Stupid, stupid, stupid

Sure, I am long the stock, and know a higher price will occur soon. But leave apart the writer's and my dueling banjos perceptions of the same stock, and think on his imbecilic recommendation...

Short Heinz/HNZ at $55, with a stop loss at $61.73, or 12.23% Your profit objective is $51.63, or 6.12%... $6.73 of risk, $3.37 of possible profit. In essence, an abomination of the typical relationship between risk and reward.

Did I say stupid? I also mean misguided, irresponsible, and wrong. Horribly wrong.
-- David M Gordon / The Deipnosophist

[Trend] Lines and measured moves

The article below is from my site dedicated to investments and markets, Investment Poetry, posted earlier this week...

Always helpful to circumscribe the market’s oscillations to keep those oscillations from surprising you. For example, the Nasdaq Composite/COMPX, in which I identify several items...

1) Support and resistance. Focus on the line at ~2600 – former resistance becomes support, and now, possibly, resistance again;
2) Measured moves. The distance in prices (~2600 to ~2875) is the same distance to 2325 (from ~2600), and the level from which the market bounced. (And should the COMPX break down beneath ~2325, the next measured move counts to ~2050, the lowest trend line drawn. NB: the points of support and resistance clustered at the price level.)

The takeaway is that measured moves, in tandem with support and resistance - and other technical studies not shown - identify turning points, however ephemeral. The second takeaway is that as price crosses the channel to seeming resistance at ~2600, risk increases. (“Seeming” means presumed resistance until proved otherwise, which would require a close well above 2600.)

Of course, unless you trade the indices, you do not buy the market; you invest in individual securities. Perform a similar analysis for your favored investment opportunities, and then overlay those charts with the market’s chart to identify the few opportunities that act stronger than the market. Many such investment opportunities exist today, as always.
-- David M Gordon / The Deipnosophist

Separating rumor from news, opportunity from risk

Market professionals rely on the clues that other investors betray, knowingly or no. Positive and negative divergences -- that is divergent action between a stock and its group, a stock or group and the market, and markets themselves (metals vs currencies) are one clue. Another clue is how a stock trades on rumors.

Consider two stocks (labeled 1 and 2) below (click on each chart to enlarge)...

Company #1

~~~

Company #2

Okay, you will quickly notice that each chart:
1) Includes daily bars since mid-2009
2) Ends on 30 November
3) Mimics the other, eerily so.

It is that last item I call to your attention: Two near-identical trading patterns... that ends, rather abruptly, come 1 December 2010...

Company #1

Company #2

Of course it would help were you to know the two companies; #1 is AT&T/T and #2 is Verizon/VZ. "Ahh," you say, "Now I get it!"

You probably do. Rumors abound that AT&T will lose its contract with Apple/AAPL for exclusive rights to offer the iPhone in the USA. But that rumor has been around for a good long while; what's different now?

One rule investors keep in mind is, "Buy the rumor, sell the news." It will be interesting to learn the news from Apple, AT&T, and Verizon in coming days and weeks. And the effect that news will have on their respective stock prices, now that the rumor of something has been priced in; arguably adequately so.

Full Disclosure: Long Apple/AAPL and Verizon/VZ.
-- David M Gordon / The Deipnosophist

A meme, sure, but still way cool

Statistics come to life when Swedish academic superstar, Hans Rosling, graphically illustrates global development over the last 200 years in a brief (fewer than 5 minutes) video...



Gosh, I love Hans's use and combination of Cartesian coordinates with scatterplotting to offer almost, although not quite, the z-axis I often suggest. Still a gorgeous visual display. Enjoy!

Happy Holidays!
-- David M Gordon / The Deipnosophist

Of disposable leads, and new leaders

To invest, even to trade, requires a risk of loss (of capital). And of ego, "I was wrong. How horrible!" So we each identify some analytical tool (fundamental, technical, valuation, top down, bottom up, etc) to derive some measure of comfort -- er, on which to base our investment decisions. Most analyses of the market, of opportunities, is of the worst type: they seem to offer insight, but really do not.

One part of my investing methodology is to select  potential investment opportunities from among high growth, small cap companies. Not so easy to find small cap companies these days, even after the horrific bear market of 2007-2009: a low share price does not necessarily equal a small market cap. And news about companies disseminates more quickly to everyone at mostly the same time, which means largely that only from the gleanings can an investor discover a true small cap opportunity. A related part of my methodology, explicated previously, is not to invest in penny stocks; in fact, I stay away from stocks that sell under $15-20 threshold. And a second part of my investing methodology is to identify the stocks that perform the best within its group, its sector, and the market: the leaders.

My template is the high level consolidation (HLC), defined and described previously. Prices rise and fall, rise and fall, but remain bounded by the HLC. That pattern ultimately will give way in one direction or the other. The oddity is the expectation almost always is for the break to be down; what with the bearish news that typically prevails throughout the secular version of this pattern, the decline from the top of the range to its lower boundary, most people expect more of the same price action. The quirk, and our opportunity as investors, is that the break almost always is opposite the widely-held expectation.

