Prophet
Stockscores.com Perspectives for the week ending July 5, 2009
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In this week's issue:
Individual Investor: "Oh Stock Prophet, my investments are not doing well, and I can't make money in the market. When I buy, invariably the stock goes down. When I sell, it often turns around and heads higher yet again. Help me, Stock Prophet, for soon I will have no money left."
Stock Prophet: "Let us take one step at a time my friend. The market is a great game of chess; to win, you must be a good chess player. Do not despair at your apparent ineptitude, for like the development of a chess master, it takes time to become masterful at the art of investing. Now tell me specifically of one of your recent failures."
Individual Investor: "While at work, nature beckoned and I went to the lavatory. There I met someone I deemed to be wise about the ways of the market and listened with great intent as he told me of a wonderful market opportunity that would pass me by if I did not act quickly. I bought 5,000 shares, but the promise bestowed upon me has not materialized yet, and I worry because the value of my original investment is now significantly lower than when I purchased it."
Stock Prophet: "You are the victim of a misguided tip, my friend. Few men are interested in making wealth for another, for greed demands they make money for themselves first. Your tipster's motivation was to see the stock move higher so that he could see wealth, and having you buy stock is a step in that direction. I have rarely made money on tips, no matter how great the source, for greed's emotions clouds the judgment of many, and brings them to attach greater significance to events than is warranted."
Individual Investor: "Thank-you Stock Prophet, from this day forth I will recognize the tipster and his motivations, and require that I do my own due diligence absent the emotion of ownership. But what about the information exchanged on electronic stock message boards?"
Stock Prophet: "In many ways, these are similar to the tipster, but often worse for these individuals are afforded a secret identity, and need not answer to their market prognostications. Be wary of those whose track record you can not judge, for they may be seeking a buyer for their stock."
Individual Investor: "I have trouble selling stocks at a loss, and now find myself with a stable of losers. What should I do?"
Stock Prophet: "You must first change your view on what constitutes a loss. Do not judge your worthiness on the outcome of individual trades, but rather, on the change in the size of your portfolio over time. To be successful, you must cut a loser loose when the market has proven you wrong, for like a lame horse, a bad stock will have trouble keeping up with the rest of the market until it has had time to heal. You must judge each stock each day and decide whether it has more potential to appreciate than the alternative. If the answer is not yes, then it should be set free, so your capital can be better put to work."
Individual Investor: "But it seems that when I do sell the stock, it turns around and proves me wrong again."
Stock Prophet: "That is because you do not sell when you have been proven wrong, but instead, you sell when your emotional threshold has been stretched to its limit. As other investors experience the same pain, they sell a stock lower than the company's fundamentals justify. Savvy market players, realizing that emotion has replaced rational thought, jump in to the market and take advantage of the short term trading opportunity. To avoid this, you must maintain the discipline to sell when the market has told you to do so, and not to wait until you can suffer no more."
Individual Investor: "You speak of rational thought, but it seems that when I apply the rules of logic, my analysis leads to failure. I read about a company that has a great product so I buy their stock and then watch as it heads lower. Is what I read a lie?"
Stock Prophet: "No my fine friend, what you read may be the truth, but your logical progression of thought is what is suspect. Remember that logical arguments are based upon a series of premises. If you fail to factor in an important premise, then the output of your logical reasoning may be at fault. In the stock market, there could be thousands of important premises. If you only factor in some, you may make the wrong conclusion. Trust the market to factor in all the premises, and learn to read market activity so that you can judge what the market will ultimately conclude. In the example you offer, it is likely that the company had a great product that the market liked, but that it had already priced in the information. By the time you read about, it was too late."
Individual Investor: "I see the wisdom in what you espouse, and you have spoken well on the topic of discipline. Is there anything more important that this?"
Stock Prophet: "Simply put, there is nothing more important to successful trading than discipline."
Individual Investor: "But I have often discovered a great opportunity but ignored it for too long. When I finally bought in, the stock had run its course and I was left with yet another loss. Has discipline served me poorly?"
Stock Prophet: "It is not the case, for instead what you suffer from is a lack of confidence. There is security in numbers, and you seek comfort knowing that others share your enthusiasm for a stock. You wait until many buy in to a story, and then do so yourself when your judgement has been proven correct. Alas, it is too late, for the confirmation of your market call is also the thing that takes away the opportunity. It is not necessary to be a leader, but you do need to be at the front of the pack, for it is those at the front who reach the bounty."
Individual Investor: "Tell me more, please."
Stock Prophet: "That will have to wait, my friend, for patience is also of utmost importance. Investing is a skill to be developed over time, but the lack of barriers to entry into the market allows for failure as a result of inexperience. Take time to learn, and risk little until you have developed the skills necessary for success. We will talk again, my friend."Back To Top
I think the stock market is going lower in the next little while, it has now broken down from a falling top pattern which is a sign of pessimism. This comes on the heels on a break of the upward trend line.
So, I think it is better to favor short selling strategies right now. On Thursday I ran the Reversal of Fortune Market Scan and found a few candidates that I think will go lower with the rest of the market.Back To Top
1. HLX
HLX breaking down from a flag that has formed a falling top, resistance, and the stop loss on close point, at $11.44.
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2. NWS
NWS breaks the uwpard trend line and breaks down from a falling top on the same day. Resistance and stop at $10.91.
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3. AFL
AFL broke its upward trend line a few weeks ago, now breaking down from a falling top. Resistance at $32.23, stop on a close just above that.
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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.
Scan the market using extensive filter criteria.
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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