or is your idea of a nasty drawdown somewhere around 10%? Do you have a plan for entering, pyramiding, cutting losses, and taking profits?
If you can answer the questions above, then you know whether or not you can start buying stocks in this market. For me, at this exact moment, this is not a good time to be trading in anything.
I am primarily an intermediate-term trader (2 weeks to 3 months) but I also like to hold long term if the market allows (3 months to a year or so). Before buying any stocks I make sure that:
1) The market is trending up
2) The sector is strong
3) The stock has phenomenal fundamentals (EPS, REV, ROE, Innovative products)
4) The stock is technically strong (High RS, solid, base, proper price and volume characteristics)
5) The stock is above its 50 day and 200 day MA
6) The stock is at or near 52 week highs (preferably all-time highs)
7) The volume on the break above resistance is very strong
8) The market isn't at overbought levels on the initial purchase
I also limit my initial risk to less than 1% of my portfolio (yes, very conservative, I know - I'm in this for the long haul), so I need to know exactly where I will enter and exactly where I will cut my loss. The cut-out point needs to be clear so that I can purchase the proper amount of shares (is the risk $1 or $5 - need to buy accordingly).
I am not comfortable with a 50% drawdown either, or a 40%, or a 30%, or a 20% drawdown.
I don't like to own stocks before they report earnings either, because a stock can fall 30% overnight on a miss or poor guidance (earnings season is right around the corner ~ AA kicks us off on the 12th of January, about 15 trading sessions away.)
So, anyway, this market is not right for me yet. I don't have any edge and there are very few low-risk ideas for the type of trading that I do. The picture will be much clearer in January and February.
If you are in ~ Good luck.
By the way, I'm looking very forward to the upcoming year. I think we are going to see some good opportunities. Get ready!
Many stocks are beginning to build the right sides of their bases and that too is positive.
But is it time to get back in? Well, I used to be a consultant, so I can answer that question very easily: It depends. What kind of speculator are you? Are you a short-term, intermediate term, or long-term trader? Or maybe you consider yourself as talented as Warren Buffett and are willing to risk all your money on a single throw of the dice and just hold a stock forever? Do you want to make a whole lot of money in the market or are you willing to settle for 5 to 8% a year? If you buy a stock and it falls from where you bought it, do you know where you will sell? Or is your plan to just hold it until it comes back up? And then what? Does it bother you to lose 50% in your portfolio or is your idea of a nasty drawdown somewhere around 10%? Do you have a plan for entering, pyramiding, cutting losses, and taking profits?
If you can answer the questions above, then you know whether or not you can start buying stocks in this market. For me, at this exact moment, this is not a good time to be trading in anything.
I am primarily an intermediate-term trader (2 weeks to 3 months) but I also like to hold long term if the market allows (3 months to a year or so). Before buying any stocks I make sure that:
1) The market is trending up
2) The sector is strong
3) The stock has phenomenal fundamentals (EPS, REV, ROE, Innovative products)
4) The stock is technically strong (High RS, solid, base, proper price and volume characteristics)
5) The stock is above its 50 day and 200 day MA
6) The stock is at or near 52 week highs (preferably all-time highs)
7) The volume on the break above resistance is very strong
8) The market isn't at overbought levels on the initial purchase
I also limit my initial risk to less than 1% of my portfolio (yes, very conservative, I know - I'm in this for the long haul), so I need to know exactly where I will enter and exactly where I will cut my loss. The cut-out point needs to be clear so that I can purchase the proper amount of shares (is the risk $1 or $5 - need to buy accordingly).
I am not comfortable with a 50% drawdown either, or a 40%, or a 30%, or a 20% drawdown.
I don't like to own stocks before they report earnings either, because a stock can fall 30% overnight on a miss or poor guidance (earnings season is right around the corner ~ AA kicks us off on the 12th of January, about 15 trading sessions away.)
So, anyway, this market is not right for me yet. I don't have any edge and there are very few low-risk ideas for the type of trading that I do. The picture will be much clearer in January and February.
If you are in ~ Good luck.
By the way, I'm looking very forward to the upcoming year. I think we are going to see some good opportunities. Get ready!