Such as now. I have argued ad nauseum for 11 years now that the market is in a high level consolidation that would perdure for 15-20 years. Yes, things look perniciously ugly out there – as occurs during any secular HLC. I agree the news is horribly bearish. I agree fundamentals do not favor a sustained market rise. I admit I expect another damaging decline to occur sometime next year (2011). But, with the exception of the last item, this all is well-known. Markets factor into price future unknowns and uncertainties, not the knowns and certainties, which were priced-in long ago. Please explain Apple/AAPL's absolute and relative chasm of a valuation discount, if you disagree. Or explain the strength of the retailing sector, across all its constituent groups, for the past 18 months (since the March 2009 low) in the face of what we all knew was the most dire period for retailers in... well, forever. Even now, still; after all this out-performance.

We all, being human, are subject to all the fallibilities and foibles that reality engenders. The crucial recognition, to me, is to recognize that these sideways-trending periods come... and go. Sure, they could endure for weeks, months, years, even a decade or two, but it is our task to identify these periods and invest around their limitations. And the opportunities they create. So frustrated is okay, but never flustered. Assemble your list of possible investment candidates, and via the process of due diligence and market performance, which includes declines, continuously whittle the list to find those few opportunities that have potential to be long term investments.

So how odd is it that my new investment recommendation below violates one part of my investing methodology, share price? Not so odd when you consider it: the company is under the radar for most investors. Not for long, though. Only one reason I recommend this largely unknown company that offers excellent potential to be a successful, long term portfolio investment...

This post continues on InvestmentPoetry. See you there!
-- David M Gordon / The Deipnosophist

Two Important Market Indicators to Watch

Two Important Market Indicators to Watch

Gerald Appel

Marvin Appel, PhD, CEO

Signalert Corporation

Two simple short-term measurements have proved to be effective and reliable indicators of the risks associated with investing in the stock market. Following these indicators isn’t a way to get rich quick. But over time, they can help save you from being too optimistic and getting burned or being too fearful and missing out on potential profits...

·        10-day high-low average: This indicator tracks the number of New York Stock Exchange stocks hitting new 52-week highs in price divided by the total number making new 52-week highs and lows.

Example: If 100 stocks reach their highest prices of the past year and nine hit their lowest, then the high-low average is 92% (100 ÷ 109) -- where we were recently, down from 99% in early 2009.

Why it is useful. You want to be heavily in the stock market whenever this indicator is rising and hits 90% or more. That’s because more and more stocks are participating in the rally, investors are pouring money into the market and it’s gaining strength. However, when the indicator drops below 80%, it’s historically been a good time to reduce your positions.

You can find these figures each day at The Wall Street Journal online market data center (www.wsj.com, click on "Markets," "Market Data" then under "US Stocks," click on "New Highs & Lows").

·        VIX: This is the ticker symbol for the Chicago Board Options Exchange Volatility Index, which is a popular measure of how much fear investors have about the future direction of the S&P 500.

When a large number of traders become fearful and sell indiscriminately, VIX levels rise. The index hit an all-time intra-day high of 89.53 on October 24, 2008. When market conditions improve, stock price movements generally become more orderly and the index declines. The end points of market declines are frequently signaled when the index rises to very high levels, perhaps 40 to 45 or more, and then turn down, indicating a reduction in market instability.

Why it is useful: A gradual decline from levels in the 20s or higher down to levels of 20 or below usually indicates a more stable stock market and may be a bullish signal. However, if the VIX declines to very low levels, perhaps 10 to 12, this often is an indication that investors have become too complacent, and it may be a bearish sign for stocks.

Example: The VIX dropped to as low as 10 in 2007, just a few months before the start of the 2008-2009 bear market. Recently, the VIX has been between 18 and 20, which generally indicates a stable market. Investors should get nervous if the VIX drops again to 10 to 12 or rises above 25. You can find the current VIX reading at www.cboe.com/VIX.

What I did when I was younger...

-- David M Gordon / The Deipnosophist

The market today

From a letter to clients I wrote only 31 days ago...

"Moreover, the market's current position and posture argue for an intermediate term decline. Assuming forthcoming events prove correct my analysis (a decline to SPX 900-850), the possibility looms for a deeper decline based now on a weakening backdrop. But one step at a time. I would be remiss if I were not to mention my conviction that the leveraged short ETF, SPXU, will redeem your patience, and your portfolio, many times over. Markets never are mono-directional forever, oscillations against the prevailing trend do occur, and the current market has many reasons to decline, short and intermediate term..."

May 2010 proves to be the worst monthly decline since February 2009 and the worst month of May since 1962; SPXU, in turn, roared higher. The question now is, "What and where next...?" To that end, I study the chart of the SPX...

The ominous Head & Shoulders top identified previously -- and whose crucial trend line (the drawn neckline) the market stubbornly refuses to breach. At least to date. The pattern since March 2009 is not a pretty picture -- if you rely solely on its look; other factors come into play, though -- sentiment, market internals, money flows, geo-politics, etc -- that to rely on one item is folly. Nonetheless, many gauges and metrics align with a bearish tilt.

Easy to imagine many scenarios:
● Equity markets plummet now;
● Markets trade sideways for a few weeks or even a few months before breaching the neckline;
● The markets stabilize, and the feared correction is more time and shallow price than deep price.

