The Deipnosophist

Where the science of investing becomes an art of living

My Photo
Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

18 August 2008

Tasseomancy, or Black Fridays, black Wednesdays, black everyday... black markets! Part 3

Even my clients have grown despondent in their concerns and fears that the market's triumphal march higher has ended, and with its ending chimes the death knell of the investment opportunities I favor (and guide their portfolios toward). Certainly, the ~9 month decline calculates as among the more unbearable, but "the market you are in always feels like the worst."

I attempt to keep my readers (and clients' portfolios) on the right side of the market; for example, warning and assuming a defensive posture last October and November, then counseling in late-March that what then was ballyhooed elsewhere as a double-bottom in fact was not. And, finally, that this decline, too, would end. They always do.

Point your finger at this cause and that effect, and their follow-on problems -- for the markets, for your portfolios, for the economy, etc -- loom large. The problems never really disappear, especially not the type that we suffer today, but the markets themselves continue. And because we are human we create the problems and the opportunities -- even the vaunted portfolio management done by computer algorithm, because their programming comes from the fallible minds (and emotions) of humans. So slough off your despondency; the times they are a changing.

While my trades might appear random, they are anything but. Stocks always oscillate, so long term investors provide sufficient leash for those oscillations. Each investor has his or her own preferred methodology that presumably achieves consistent success; I prefer an investment opportunity that remains within its long term up trend but merely pauses for the intermediate term. The intermediate term can stretch on for months, sometimes years, and sizable price and percentage declines and rises could occur regularly and repeatedly during the consolidation phases, but the bases -- assuming you identify them correctly -- always offer fantastic investment opportunities.

Excellent companies, with a strong executive team, and an exciting, interesting product or service, make for great long term investments -- and are not difficult to find. Alas, it is the process of investing that trips us up, fraught and beset as it is by our emotions and expectations. I do not attempt to sidestep the inevitable bases that occur. I monitor closely each of the investment opportunities I favor for signs of long term change, and whether that change, should it occur, might endure. Consider only four of my Core 9 Opportunities...

1) Apple/AAPL could -- not will, but could -- decline to ~$145-135, or lower, as other traders posit. (Go here for yet another bearish opinion.) And even if it does, so what? Perhaps it comes as no surprise, but I disagree with their (chart) analysis; I perceive Apple/AAPL to qualify easily as a buy. (In fact, I purchased more shares just 2 weeks ago at ~$153.)
2) Google/GOOG scares many investors, including those who have been wrong -- habitually, congenitally wrong -- on the company, and its stock. I look at the company, and see more than a "one trick pony"; I look at the stock, and despite the obvious ugliness of its chart, see fantastic opportunity for it to rise, and dramatically so. Soon.
3) Intuitive Surgical/ISRG is a great opportunity to show how wrong most chart readers can be when they attempt to analyze chart action, which is one reason why chart reading has a bad reputation (and gets a bad rap from me). The failure, though, lies not in the chart, but in the chart's so-called readers. Rather than use ISRG as this post's lesson, I will use...
4) Johnson & Johnson/JNJ. Sheesh, what can I possibly add to what I have stated here, ad infinitum, ad nauseum? I have singled out JNJ as the "poster child" for the type of growth stock I favor and seek, and that its current base is "profoundly bullish." (Search this blog for those two terms for more information, and understanding.)

First, the perfunctory explanation of the company...

Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson has more than 250 operating companies. The Company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. Sales of the Company's two largest products, Risperdal and Remicade, accounted for approximately 6% and 5% of Johnson & Johnson’s total revenues, respectively, during the fiscal year ended December 30, 2007 (fiscal 2007).

Hmm, that précis of the company offers little to help guide the investor, although for the investor not familiar with the company, her or she learns quickly that JNJ is more than baby powder and skin lotion. Perhaps investors might glean some measure of truth from the company's products and services? Its pipeline of new pharmaceutical products...? Or its history? How about, then, the company's fundamentals...? Certainly, the company's valuation...?

Being familiar with the company in advance of an investment certainly helps, and knowing how stocks trade helps even more, for the very reason that we express our interest in a company via our investment in its stock. And, being human, and thus emotional, we attempt to purchase at optimal moments. (Read: The stock screams skyward immediately after our purchase.) In the attempt to illustrate this point, piece together the 3 separate parts of this post...