Friday, December 12, 2008
The Kind and Gentle Face of Wall Street
Some people think I'm a little cynical about it, but this is exactly why I don't trust anything that comes out of the Wall Street establishment. This guy is a licensed Investment Advisor, ex-Chairman of the NASDAQ, International Market Maker...a fully licensed, bona fide, "wall street approved", white-collar crook.
Thursday, December 11, 2008
10,000 Hours of Practice
In Van Tharp's latest newsletter he reviews a book by Malcolm Gadwell called "The Outliers".
The book is about "success" in general. It asks the basic question, “What do hugely successful people have in common?”
What I found fascinating from the review (I just ordered the book) was the fact that one trait hugely successful people have in common is that they have all practiced their particular skill for more than 10,000 hours.
In the book he gives a lot of examples: Billy Joy, Bill Gates, Mozart, The Beatles, etc.
It makes sense. Think of all the successful traders and investors you have read about. One characteristic they all had in common was a "passion" for trading, for beating the game. That common element was probably the key that pushed them over the 10,000 hour threshold - which might have been the real key that made them truly great. Think of them for a minute: Baruch, Livermore, Loeb, Darvas, Buffett, O'Neil, Wyckoff, Wilson, Dreyfuss, Jones, Schwartz, Ryan, Rogers, Cook, and the list goes on - guaranteed - every one of them put in more than 10,000 + hours very quickly early in their careers.
If you practice trading/investing with intensity (read, study, trade, analyze, review, and so on) eight to 10 hours a day you can amass 10,000 + quality hours fairly quickly (6 days/week * 8 hours avg./day * 52 weeks = 2,496 hours/year. Multiply that times four years and you get about 10,000 hours). Some folks could get those 10,000 hours in less than two years if trading/investing were their full-time occupation. For others it will take longer. Most will never get there. It all depends on your level of commitment, passion, dedication, and desire.
This whole subject ties into a question someone asked me a few days ago about how long it takes to "really get it" as a trader/investor. I suppose Malcolm Gadwell has given us one of the answers: 10,000 hours.
I think that this 10,000 hours of practice also does something else for us.... It helps us appreciate success when it comes. Many people who are "instant successes" end up squandering that success only a short while later. Think of the "newbie" trader who got lucky hanging onto a few hot stocks during a bull market. Unless he is uncommonly wise he won't keep those gains because he has no real appreciation for them. They came too easily.
However, if a trader/investor happens to put in 10,000 + hours of hard work before becoming succesful in the market, he is much more likely to keep his gains because he has a deep appreciation for how difficult it was to achieve them in the first place. That man won't squander his profits, nor will he be a "flash in the pan". He has the necessary knowledge foundation and mental conditioning to continue being successful for a very long time...and he will keep adding on to that initial 10,000+ hours of practice.
Emerson could also be speaking of the 10,000 hour+ trader/investor in the following paragraph:
"The farmer is covetous of his dollar, and with reason. It is no waif to him. He knows how many strokes of labor it represents - how much rain, frost, and sunshine. He knows that, in the dollar, he gives you so much discretion and patience so much hoeing and threshing. Try to lift his dollar; you must lift all that weight. In the city, where money follows the skit of a pen, or a lucky rise in exchange, it comes to be looked on as light."
The book is about "success" in general. It asks the basic question, “What do hugely successful people have in common?”
What I found fascinating from the review (I just ordered the book) was the fact that one trait hugely successful people have in common is that they have all practiced their particular skill for more than 10,000 hours.
In the book he gives a lot of examples: Billy Joy, Bill Gates, Mozart, The Beatles, etc.
It makes sense. Think of all the successful traders and investors you have read about. One characteristic they all had in common was a "passion" for trading, for beating the game. That common element was probably the key that pushed them over the 10,000 hour threshold - which might have been the real key that made them truly great. Think of them for a minute: Baruch, Livermore, Loeb, Darvas, Buffett, O'Neil, Wyckoff, Wilson, Dreyfuss, Jones, Schwartz, Ryan, Rogers, Cook, and the list goes on - guaranteed - every one of them put in more than 10,000 + hours very quickly early in their careers.