So I exercise patience while I also search for signs of the true break. Easy to imagine my tactics whichever way the market breaks:
● Down -- buy more SPXU;
● Up -- immediately reverse course (cover SPXU and go long)

As of this moment, I still believe the market's intermediate term (the next ~4-6 months) trajectory is down to SPX 900-850, arguably lower. No matter the outcome, the onus remains upon me to identify now those stocks that manifest as excellent long term investment opportunities. Which is largely how I spend my market days: Identifying the new leaders and the true market direction.

I hope you are equally as happy as I am confident that the decision to increase cash to a dominant percentage of your portfolio was the correct choice. The market appears exceedingly treacherous right now, and for the next several weeks and months. Certainly, the systemic peril has never been greater, 2007/2008 included, the opportunities never fraught with more risk than now.

Full Disclosure: Long SPXU.
-- David M Gordon / The Deipnosophist

Today's reality: Potential systemic failure or system failed?

Which came first, the chicken or the egg?

Apply that puzzle of philosophy as metaphor to global economics and financial markets, and we all wonder whether equities truly move in advance of economic fundamentals or react to them. Too many swings and oscillations occur to name this or that price swing as distinct from any large economic or financial news item.

In today's speed-of-light world, grave concerns increase re the sanctity of markets and economies, and markets react immediately, devastatingly. Or do markets' renewed declines anticipate follow-on weakness? The economic and financial problems the world faces are no secret; we all know them. What we do not not know, yet, is the fallout from all our past misguided policies and pursuits (by both business and government) and the maladroit attempt to control, top down, the consequences of past bad decisions and actions.

In The Lessons of '92, I alluded that bad decisions beget bad actions, which often create negative consequences. Market speculators smelled blood as a result of the bad policies and actions made by the Bank of England and the UK government, and dove in to the banquet. In The True Objective of All That Money I pointed out how welfare nations everywhere find themselves on a cliff's edge, with one foot dangling and the other sliding toward doom. And now the world finds itself on the cusp of a crack-up boom. (This article ably explains Ludwig von Mises' notion, and the terrifying nature of its consequences.) In essence, not good.

I, and other commentators, could argue (winningly) that the global financial system does not face possible systemic failure; in fact, the system already has failed. You need look no farther than last week's embrace by the EU of the detested nuclear option: the European Central Bank's (ECB) decision to purchase government bonds issued by euro zone members, thus abandoning their long-held resistance to such a move. And which action follows on our (the USA's) many bailouts of the past 2+ years, from which directives, policies, actions, and bailouts the Europeans recoiled with shuddering horror. "Welcome to the (debt) party, Europe! By the way, the hangover is a bitch."

What the Western world attempts today is as misguided as it is noble: to spend money it does not have, to create from thin air the paper necessary to 'cover' the new deficits, to paper over past errors with more paper, to issue more debt to fund existing debt. Oh, and to give to everyone everything he or she wants: jobs, holidays, health care, a car in every garage and a chicken in every pot. (NB: the protests in Greece will come soon enough to a piazza or square, or street, near you.)

For various reasons, parts of the world are immune to this outbreak of the debt contagion: the Middle East (for reasons cultural and religious) and South East Asia (because those nations endured their own version of this financial mess in 1997/1998, and came out for the better). China remains a question mark; the nation has gazillions of liquid reserves, but most of those reserves are in US$ denominated assets (Treasuries, the $ itself), which could wither to zero in an all-out financial storm. The Chinese know and fear this possibility, so the nation hastily diversifies into real assets -- which satisfies one step of Mises' crack up boom: "Everybody is anxious to swap his money against 'real' goods..." Pay attention to what China does with its excess reserves, continues to do, now and in the future.

Global markets reflect this concern, amid mounting doubts as to how governments regard their sovereign debt, and treat their debt-holders. (Servicing debt, especially with more debt, is a bitch!) China's markets peaked months ago, as did the European markets; they all are in the throes of their price corrections. The US markets... well, let's just say the rally since March 2009 is suspect. Chart below is of the S&P 500:

Note a trend that loses upside momentum; note, too, a possible head & shoulders top. (I ignored the integral component of volume, largely because volume has diminished throughout the recovery rally.) This particular, and potentially powerful, pattern remains a work-in-process, so its realization remains anticipatory; it requires a right shoulder (arguably complete) and a breach of the neckline (identified) to confirm. The double-arrowed line measures the potential for the pattern, ~160 S&P points from the breach, a potential decline to ~910-870. (The same level I pointed to for the past several months, well before this pattern showed up on the chart!) Several stair-steps lower must occur first, though, to validate the bearish scenario: 1125, 1110, 1100, the identified neckline, and the 6 May low of 1065.

What could go wrong with the bearish expectation...?
● No right shoulder forms;
● No breach of the neckline (~1070-1065);
● An accelerated rise from a pattern failure. (No pattern is as bullish as a failed H&S top!)

