Visually Compelling TA

Triple Lows Not Necessarily a Bottom

2009-03-29T20:51:53Z

Louis Navellier recently wrote about the market's three latest lows on October 10, November 20, and March 9 (The Market Makes a Three-Point Landing). He then aptly compared these to three market lows of July 2002 - March 2003 which were followed by a sizable market rebound. Navellier builds on this observation with other similarities between 2003 and 2009 positing a similar rally can be expected at this time. He is not alone (Murphy, Lansing) in anticipating near-term rally but I observe two things different between then and now.

First, examine duration and momentum. The three earlier lows occurred over a period of eight months while the current three lows occurred over only five months. Further the bearish momentum preceding the current low was twice that of the earlier low. (The 700-point bear move preceding the current lows occurred over 12 months while the same size drop preceding the July 2002's low took place over a much longer 24 month.) Given the severity of the market's recent drop, I contend the market will take a longer time to reestablish a foundation before a new bull market ensues.

The second difference pertains to the strength of the index internals. As of March 2003, about two-thirds (342) of the S&P 500 constituent stocks were above their July 2002 price (the time of the first low). As of this past Friday, only about one-third (168) S&P 500 stocks were above their October 10 lows. Only one stock is trading at more than 100% and only 18 are trading at more than 50% of their October value. By contrast in March 2003, ten were above 100% and 40 were above 50% of their July 2002 prices. This is not the internal strength from which enduring broad-based rallies are launched.

The resolution of the current basing period will likely require a few more months of strengthening internals. As the market churns in the 800-850 range during the next few months, profitable companies will attract buyers while weaker stocks will fall further. But once a critical mass of buying interest is evident in 2/3 of the stocks rather than merely 1/3 of the stocks, we can expect a renewed bull market.

Three Medical Stock Pennants

2009-02-09T00:01:20Z

Bullish pennants have been rare this past year, but three interesting ones have formed over the past two weeks. See the charts for Wythe (WYE), Geron (GERN), and CV Theraputics (CVTX) below. These are especially interesting due the way they entered this pattern. First, each was positively divergent from the overall market during the past three months. And second, they each gapped upward on high volume to begin their pennant. Should any of these breakout higher, look out for a strong continuation of the uptrend.

No Data and No Model

2008-12-10T03:41:52Z

Many pundits the last few months have boldly stated that the recovery from the present economic malaise will be long and slow and painful. The common thread in all these pronouncements is they never seem to offer any data to support this assertion. Nor do they claim any particular model has been used to guide them into this conclusion. The best they offer are supporting arguments such as "loss of consumer confidence" or that it is "a most difficult business environment."

It is apparent to me they are really saying it is difficult environment for THEIR business. It is also noticeable consumers are exhausted from an oversupply of indistinguishable goods and services. I suggest that macro conditions are quite fertile for business as a whole (granted some are not). First, monetary policy is now loosened and Governments world-wide are manically printing money. Further, Governments have promised they have more stimulus mechanisms in their toolbox and will not hesitate to use them. Second, energy costs are down. Almost all products have a notable amount of energy cost - in their transport if not their manufacture. Third, as unemployment rises the cost of labor will decrease and an overall workplace migration from inefficient businesses to innovative businesses is enabled. I posit the present business environment is amenable to astute enterprises.

I'll close with a small consumer anecdote. I spent two weeks looking for a Wii Fit and found them absent from retailer shelves. Wii, and the Wii Fit in particular, are unique and creative products. I noticed the electronic games shelves were stacked high with various Guitar Hero products largely indistinguishable one from one another. Suggested short: Activitision (ATVI). Suggested long: Nintendo (NTDOY.PK).

Mosaic Technical Failures

2008-10-04T20:19:47Z

Mosaic Company (MOS) has no technical merit as a buy or a hold. The 10-day, 20-day, and 30-day moving averages have been in bearish order for more than three months after reaching a high in June. Four times (A, B, C, and D on the chart below) it tested and failed to hold above its 30-day moving average. Any of these times should have been a sell signal. Even on the fourth one, a further 50% loss could have been avoided. Finally this past week it gapped down on unusually high volume (E on the chart).