If you practice trading/investing with intensity (read, study, trade, analyze, review, and so on) eight to 10 hours a day you can amass 10,000 + quality hours fairly quickly (6 days/week * 8 hours avg./day * 52 weeks = 2,496 hours/year. Multiply that times four years and you get about 10,000 hours). Some folks could get those 10,000 hours in less than two years if trading/investing were their full-time occupation. For others it will take longer. Most will never get there. It all depends on your level of commitment, passion, dedication, and desire.
This whole subject ties into a question someone asked me a few days ago about how long it takes to "really get it" as a trader/investor. I suppose Malcolm Gadwell has given us one of the answers: 10,000 hours.
I think that this 10,000 hours of practice also does something else for us.... It helps us appreciate success when it comes. Many people who are "instant successes" end up squandering that success only a short while later. Think of the "newbie" trader who got lucky hanging onto a few hot stocks during a bull market. Unless he is uncommonly wise he won't keep those gains because he has no real appreciation for them. They came too easily.
However, if a trader/investor happens to put in 10,000 + hours of hard work before becoming succesful in the market, he is much more likely to keep his gains because he has a deep appreciation for how difficult it was to achieve them in the first place. That man won't squander his profits, nor will he be a "flash in the pan". He has the necessary knowledge foundation and mental conditioning to continue being successful for a very long time...and he will keep adding on to that initial 10,000+ hours of practice.
Emerson could also be speaking of the 10,000 hour+ trader/investor in the following paragraph:
"The farmer is covetous of his dollar, and with reason. It is no waif to him. He knows how many strokes of labor it represents - how much rain, frost, and sunshine. He knows that, in the dollar, he gives you so much discretion and patience so much hoeing and threshing. Try to lift his dollar; you must lift all that weight. In the city, where money follows the skit of a pen, or a lucky rise in exchange, it comes to be looked on as light."
- Emerson, "Wealth"
Monday, December 8, 2008
Overbought
This weekend I scrolled through the Daily Graphs Charts as usual. I placed about 50 stocks on my watch list. They all, for the most, part have good earnings, recent high volume, and and are building the right sides of their bases. There are signs of life out there. Some stocks have broken out only to fail shortly thereafter. This is normal. Other stocks are on the verge of breaking out - chances are they will fall back into their bases and fail as well. But the very fact that stocks like THOR, EBS, VRX, ALGT, COGT, ESI, INT and others are near highs is encouraging.
It is obvious we are in a rally. Can you take advantage of it? That's another question. So far I haven't done anything. There are two primary reasons for that. First is that we are extremely overbought and the snapback from that overbought condition will cause almost all breakouts to fail. Experience has taught me that. Secondly, similar to the first, this market is still far too volatile and news driven.
I will most likely wait until mid-January before committing capital to the market. My main goal is to not lose money. In the market, defense is by far the best offense. A person can do a lot of damage to his account in a choppy, volatile market. Getting whipsawed around can also create problems in the area of self-confidence...so, be careful.
You only need a handful of really good stocks to do well. Let them come to you. You will recognize them when the time is right.
Meanwhile, the market is extremely overbought, a condition that is very dangerous. You never know where it will come from when the news seems so good; but somehow bad news will always find a way to come from out of nowhere and drop an overbought market hard: http://stockcharts.com/charts/indices/McSumNYSE.html
It is obvious we are in a rally. Can you take advantage of it? That's another question. So far I haven't done anything. There are two primary reasons for that. First is that we are extremely overbought and the snapback from that overbought condition will cause almost all breakouts to fail. Experience has taught me that. Secondly, similar to the first, this market is still far too volatile and news driven.
I will most likely wait until mid-January before committing capital to the market. My main goal is to not lose money. In the market, defense is by far the best offense. A person can do a lot of damage to his account in a choppy, volatile market. Getting whipsawed around can also create problems in the area of self-confidence...so, be careful.
You only need a handful of really good stocks to do well. Let them come to you. You will recognize them when the time is right.
Meanwhile, the market is extremely overbought, a condition that is very dangerous. You never know where it will come from when the news seems so good; but somehow bad news will always find a way to come from out of nowhere and drop an overbought market hard: http://stockcharts.com/charts/indices/McSumNYSE.html
Wednesday, December 3, 2008
Follow Through Day...Again
Yesterday was a "follow through day"... a gain of roughly 2% on one or more of the three major indexes (S&P 500, DJIA, NASDAQ) on above average volume greater than the previous day's volume occurring four to ten days or so after the first rally attempt.