I could argue that the 6 May low represents a climactic low, which would put paid to the entire expected decline (albeit that expectation was for 900-870, not 1065); certainly the data reached oversold levels. Even were that the case, however, climactic lows typically are tested, sometimes repeatedly. Worse, US equity markets trade 'heavy' and a decline of one week, however seemingly climactic, is insufficient to erase all the technical divergences and negatives built up over the past 6 and 15 months. One possible scenario, of which I could limn many, is a sideways range between 1175 and 1075 that endures for several weeks or months -- before the breach beneath the neckline finally occurs in late-summer (August/September time frame). Only time, and the accumulation of new data, will tell the true tale.

Please recall again the post, The Lessons of '92: speculators will sell short an item they deem has a lesser value than its prevailing price. This means speculators could, would, and do sell short sovereign debt, sovereign currencies, even sovereign governments. (Oh, hello, Goldman Sachs -- arguably today's equivalent of Switzerland during WW2; purportedly neutral, but if they can make a buck, then Grandma also is for sale...) The intent of the new positions that occurred on Thursday and Friday of last week could be to test the EU's mettle and intentions. (viz, the EU's $1 trillion commitment of paper and jawboning.) I know not what actions governments will effect in the attempt to bind, or even banish, speculators. Not difficult, though, to imagine a future in which governments impose confiscatory taxes against 'evil' investors (of all types and time frames), which begets more selling to pay the tax. Until resolute action of some form occurs (best would be reining in our individual and collective expectations), currencies weaken, debt prices decline, and investors (even investors!) sell equities. Actions, reactions; sequences, consequences; selling... and more selling? Perhaps the sudden vacuum of no bids on 6 May will soon reoccur, regularly so. Caveat emptor. The game of musical chairs continues. Fun, eh?

The markets finally will break, up or down. What occurs today, before the break, is the usual comparative and relative swapping vs absolute sales (or buys): trading this weaker currency for that stronger currency one (say, the arguably devolving Euro for the strengthening US$), selling short this sovereign debt and going long that sovereign debt, selling short this or that equity or equity market and going long another equity or equity market. This all is the province of hedge funds in their original form (short this/long that), and bespeaks an ongoing process of correction, not bear market; nor the end of days. The bottom could drop out, though, at any moment; certainly the warning signs, economically and financially, begin to dot and dominate the landscape (charts).

I predict nothing. My role as portfolio manager and market commentator is to lessen risk and increase reward. So I seek the new investment themes and the new leaders: those sectors, groups, and companies that not only will ride out the (coming) storm but should succeed, if not excel. Of course, between then and now lies the Land of Uncertainty, and the possibility of lower share prices.

Fascinating topics (global economics / finances, and markets), to be sure; I could continue for a good while longer. Frankly, it all is rank speculation; at least, at this moment. Will the world muddle through (again)? Will markets stabilize, and rise? Will Charon still demand his fee for ferrying us to there from here? In what form will that coin be?

It pays to be ready for all contingencies:
1) Equity markets stabilize, and then rise anew
2) Equity markets plummet, but recover
3) The world (as we know it) ends

I prefer to focus my attention on items 1 and 2 for the obvious reason. I will do just that on InvestmentPoetry, with specific recommendations, in addition to a deeper discussion of the topics I presented above. As always, your comments and insights are welcomed and appreciated.
-- David M Gordon / The Deipnosophist

Good analysis, whether right or wrong

I knew naught of Michael Kahn, but this one article alone indicates I should gain familiarity quickly.

Of course, you can read the analysis for his forecast of coming market action, and possibly come out ahead. Do not misunderstand my recommendation, though. Sure Michael has a market prognosis, but what I truly like is his willingness to embrace several aspects of technical analysis to arrive at his conclusion. I care not at all whether time proves him right or wrong, only that his embrace of multiple disciplines affords him a perspective unseen by many.

I since have discovered Michael's blog. So far, so good.
-- David M Gordon / The Deipnosophist

A tipping point for European debt?

The chart below measures each European nation's budget deficit as a percentage of its GDP; three of the five PIIGS countries (Spain, Greece, and Ireland) lie to the far right (exclude the EU16 and the EU 27). Italy's debt load looks manageable absolutely and comparatively, until you dig deeper. For some reason, Portugal is not shown.

Of the five nations, only Ireland does the necessary heavy lifting, the painful work, to close its deficit; meanwhile, the dream of easy money continues for the other nations. What happens, though, if that dream becomes nightmare? Perhaps interest rates rise, as they will, and the debt service load becomes unmanageable -- what then? Perhaps no buyer anywhere steps forward at any blandishment (rate) to own more of that nation's sovereign debt -- what then?

Really, there once was a cycle for this type of event. When interest rates dropped, debtors would re-finance at better terms and longer term to lock in the low rates. The result was increased liquidity for the debtors, which enabled them to withstand the other side of the cycle, increasing rates.

Not now, though; certainly not for the countries in Europe. (And not for England, Japan, and the US, which all are in equally parlous financial condition.) Does there exist a tipping point that investors perceive to be too much debt? Is this really one giant con game -- investors conned and no one convicted?

Which leaves us with Dorothy Parker's memorable phrase, "Eat, drink, and be merry, for tomorrow we may die." Except this time, few enjoy the party, I fear... and the piles of debt just keep growing larger and larger.