While it is certainty oversold and has experienced an obvious capitulation gap down, it is too early to call it a buy. I recommend waiting six weeks of basing before considering MOS a buy. As it was downtrending it attempted to base near 105 and again at 75 but each basing period lasted only three weeks before failing. This is in contrast to the six week basing near 120 which preceded the run-up to its 163 high.

One scenario for calling a buy: when (and if) a six-week basing occurs look for a confirming upward breakout. Carefully guard this position with trailing stops and expect resistance around 70 - 75. The last basing attempt occurred at 75 so this is likely a resistance point for a resumed uptrend. It is also noteworthy an enormous amount of open interest for 70 calls (see below) exists making 70-75 a very interesting area.

How Investing Imitates Chess (17 of 17)

2008-09-14T21:49:21Z

Garry Kasparov closes How Life Imitates Chess with a final chapter titled Endgame. The theme of this book has been inspiring readers to continually challenge themselves in pursuit of success. "My hope is that in this book I have managed to pass along some of the wisdom and strategies I've learned, and that you too will find ways to use the world's greatest game to your every advantage."

I opened SLO2 with How Investing Imitates Chess (1 of 17) and with this post the series is concluded. The theme of this blog series has been to glean a few morsels from Kasparov's book and apply them to investing. My hope is that you have enjoyed them. Summarizing three of my favorite morsels:
• There are often times when an investor must practice the art of useful waiting, which is an excellent opportunity to visualize market and economic scenarios.
• The keys to great investing are self-awareness and consistency.
• Investing is comprised of three phases (opening, middle game, and endgame) each with distinct characteristics that poses problems that benefit from different modes of thinking.

How Investing Imitates Chess (16)

2008-09-14T21:20:26Z

Garry Kasparov discusses Crisis Point in chapter fifteen of How Life Imitates Chess as a time when performing the best matters most. A crisis is neither a disaster nor a catastrophe. Disaster and catastrophe suggest finality. But a crisis embodies a critical moment when stakes are high and opportunity and danger are both present. Kasparov relates this material to his series of matches with Karpov and concludes he performed his best when it mattered most. But the portion of this chapter most related to investing is on the topic of detection.

Detecting a crisis in the making is a separate skill from solving a crisis. Success depends on detecting, evaluating, and controlling risks. Detection is often the most important and is the most difficult of these three. Detection of market bubbles is a clear component in managing investing risk. Detecting a rational bubble from a speculative bubble is even more difficult. Determining the inflection just before such bubbles burst poses further challenge. Bubbles are often accompanied with the statement "but it's different this time" and such statements are correctly ballyhooed by market kibitzers. But occasionally certain investors, when performing their best, really do determine when it indeed really is different.

It is prudent to guard against most of the "it's different this time" fear during a crisis and the "it's different this time" jubilation during a bubble. But my preference is to carefully watch and diligently search in order to detect situations where it really truly is different even though others have yet to notice. When no one is yet saying "it's different this time" is when it matters most.

How Investing Imitates Chess (15)

2008-09-06T20:23:07Z

Garry Kasparov discusses Intuition in chapter fourteen of How Life Imitates Chess. Intuition is a powerful force of recollected knowledge. You cannot ignore it and cannot fully explain it. It is the indispensable product of our experience, our knowledge, and our will to know and do more. The power of intuition and the ability to harness it and to use it like a master is at the heart of success. A well-developed intuition is used to distinguishing between an anomaly and a movement. Kasparov even uses an investing illustration. "Stock analysts search for visual patterns in stock charts ... the way chess players look for checkmating patterns. Intuition tells us not just what and how, but also when."

Many market observers speak often of fear and greed moving markets. Fear and greed are emotions that cause traders to step out of logical behavior and into irrational behavior. When we are trading on emotions such as fear and greed, we find we are suppressing not only our objective measures of the market, but also are suppressing our intuition.