This term "follow through day" simply states that a rally attempt during a bear market might not simply be a short term phenomenon. It might actually be the beginnings of a new bull market. Sometimes they fail. Sometimes they work. Generally they work more than they fail. There is nothing magical about it.
No bull market has ever started without one. That is the logic behind keeping our eyes open for the "follow through day" event. We don't want to be left in the bull's dust still lamenting the housing crisis and the demise of Lehman Brothers.
The very next thing that should start occurring, on, or shortly after the "follow through day" is that the strongest stocks should start breaking out of well-formed bases: these bases being double bottoms, cup & handles, saucers, shakeout + 3's, ascending bases, bull flags, and the like. This isn't happening yet.
Some investors start a little earlier and begin initiating positions as stocks break up through downward slanting trendlines.
Anyway, it is a time to keep our eyes open, whether we are skeptical or not. The market does not care what our opinions are on the bailouts, the poor earnings, the recession... or anything else for that matter.
The follow through day signals that it is time to be humble and to listen to what the market is telling us. It communicates to us through price and volume action and that is really the only thing we should be paying attention to at this juncture.
If you're like most, the "follow through day" can produce a lot of angst; especially in a market like this that has fallen so far and so precipitously. You don't want to miss the opportunity to rack up solid gains in a new bull rally. But neither do you want to get sucked into yet another bear trap...Angst...caused by the two demons that afflict almost every single player in the market: Fear and its bedfellow - Greed.
If you think about it, Greed is always Fearful ~ afraid of not getting what it wants or afraid of losing what it already has. Fear is never far from Greed. Thus, the less Greed you have the less Fearful you will be (in the market or outside the market). Less of both allows us to think more rationally and thus act more intelligently.
If this is truly a new bull rally, opportunites will present themselves. If it isn't, they won't. Most of us didn't get crushed as the market fell. We acted rationally and sold when we should have. We also waited patiently as the market corrected, for almost a full year. Now, hopefully, we can all act just as rationally if the bottom is in.
We are approaching extreme overbought levels here http://stockcharts.com/charts/indices/McSumNYSE.html
This term "follow through day" simply states that a rally attempt during a bear market might not simply be a short term phenomenon. It might actually be the beginnings of a new bull market. Sometimes they fail. Sometimes they work. Generally they work more than they fail. There is nothing magical about it.
No bull market has ever started without one. That is the logic behind keeping our eyes open for the "follow through day" event. We don't want to be left in the bull's dust still lamenting the housing crisis and the demise of Lehman Brothers.
The very next thing that should start occurring, on, or shortly after the "follow through day" is that the strongest stocks should start breaking out of well-formed bases: these bases being double bottoms, cup & handles, saucers, shakeout + 3's, ascending bases, bull flags, and the like. This isn't happening yet.
Some investors start a little earlier and begin initiating positions as stocks break up through downward slanting trendlines.
Anyway, it is a time to keep our eyes open, whether we are skeptical or not. The market does not care what our opinions are on the bailouts, the poor earnings, the recession... or anything else for that matter.
The follow through day signals that it is time to be humble and to listen to what the market is telling us. It communicates to us through price and volume action and that is really the only thing we should be paying attention to at this juncture.
If you're like most, the "follow through day" can produce a lot of angst; especially in a market like this that has fallen so far and so precipitously. You don't want to miss the opportunity to rack up solid gains in a new bull rally. But neither do you want to get sucked into yet another bear trap...Angst...caused by the two demons that afflict almost every single player in the market: Fear and its bedfellow - Greed.
If you think about it, Greed is always Fearful ~ afraid of not getting what it wants or afraid of losing what it already has. Fear is never far from Greed. Thus, the less Greed you have the less Fearful you will be (in the market or outside the market). Less of both allows us to think more rationally and thus act more intelligently.
If this is truly a new bull rally, opportunites will present themselves. If it isn't, they won't. Most of us didn't get crushed as the market fell. We acted rationally and sold when we should have. We also waited patiently as the market corrected, for almost a full year. Now, hopefully, we can all act just as rationally if the bottom is in.
We are approaching extreme overbought levels here http://stockcharts.com/charts/indices/McSumNYSE.html
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