-- David M Gordon / The Deipnosophist

Interesting perspective

Ian, over at Ekonomi Turk, shares that he had "analyzed the relationship between Roubini's popularity in Google search results and S&P 500 index." And the results he finds are pretty interesting.

Roubini's popularity correlates negatively, and significantly so, with the S&P 500 is no surprise. That a one (1) unit increase in Roubini's popularity corresponds to a 114 point decline in the S&P is fascinating. Which means that, on this measure, fair value would be...

Well, check it out for yourself!
-- David M Gordon / The Deipnosophist

A map that shows the risks for 2010?

You bet'cha. A map can be like any other visual representation (a picture is worth 1000 words); make that map interactive and you have something.

Which is precisely what the recently-convened World Economic Forum in Davos, Switzerland did with their Risks Interconnection Map 2010. The RIM 2010 is a network visualization weighting the most important global risks and their connections. The risks are grouped in Economics, Geopolitics, Environment, Society, and Technology.

Go here to see for yourself.
-- David M Gordon / The Deipnosophist

What's Changed This Decade (1999-2009)

Excellent graphic display that says a whole heck of a lot...


Source: Online Education

-- David M Gordon / The Deipnosophist

Unemployment

This interactive map is an excellent dynamic representation of unemployment.

You need only click "play" for a visual display of some frightening info.
-- David M Gordon / The Deipnosophist

Of trends and traditions

Support and Resistance
Think of share price fluctuations as a skirmish between buyers (bulls) and sellers (bears). The price at which bears and bulls reach a consensus and a trade takes place is the clearing price. There is a level at which bulls think the price will move up and which bears are not willing to sell. From that point, below which bears won’t sell and bulls are willing to buy, the purchases are the kinetic energy that generates higher prices, and trend. And, of course, vice-versa.

Thus, support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower. Resistance is the opposite of support. It’s the point at which sellers take control of prices and prevent them from rising higher.

But, over time, investor expectations change, often abruptly. When a share price rises above the correctly identified resistance level, they tend to do so decisively, resolutely, and with alacrity. A significant increase in volume accompanies the breakout (above resistance), and convinced that the share price would remain above its breakout, more investors are willing to buy at higher levels, thereby creating the new trend; i.e., both price and volume rise. Similarly, sellers who previously sold when prices approached resistance also begin to expect prices to move higher and are no longer willing to sell, and instead began to purchase shares. More buyers, fewer sellers, and fewer shares for sale sum as a powerful new trend!

Supply and demand
There is nothing baffling about support and resistance; it is supply and demand. Supply manifests the quantity — i.e., the number of shares — sellers are willing to supply at a given price. When prices increase, the quantity of sellers also increases, as more investors are willing to sell at these higher prices. Demand shows the number of shares that buyers are willing to buy at a given price. When prices increase, the quantity of buyers decreases, as fewer investors are willing to buy at higher prices. And, theoretically, as prices decline, the quantity of buyers should increase… but fails to; likely because human nature takes hold, and subverts the symmetry of this notion.

As investor expectations change, so do the prices buyers and sellers believe are acceptable to satisfy their objectives. A breakout above a resistance level is evidence of an upward shift in demand as more buyers become willing to buy, and at higher and rising prices. Perhaps the best method to track changing expectations following a breakout is with volume. If prices break through the support/resistance level with a large increase in volume relative to its recent average volume for the examined periodicity, it implies that the new expectations will reign. Low to moderate volume — again, relative to that  periodicity’s average volume — on the breakout implies that very few investor expectations have changed, and a return to the original expectations — and original, if not lower, prices — is likely.

Resistance becomes support
When a resistance level is successfully breached, that level becomes support. Similarly, when a support level is successfully penetrated, that level becomes a resistance level.

Knowledge and portfolio management
To generate consistently successful investment results the investor must consider the following...

Vision: the macrocosmic, or geopolitical, social,and economic perspective. This type of analysis is more than mere mind candy; the investor gives thought to those factors that are larger than his specific portfolio needs but have a direct bearing on his investment’s corporate results. In the present market environment, arguably the most critical geopolitical factor is the next major direction for the US$.

Strategy: the microcosmic, or market perspective. The investor who studies and understands market cycles and history has an advantage. Attention paid to greater epochs —periodicities measured in decades — can offer substantial reward. This means the belief that the market’s rising trend continues forever is folly. That  moment was the appropriate time for the shrewd investor to re-think his or her strategy, and to follow through with new, more correct portfolio tactics. And there is the truth of it: when I enjoined, "Prepare to have your assumptions shattered, or have the market shatter them for you…” I referred to the general predisposition for a bullish mindset, which continues today.

Tactics: the implementation of strategy, or day-to-day perspective. Portfolio management follows the investor’s market strategy. Either the investor patiently awaits the next major market trend, or he proactively determines a portfolio strategy and a market strategy. If the market perception is bullish, the investor will purchase each dip or breakout. If the market perception is for one that trends sideways, the investor would purchase dips and sell rallies.