Let's say we have our favorite overbought/oversold technical indicator and commence trading on its signals. We are trading objectively. But there are times when we will hesitate on these triggers. Once we pause and check our emotions to consider if fear or greed has led to the hesitation we look further. Is this the expected price movement the indicator was devised to capture? Is this an anomaly giving rise to a false signal? The answer lies in our experience, our knowledge and our drive to know more. Skillful use of this indispensable force of recollected knowledge is a key of successful investing.

Big Lots: Resistance at 34

2008-09-01T17:22:59Z

Big Lots has a knack for upside surprises but its stock (BIG) demonstrates resistance near 34 as shown on a six-month chart. The 34 resistance point is evidenced on a three-year chart as well and perhaps motivated many traders to take profits upon its latest earnings announcement. BIG also exhibits support near 27 - an approximate 10% further decline from its current price. If it successfully tests 27, BIG will be a particularly tempting buy. A repeated run-up to 34 would net a 25% gain. Continued good results coupled with markets warming to retail stocks could very well propel BIG beyond 34.

How Investing Imitates Chess (14)

2008-08-25T01:11:20Z

Grandmasters play chess by combining experience with intuition, backed up with calculation and study. Computers play chess by brute calculation. Garry Kasparov discusses computer chess in Man vs. Machine the thirteenth chapter of How Life Imitates Chess. The reader is treated to a history of chess-playing machines from the 18th century hoax of the Turk through Kasparov's own series of widely-followed matches with IBM's supercomputer Deep Blue. Man won the first match; Computer won the second match.

Following the Deep Blue series, Kasparov pursued the concept of Advanced Chess as collaboration between human and computer. In Advanced Chess, teams of humans and computers collaborate in games against one another. Advanced Chess has spawned the concept of "freestyle" tournaments where solo humans, solo machines, or mixed teams compete. The surprise in the inaugural freestyle tournament is the winner was not a grandmaster with a stellar machine, but rather a pair of amateurs using three modest computers. This team understood their tools and figured how to best get the most from them. The winners demonstrated a superior process. Process. Process is critical. A team of weak humans plus machines plus a superior process was stronger than both strong solo computers and teams of strong humans plus machines with inferior processes.

It is the human that possesses the ability to conceptualize problems and then task the computer to look deeply into the problem. Computers extend our reach and present us with new ways of solving old problems. Pursuit of robotic trading programs is no doubt as old as any other computing pursuit. Occasionally we gain brief glimpses into the practice such as recent widely-publicized implosions of some "quant" funds. These funds were apparently dominated by solo computer trading and while it whispers the limits of present day solo computer trading, it screams of inferior process.

No matter the tools or the processes, the never-ending challenge for investors is to conceptualize the investing problem and apply their tools to find the best choices. Investing remains an endeavor combining experience with intuition, backed up with calculation and study.

How Investing Imitates Chess (13)

2008-08-10T21:15:29Z

Garry Kasparov discusses The Inner Game in chapter twelve of How Life Imitates Chess. The author asserts there are few things a brutal as chess noting that during a game there is nowhere to hide and you have no teammates. Winning chess requires a constant and strong psychology. One has the difficult challenge to learn from a tough loss and still come out the next day believing they are the best. It takes a strong mind to balance these somewhat contradictory story lines, especially after a particularly crushing defeat.

Speaking of crushing defeat, my SLO2 approach centered on three industry groups: airline, internet, and consumer. During the early period of the contest I lost considerable NAV on the airlines' decline due to rising oil prices. With a NAV in the sevens, I threw in the towel on airlines in mid-April and focused on some internet/consumer companies ahead of their earnings announcements. Doing so allowed me to recover achieving a "respectable" NAV in the mid-nines by early June. But to reach a competitive end point in the contest with less than one month to go, I needed to seek explosive growth. Such growth requires buying equities capable of sizable daily moves. On June 18th, after the conclusion of the 2008 Merrill Lynch Global Transportation Conference which included presentations from many of the airlines, their stocks popped more than ten percent in a single day of trading. Sensing a change in character, I not only repurchased my earlier airline positions but put 90% of my SLO portfolio into them. (By the way this is not good practice as one must be better diversified with real money.) Despite this pivotal indicator in airline character, their prices eroded further and my NAV reached even lower lows such that in the final SLO2 ranking I was fifth from the bottom. (Further evidence you need diversification with your real money.)