Johnson & Johnson/JNJ categorizes within the health-care sector, and that the company's deep and broad product line cuts swaths across all the groups of the health-care sector. Health care is among the hotter sectors of late, as I note the positive price action of health care brethren: Abbott Labs/ABT, Auxilium Pharmaceuticals/AUXL, Baxter/BAX, Becton Dickinson/BDX, Express Scripts/ESRX, and Intuitive Surgical/ISRG (oops, how did that company slip in here?!) to name only a handful that confirms group and sector strength. Okay, I can qualify the expected strength in Johnson & Johnson/JNJ, but can I quantify my expectation...?

The effort requires the correct analysis of its chart...

[click on charts to enlarge]

In the chart above, I circumscribe the 3 1/2 year intermediate term base, or high level consolidation. (The better for you to see it.) Do 3 1/2 years seem too lengthy for the intermediate term? Than substitute interlude for intermediate term. Fact is that such bases create the bouts of despondency that plague most investors, whereas I view them to be opportunities. While the market raced higher during 2005, 2006, and much of 2007, seemingly JNJ went nowhere fast. Note well, however, the higher bottoms (areas 1, 2, 3, and 4) within the high level consolidation; demand subtly gathered strength against dwindling supply. I will return to this point in the chart (two) below.

The same intermediate term base, but this time drawn with a point & figure chart (above); a methodology that helps most investors elide one key problem, their emotions. But why do I delineate the base as beginning from the high of March 2005? Because that is when the long term up trend halts, albeit temporarily. Yes, it is obvious now for all to to see (chart below), albeit after the fact... and especially obvious after the upside breakout of 2 weeks ago. But I have shown previously how to identify the changes as they occur real time via use of the subtle clues that betray the next direction.

But it is the chart above that helped me, over the past 3 1/2 years, to perceive this chart -- as it built its setup and pattern -- to be "profoundly bullish." The high level consolidation pattern betrays itself to be part of a 15 year ascending triangle. The ideal breakout from this pattern would occur approximately 42-47 months from the inception of the base, or 67-75% of the way to the apex of its pattern (June 2010), which calculates as now to March 2009; in fact, Johnson & Johnson/JNJ broke out 2 weeks ago. Remember from the first chart that JNJ made higher bottoms throughout its high level consolidation, showing, albeit subtly, that supply was slowly giving way to increasing demand for the shares. The ideal entry point in Johnson & Johnson/JNJ would be a test back to the 67-69 area, a short term price oscillation for a stock in a long term up trend and that has just broken above its major intermediate term base, but my upside objective counts as ~$125. Assuming my chart reading ability and follow-on expectation to be correct results in a downside risk of ~$5, and a possible and potential upside reward of ~$55, an 11:1 reward:risk ratio. And in a company that is about as blue as blue chips can be.

I admit that price oscillations, in particular, the downswings can be frustrating, can even cause investors to wax despondent, but they also create potentially profitable opportunities. Although I detest superlatives when writing these posts (the use of superlatives choke off discussion), always try not to buy into the ubiquitous news of the day, broadcast to all via the mass media. (Which includes CNBC.) Price oscillations -- down, up, sideways -- serve only to create your opportunity to invest... and to profit. Despite the news, or even in spite of it.

To reiterate, the investments I seek are only those in which I want to invest long term. I do not chase stock action; i.e., I do not rely on a stock's chart to tell me whether I should consider it as an investment opportunity, but instead first research the company, its products and services, its management team, etc, and then, and only then, wait for the stock to come to me -- when my time frame and the stock's periodicty match off like hand in glove. All true patterns are replicable in all periodicities.

So I can only wonder... Why the despondency?

"I can feel guilty about the past, apprehensive about the future, but only in the present can I act. The ability to be in the present moment is a major component of mental wellness."
-- Abraham Maslow

Full Disclosure: Long the shares of Apple/AAPL, Google/GOOG, Intuitive Surgical/ISRG, and Johnson & Johnson/JNJ.
-- David M Gordon / The Deipnosophist

Labels: , , ,

who's online