A key requirement for successful portfolio management is the ability to make decisions, and finally to abide by those decisions without self-recriminations. Investing in all market conditions, but especially in fast markets, entails split second judgments based upon rapid recognition of the problem at hand and how best to deal with it -- without second guessing the decision. To adapt and embrace changing market conditions, to embrace change itself.

Critical thinkers and successful investors are honest with themselves, can resist manipulation, overcome confusion, ask questions, look for connections between subjects, make judgments based on evidence, and are intellectually independent.

Barriers to effective decision-making
Indecision: To avoid making decisions in the hope of sidestepping risk, fear, and anxiety;
Stall: Obsessive gathering of endless facts; refusal to face the issue;
Overreact: Let a situation spin out of control; allow emotions to assert control;
Vacillate: Reverse decisions; half-heartedly commit to a course of action;
Half measures: Muddle through.

Errors of omission vs. errors of commission
Unfortunately, it seems that most market participants either lack deep market understanding, do not deploy a sense of perspective (market history), ignore the market’s perdurable oscillations, do not explicate their investing strategies, or suffer a failure of imagination. Investing is not done in a vacuum — awareness of geopolitical, social, and economic factors is critical, as well as apprehending where the market is within its current cycle, the age of its current trend.

So is the awareness of the possible unreliability of his portfolio investments; bad or wrong decisions — corporate risk, market risk, event risk, etc — do occur, and must be corrected. After having discerned his objectives and goals, understood the market’s mechanisms, discovered those companies whose shares will help achieve specific investment goals, it is insufficient to hesitate and not act decisively and resolutely, instead praying that a (or any) market trend will remedy errors. Having made the initial investment decision (purchase or sale), the responsibility, the decision, is the investor’s to make. To make one decision ("I am an investor") is wholly insufficient to the task at hand. Decisions must be made always; i.e., whether or not to take profits, stop losses, buy this, sell that, even that a specific investment is proceeding nicely but a new one seems to offer greater potential profit. To shrug off the importance of these necessitous and omnipresent decisions is tantamount to poor money management — itself a term that denotes the process rather than the event.

If breaking up the one decision (to take action) to a sequence of smaller decisions is helpful, then do so. The decision process is now more emotionally digestible because it is more holistic, no longer monolithic. No longer fraught with having to make the one right decision but a series of smaller ones better enables the investor to forge ahead to his true goal — to make money, not be right.

Minor periodicities
Though there exist distinct minor trends within greater periodicities, no market leader will break out and trend to new all time highs without the market emerging from its high level consolidation. Of course, the market will not emerge from its base without the new market leaders commencing their new trends. Critical to this notion is the understanding that the new leaders must emerge as a group (drugs, grocers, telecom, et al), sector, or theme. Isolated instances of new highs during a lengthy high-level consolidation or bear market are common — as is the inverse — and are not a true signal. How do the other companies in that group or sector fare? The example of one company’s shares (in a sector of ten) emerging to new highs is insufficient to generate a true signal.

Because all true patterns are replicable in all periodicities, the investor should time purchases at optimal moments of low risk and high reward. Recognize, though, that the half-life of any trend is directly proportional to the studied periodicity. To accumulate shares with full recognition of the market’s trading range. It is not always necessary that markets decline in  devastating bear market fashion. It is probable that the current instance of a now 12-years lengthy high-level consolidation evident in the Dow 30 Industrial Average and S & P 500 will continue, at least until corporate earnings can catch up to current valuations to again create an undervalued and perhaps under-appreciated market. The prerequisite for success is not to know precisely where prices will be in the future — but to improve the odds. So the shrewd investor not only seeks market leaders, but simultaneously pays heed to the market’s message; if the market is discerned to be trading in a high level consolidation and at the top of the correctly identified range, not only is risk present, it is heightened.

Determinism vs. deterministic behavior
"Psychology is both the reason for the consistently superior performance of the methods the financial academics cannot explain, as well as the consistently poorer results of those approaches that fail.” -- David Dreman

Our world is neither static nor absolute. Everything is relative. Change is the only given, nothing remains the same, and all standards are relative. We are born, we mature, we grow old, and we die. Only the fact of change itself is unchanging, the sole reality. So it is with our investments. Buy low, sell high; buy cheap, sell dear. The investments we consider do not come into being the moment we first notice them. In some form they have always existed. Recognition of this continuum allows the investor to place appropriate emphasis on what is important and critical, not merely urgent.

Charting and technical analysis offer neither science nor black art of predictive ability, tiresome claims of the naysayer notwithstanding. These analyses are the science and art of observation. Of discipline, patience, and diligence. Samuel Johnson said, "What we hope ever to do with ease, we must learn first to do with diligence.” This moment — here, now — is equally good for the tactical and strategic investor to learn how the market works, to set into place that recognition as foundational portfolio behavior, and to profit from the increased percipience that recognition brings.

When a market or company shares breakout from a High Level Consolidation, that sudden volatility has the potential and possibility to transmute as a new trend — either up or down, but no longer sideways. And then age accordingly.

Markets are not living proof of determinism. However, trends do have a discernible life that age in a time-tested manner. The ability to discern trends — how they birth, live, age, and die — helps alert the investor to heightened risk or increased opportunity. As a result, it is not the ad absurdum claims of determinism in the markets but the investor’s deterministic behavior that ushers in portfolio success. Investing is about odds, chance, actualizing possibilities. None of this is possible without choices selected, decisions
made.