But all is not bitter in this story. The sought-after explosive growth did materialize upon the contest's close and my NAV was above ten with two weeks and at Friday's close was 12.34 as shown in the figure below. Kasparov says you must rely on your inner observer to look at your results dispassionately. The bittersweet conclusion is my observations were on target though ill-timed. And the sweet part of this story is that my participation in this contest heightened my awareness of this industry group's price movements and led me to buy airlines in my real-life portfolio and in one of my long-running Marketocracy portfolios (albeit within the bounds of proper diversification).

How Investing Imitates Chess (12)

2008-07-12T15:40:43Z

Garry Kasparov says "success and satisfaction can lead to bad habits that will impede greater success and satisfaction" as he discusses Question Success in chapter eleven of How Life Imitates Chess. Success leads to an illusion that everything is fine which leads to complacency which can lead to failure. Fighting complacency requires continuous questioning of the status quo. How do we as investors inspire ourselves to keep pushing for better results? Drawing from Kasparov three thoughts are:

1. Competition. Sports endeavors have an obvious competitive component but when it comes to personal real money investing you rarely have competitors per se. But you can develop a set of benchmarks for self-competition. Percent gain over time, percent of winning trades, percent gain over various indices, can all become metrics by which you can compete with yourself. SLO and other available on-line stock picking contests are certainly enjoyable (and instructive) competitions but translating the activity to real life investing can be elusive.

2. Continually raising your own goals and standards. The aforementioned metric can be used as a framework for pushing for better results. Did you beat the S&P 500 index by 2% last month? Strive for 3% this quarter! Is your winning trade ratio 55/45? Strive for 60/40!

3. See value in other methods. In a recent Bob Dylan documentary I was struck by his propensity to adapt or try-on the style of whatever musician he himself was enjoying at the time. But even so most would agree he has a distinct musical style that is his alone. The MSN Strategy Lab, SLO blogs, InvestorPlace, and Marketocracy are all venues for observing the methods of others. It is interesting to see many divergent methods practiced by successful investors. It is hard to really dismiss any - even those that are not my style. After all, as Ken Kam says, "no system, style or strategy works in every market."

How Investing Imitates Chess (11)

2008-06-14T23:00:45Z

In chess the player that is creating the action, as opposed to reacting, can see farther ahead and maintain control of the game. Garry Kasparov discusses Attacker's Advantage in chapter ten of How Life Imitates Chess. The aggressive mentality involved in a successful chess attack is commonplace in many competitive endeavors, but has limited application in investing because investors are nearly always reacting. Reacting to market forces, earnings announcements, upgrades/downgrades, lawsuits, etc. And when investors are not reacting we are simply waiting. Waiting for the next earnings release, waiting for a given target price to be reached, waiting for product approvals, etc. But never does the typical investor have sufficient clout to create genuine pressure in markets nor the business of the companies whose equities we trade. We do not create action.

On the other hand Kasparov points out that the attacking player is exercising a vitality of play which is characterized by optimism, dynamism, innovation, and a degree of intuition. These are all positive characteristics desirable in an active investor. Every few weeks I run across an article lamenting the persistence of bullish sentiment among investors but I would expect investor sentiment to rarely be bearish. Prolonged bearish sentiment would lead to one abandoning the market. (By the way, I would contend that someone actively shorting the market remains optimistic their market participation is going to pay off for them.)

Many investing sages agree limiting losses is a key to successful investing. Cutting your losses by ruthlessly selling those weakened positions takes a very aggressive energy indeed. With the new cash you may not be exerting force on an opponent, but actively searching for the next opportunity is indeed an attacker's mind-set.

