The Simple Ten
Stockscores.com Perspectives for the week ending April 11, 2009
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In this week's issue:
Experience has taught that the simple approach is usually the best, it seems to capture the essence of what is important. So, with that in mind, here is a list of the 10 simple things everyone should know about the stock market:
1. Price Trends Are Made of Moves and Counter Moves
A move occurs when the stock moves either up or down for a sustained period of time without a move in the opposite direction. A counter move is a price move in the opposite direction but with less intensity than the original move. Up trends join the bottoms of counter moves and downtrends form the tops of counter moves. Therefore, a trend is a series of upward moves, each followed by a short term downward counter move. The trend line is drawn across the lows of the counter moves, creating an upward sloping line.
2. Irrational Valuations Can Not Last Forever
Stock price is based on the present value of future earnings expectations. That means the company is worth what it can make in the future. The market's job is to figure out what a company can make in the future and discount that value back in to today's dollars and adjust for risk. When stock's price in earnings expectations that are far beyond the company's ability, the market is being irrational. Eventually, irrational behavior is corrected.
3. Irrational Behavior Can Last Longer Than Your Bank Account Can Afford
The market is efficient at pricing stocks but that does not mean it can not make mistakes in the short term. Investor emotion can cause the market to pay too high a price or accept too low a price for a stock and may inspire some investors to trade against this emotion, citing irrational behavior. However, the market has been known to stay irrational for a very long time and in doing so, take the hard earned investment capital of those betting against it. The lesson: don't fight against the market, it is always right.
4. Rising Bottoms Mean the Buyers Are In Control
If you look at a stock chart and see that the lows of the counter moves over time are rising from left to right then the buyers are in control of the market. Your success in buying stocks will be higher when you wait for the buyers to take control.
5. Falling Tops Mean the Sellers Are In Control
If you look at a stock chart and see that the highs of the counter moves over time are falling from left to right then the sellers are in control of the market. Your success in shorting stocks will be higher when you wait for the sellers to take control.
6. Uptrends Start Slowly and End Quickly
Bull markets are founded in skepticism and take time to develop. The upward trend will steepen as more and more investors take a buying interest in a stock. Eventually, too many investors will buy the stock and send it to irrational price levels which may then sharply correct downward.
7. Downtrends Start Quickly and End Slowly
Downtrends tend to start when irrational buying pressure gives way to a correction and the stock falls sharply, very quickly. The intensity of the downward move tends to dissipate over time until the downward trend becomes flat.
8. Trend Reversals Take Time, Exiting a Stock Takes Seconds
Investors are often unwilling to own markets that are acting irrationally, citing the likelihood of a correction is near. While this is true it should always be remembered that exiting a trade takes mere seconds and can be automatically executed with a stop loss order. Trend reversals usually take a few days to begin.
9. Public Information is Useless
There is no free money in the stock market. Companies that announce significant changes in the fundamentals of their business will see their stock price move almost immediately to reflect that new information. Using information that is already well disseminated will only produce random results.
10. Abnormal Activity Indicates Something Out of the Ordinary is Happening
To beat the market requires you trade on information that is not already well disseminated. This can be achieved with in depth research or inside knowledge. Within every company there are some people with this kind of information and they act in the market, leaving a trail to follow. New information is often highlighted by abnormal trading activity
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The North American market indexes made an important upside break on Friday. All of the major market indexes broke either their downward trend lines or through some horizontal lines of resistance. Although the very long term downtrend remains intact, I think there is a good potential for a continued rally in to the summer.
What motivated the breakout was strength in that most maligned group of stocks, the Financials. I have been asked for months when is the time to buy banking stocks and I have avoided doing so until now. Friday's action brought good chart pattern set ups on a number of banks. I list a few opportunities to trade below:
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1. BAC
BAC broke to the upside from a rising bottom with very strong volume, I bought some of this around mid day Friday and watched it close strong. Good chance of a short term pull back before it goes higher but I think that $15 is a reasonable target for the short term. Support at $6.90.
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2. XLF
XLF is a nice way to trade the US Financial sector, this ETF is made up of a group of Financial stocks and take away some of the stock specific risk by diversifying across the sector. Support at $8.90.
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3. T.XFN
Those interested in the Canadian Financials can also buy a basket of banking stocks with this ETF which broke through resistance from a cup and handle pattern on Friday. Support at $15.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
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Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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