Where now, blue DOW?
As bull markets crescendo, the investor must change his time frame and focus on the signals generated by the lesser periodicities. Conversely, at bear market or trading range lows the investor seeks guidance from the greater (longer term) periodicities. These tell-tales offer alerts far in advance of market pundits whose prognostications are too-often awry. Though market and share volatility can help with minor, short-term errors, do not allow these errors to magnify beyond proportion. Think before investing. Develop a contingency plan. “If (the market does) this, then (I do) that.”

For the past ~12 years, it is the high-level consolidation that best exemplifies the current placement of the Dow Industrial Average and S&P 500, assuming correctly identified trend lines. For however long this condition persists, this trading range manifests as opportunity for the patient investor. Low risk/high reward opportunities prevail at Major Trend Lines. Particularly tempting are those company shares found either near their own Major Trend Line, or now experience an important and actionable breakout. The investor who recognizes this pattern will be better placed to apprehend the shift in reality before it occurs; that is, the understanding that the major channel lines are inflection lines but the maximal and optimal inflection points occur on breakouts through these correctly identified lines. All else is noise, in any periodicity.

Don’t pursue opportunity; allow opportunity to come to you
To gaze at a chart of financial assets can be, for most, an experiential moment of consternation, even heterodoxy. “What do I see? What am I supposed to see…?” might best sum the tyro investor’s first glance at a stock chart. Too many investors erroneously identify volatility for a trend; they are not synonymous. When the understanding that specific patterns recur across the spectrum of investment assets but especially publicly traded shares, then the cardinality of the relationship between volatility and trend becomes clear: within any studied periodicity, all volatility is circumscribed by the extant trend but it is only volatility that can end that trend. Because most investors require certainty, they jump aboard the trend late. How many data points are required to delimit a trend? Hence, watching for increased volatility as a harbinger of a trend’s end is critical to improve the investor’s odds for success.

What is the value of correlating news to current prices when the data is already old, only now collated, and the market has already factored this news into current prices? The markets are a discounting mechanism — the investor buys today to sell tomorrow for a profit because the invested company is perceived to make more profits in the future than today. The investor that considers insufficient data or studies an insufficient periodicity exposes his portfolio to added risk. To chase after a rising share price (bid up) to purchase what is, in all likelihood, mere volatility can be hazardous. More helpful is to discern where the shares lie within its trend, and the age of that trend.  So the patient, disciplined investor allows the price of his considered investment to come to him, to gravitate lower to his eager, strong hands. Again, know thyself. What are your goals and needs?

PS: For specific investment opportunities, price and timing included, please visit Investment Poetry.
-- David M Gordon / The Deipnosophist

Of meltdowns, meltups, and portfolio success

Despite the recent upsurge in prices, the market remains in its seasonal (summer) doldrums; that is, the market continues to oscillate within its base.

Yes, base. I realize most market commentators call repeatedly for a resumption of the bear market -- a plunge back to the lows, if not a sustained breakdown beneath those lows. But the bears have been wrong for 10 months now, as the market increasingly betrays its true direction, its winning hand.

Understand: Much of the selling that occurred during 2008, especially late-September through early-November, happened for many reasons, but its net result was a portfolio blowout: a forced liquidation in the frenzied quest to raise cash during a liquidity crisis. That melt-down, amid the twin crises of liquidity and (lack of) confidence, is followed today by a melt-up as a sense of normalcy returns; stocks oscillate on individual fundamentals, valuation, and/or technicals. And, of course, the swings of the general market.

Can you feel or sense it? The decline of Fall 2008 (Ha!) had become so emotional that our skin would horripilate at the mere thought of the markets -- and another disastrous down day. The market's resolute advance since then is one the bears repeatedly decry and declaim, as though the current up trend is, in and of itself, sufficient reason for the market to resume its decline, if not plummet. Perhaps, yes, typically -- price is risk -- but the markets traded atypically during the decline of 2008. And so one extreme begets another.

In essence, the market bounced off the lower boundary of its high level consolidation; moreover, I believe the market climbs its clichéd Wall of Worry. Bad economic and fundamental news no longer propagates a resumption of the selling pressure, and individual groups and sectors begin to rise to the fore as they rise to all time highs. In the process, these groups and sectors become the market's leaders. Can you see them (rise)?

[Click on chart to enlarge]

So this is how it works:
1) Recognize that markets and individual stocks oscillate always;
2) Recognize those oscillations occur within trends -- up, down, or sideways;
3) The market averages and indices remain in their 12 years long high level consolidations; 
4) The market has traded sideways for many weeks, ~8-10 weeks, as it builds power for another upward thrust;
5) Individual sectors begin to out-perform on the upside;
6) Individual groups begin to lead higher;
7) Individual stocks within those groups and sectors bifurcate into those that trade higher, or base;
8) Many of those stocks in bases within leading groups within leading sectors should break out (up) soon, and lead higher the general market.

All trends die eventually, but until this one does, I want to own the leading sectors, groups, stocks; the market's leaders. You do as well. Especially because the market provides every hint that its up trend is nowhere near complete.