How Investing Imitates Chess (10)

2008-05-26T17:49:57Z

The terms opening, middle game, and endgame are used to describe the phases of a chess game. These terms are often used outside of chess to describe the phases of an endeavor, but rarely are they applied to investing. In chapter nine of How Life Imitates Chess Garry Kasparov points out there are no distinct definitions for the three phases of the game. But even so each phase has distinct characteristics and each poses problems that benefit from different modes of thinking. With different modes of thinking being applicable, chess players find they have strengths in one phase and weaknesses in another.

The body of knowledge of chess openings is compartmented into various sets of opening moves and these are assigned names ranging from the descriptive ones (e.g. King's Gambit), to those named for individuals (e.g. Marshall Attack), to those named poetically (e.g. Sicilian Dragon). Aspiring chess students often approach learning this phase by memorization of opening sequences. Grandmasters universally agree this is a mistake (never mind that they have already memorized them!) as the players are not thinking for themselves. When your opponent departs from the book line you may not grasp the rationale as to why their pieces are placed where they are. Mistakes ensue. While I see their point, I cannot fully agree: memorizing a few opening moves can get you into a respectable position for the remainder of the game.

An aspiring investor may embrace an opening approach with a chosen set of moves. These approaches may be named descriptively (e.g. CANSLIM), named for an individual (Benjamin Graham approach), or poetically named (e.g. Motley Fool Rule Breaker). These modes of thinking are good and fine as they get the investor into the game with a respectable portfolio. But when the approach fails on a few trades, one may not realize the markets have departed from the book line and the approach no longer works. Mistakes ensue.

The middle game is approached with tactical finesse and strategic positioning into the endgame. The middle game requires alertness in general and alertness to patterns in particular. There are no book lines to rely upon. Tactics can of course be taught but the learning key is the more you do, the better you become. Tactical prowess is essential in this phase.

The middle game of investing is when the size of one's trades exceeds its periodic accumulations. Calculation, reasoning, and alertness lead the investor out of their initial positions and into aggressive positions. Tactics such as market timing, limit orders, and selling covered calls are teachable but you gain finesse only by doing them.

A game of chess transitions to endgame when major pieces have been exchanged and the energy and excitement of the middle game has diminished. There are fewer surprises to be had, the moves are sterile, and there is little room for style. With fewer possibilities it is almost possible to calculate the outcome of every move. Successful endgame players are cautious, patient, and calculating.

While chess has a distinct endpoint, an investing endpoint is elusive. It is true your options may be decreasing in terms of the risk you accept, the years to recover from a dip, or the ability to offset losses with wages. But ever-changing markets will not decrease their options or the surprises they can spring on you. Indeed the variety of financial instruments offered is rapidly increasing.

Nevertheless, it is commonplace to envision an investing endgame where one exchanges their equity wealth for fixed income wealth upon retirement. Consider one who accepts the conventional guidance and puts 90% of their wealth into CDs and retains 10% in equities. I contend that 10% is still playing the middle game. Consider one who receives a lump-sum pension payment and puts 90% of it into CDs and puts 10% into equities. I contend that person's 10% has just entered the opening. One's wealth is never entirely in an endgame.

How Investing Imitates Chess (9)

2008-05-05T01:28:50Z

In chapter eight of How Life Imitates Chess Garry Kasparov discusses exploiting lack of symmetry in Exchanges and Imbalances.

A casual glance at a chess position leads to an immediate question: whose move is it and what is their best move from this position? This is followed by an inevitable exercise of trying one move after another while missing the big picture of strategic possibilities present in the position. This is quite natural. Indeed the player whose turn to move has an action to make. But it leaps over the essential step of evaluating position.

Got money to invest? You indeed have a move to make. As investors we often fall into a trap of the immediate question: where's the best place to invest these funds? This is followed by the inevitable exercise of running our favorite screen, or seeing what our favorite guru is recommending, or conversing with friends about what they are buying. But have we evaluated the market's macro trends and our whole portfolio's strategic positioning into these trends? Have we evaluated our portfolio in terms of its imbalances?

Kasparov describes a teaching technique where chess students are taught to evaluate structure and space quantitatively by showing chess positions without revealing whose move it is. Thereby students are forced into an assessment of the position's imbalances.