-- David M Gordon / The Deipnosophist

The bear market growls on

Not!

See charts below...

[Click on charts to enlarge]

Oh sure, the stock in the chart above got slammed by the bear market's ferocious end (September/October 2008), but it has since risen back to its prices prior to the decline, and then some. Wow!

I identify many items in the chart above, up-to-date through today's close of business. Yes, it is a symmetrical triangle; better (more bullish) than that, though, is the internal ascending triangle now building. Note trend line 1, and especially points a and b, which show the breakout and successful test of that breakout. And today, the stock breaks above trend line 3, at point c -- with 180% of average daily volume.

Look at the chart below, which is the same stock and carries over the trend lines from the chart above, but is basis weekly rather than daily: the set up and pattern look bullish to my eyes...

So where is the bear market...? The charts above -- and many, many more -- betray an increasingly bullish picture.
-- David M Gordon / The Deipnosophist

From (seeming) chaos, order

You see a chart like this...

[click on all charts to enlarge]

... and your first cogent thought is, "Keep away!" The thoughts that got you there include, "Sheesh, in near 2 years, all this stock has done is oscillate wildly (~$50 to $66), and got nowhere fast." And, "The stock appears to be breaking down, as it trades beneath its 50 and 200 day simple moving averages." And, finally, "Hey, the 50 day sma points down..." which all lead you to, "Keep away!"

Perhaps more order might be found, if we were to identify a trend or an area pattern. Begin by identifying resistance...

I admit the trend line of lower highs is drawn fairly liberally -- I could tighten it up, thus purchase earlier and at a better price -- but the stock's trading volume will tell me the correct angle of the trend line, and when I should buy. Next I draw the trend line of higher lows, as below...


Okay, now we have something, but what...? Solely because one trend line slopes downward and the other upward, we have delineated a symmetrical triangle. Which is great but for one item: The breakout of symmetrical triangles tend to break in the direction of the primary trend -- but what is this stock's primary trend?

I retain the trend lines and change the periodicity to a weekly basis from daily basis...



Ahh, now the picture offers more clarity; an obvious symmetrical triangle within an extant up trend, and a powerful up trend at that. But wait: the stock rose to $67 from $12 in fewer than 18 months. How do I know this symmetrical triangle, this time, will hold true to form, and continue its upward trajectory? So I change the periodicity to a monthly basis (below)...

And see the entire picture: the symmetrical triangle, identified on the daily basis, confirmed on the weekly basis, now reveals itself to be a mere hesitation after the breakout above the stock's multi-year high level consolidation. (While a tad wide and loose, I understand the plummet to $12; but for extreme exogenous circumstances the stock would probably have held at $20-21.)

The company? McDonalds/MCD. I delve deeper into McDonalds to discern why this stock at this time. And what I find I like. We all know the fundamental story... But do we really? The company's McCafe story ignites a sudden flurry of consumer and investor interest and growth; the company's overall growth story remains dependable, even reliable; an oasis of certainty in an epoch of prevalent uncertainty.

At the current price ($55.57), the stock offers a dividend yield of 3.6% -- nice for a foundational investment. And assuming I have identified correctly the trend lines for the symmetrical triangle, the current price is immediately above its sell stop ($55), although I would grant a little extra leash to $54. The initial upside breakout would occur at $60-$61; the first upside target would be ~$80, and the second objective ~$100. Each objective assumes the bullish resolution of the symmetrical triangle, which should occur soon because the area pattern, as delineated, now is 75% of the way to its apex. This means the stock has coiled to a posture of maximum thrust.

An item or two though before you go. Why do I get to draw the up trend line (in the third chart) as I do? After all, it defies my primary rule for the correct delineation of trend lines. Well, one reason is I expect the bullish resolution of this pattern, so I identify the low prior to the subsequent (expected) higher high. A second reason is that trend line captures sequentially higher lows, a pattern and trend yet to break. Until it does...

The really cool thing for me as an investor is that this long time blue chip growth story, which today is ~20% off its high, can move 50% to 100% in short order, once it breaks out and up. To that return, I can add a dependable 3.6% dividend yield, which serves to sweeten the pie. All that for a measly ~2.5% risk before I must admit my error, and move on.

Full Disclosure: Long McDonalds/MCD.
-- David M Gordon / The Deipnosophist

Stock Reflex

StockReflex allows a person to back test and thus hone his or her trading skills by simulating historical stock behavior. So a person could use this as an authentic stock behavior simulator and a "student" could test his skills as the simulator moves through time.

From the company website...
StockReflex lets you hone your trading skills by replaying years of real historical stock data in minutes. Simply click when you want to buy or sell and get an instant read on how your decisions would have played out.
• Refine your technical analysis skills
• Learn to trade without emotion
• Experiment with multiple trading strategies
• Improve your ability to "gut feel" a stock
• Teach yourself when to cut losses and protect gains
• Relive stock trading decisions you made in the past
• Analyze patterns and trends in various market sectors to apply to future trading
• Compare your scores against other traders
• Test if your skills and instincts beat buy and hold

Good luck!
-- David M Gordon / The Deipnosophist