The author states evaluation is not only a search for advantage but is also a search for compensation for disadvantage. For every offensive weakness is there some gain in defensiveness? For every weakness in material is there a gain in space or attacking opportunities?

The strongest holding in a portfolio is an easy search but a more challenging search is: what is its weakest holding? An even more difficult search is: am I receiving compensation for it? A declining stock may represent a hedged offset for a rising stock. Perhaps its longer term prospects exceed the temporary price decline. Perhaps it is still earning a dividend. Perhaps you perceive a value that is not presently valued by the market.

Whatever weakness is revealed in a portfolio's strategic evaluation, an assessment of offsetting compensation should precede the decision to trade it.

American Idol Portfolio

2008-05-03T22:38:45Z

One of my three themes for SLO2 is consumer stocks. While watching an episode of the country's highest-rated show, American Idol, I noted each commercial I saw with intentions of constructing an American Idol portfolio. While initially a whimsical exercise, I was smitten by the stellar collection and have been thinking such a portfolio might be quite lucrative. The nineteen publicly-traded stocks have a combined market cap of more than a trillion dollars.

First, the value of consumer branding is based on repeated positioning of its image in the minds of consumers. By placing ads on such a highly-viewed broadcast, these companies are increasing their intangible goodwill. These are growers - their median EPS growth is 12%.

Second, the ability to promote oneself on the show is not cheap suggesting these companies have cash to spend on branding themselves via this vehicle. Reportedly, AT&T, Coca-Cola and Ford are each paying about $35 million for commercial time, online content, co-branding and to be featured during American Idol. These are cash producers - fourteen of them pay dividends.

Finally, consumer stocks have been avoided by a market that assumes the consumer is "tapped out." This has resulted in some compelling values. Half of these are trading below their 200-day moving average.

The following is the list of all ads I saw on the night of the exercise. First is product advertised, second is the symbol of the parent company, and third a brief comment. Note some of these may be locally placed ads or cable company overwrites so your ads may vary.

• AT&T (T). Exclusive provider of phone service for Apple iPhone users.
• Olay (Proctor & Gamble - PG). Pervasive consumer consumables company continues to grow.
• Toyota (TM). Global automaker making entry into India.
• Vitamin Water and Minute Maid (Coca-Cola - KO). Beverage purveyor continues to see volumes rising.
• Apple (AAPL). Continued strong earning and revenue growth. One of the SLO contest largest collective holdings.
• McDonalds (MCD). Global fast food giant has no peers.
• Kraft (KFT). Packaged food company recently reaffirmed 2008 guidance..
• Waterhorse movie (Sony - SNE) Global electronics giant appears fairly priced.
• Colgate (CL). Company expects double digit earnings per share growth this year.
• Fox Shows (News Corp - NWS). Media conglomerate continues to aggressively acquire more media properties.
• Avon (AVP). Beauty products company is expanding sales in Latin America.
• Ford and Mazda (F). Despite slipping North Amercian sales, the company managed to post a profit in the most recent quarter.
• H&R Block (HRB). Services company recently unloaded its Option One mortgage loan servicing unit.
• Weight Watchers (WTW). Weight management company growth is in double digits.
• Hanes (HBI). Apparel maker tripled profits in its last earnings announcement.
• Wendy's (WEN). Being acquired by Triaric.
• Payless Shoes (Collective Brands - PSS). Shoe company's gross margins are increasing.
• Applebee's (IHOP Corp - IHP). Same store sales at both IHOP and Applebee's restaurants are increasing.
• Arby's (Triarc TRY). Acquiring Wendy's.

These ads do not appear to have a parent company tradable for this contest.
• Loreal and Garnier (traded on Paris exchange)
• Subway (Doctor's Associates - privately held)
• New Balance (privately held)
• Krystal (privately held)
• Local Fox Affiliate (privately held)

Finally these ads were from nonprofits.
• Alliance Climate Change (lobbyist - N/A)
• DTV Answers (lobbyist - N/A)

I plan to watch for good entry points for these companies as the consumer portion of my SLO2 portfolio evolves.