There’s a great story I read in the New York Times. It’s part business/part technology. While it delves into some pretty sophisticated topics, I’ll try and summarize it as best I can right here.
The author, Anne Eisenberg, wrote about an experimental website, www.many-eyes.com. This is a site where visitors can upload data they want to visualize and use tools to generate displays.
Basically, what they’re trying to do is take a range of data — and instead of leaving it on a spreadsheet for people to interpret, they use images, charts and graphs to “paint” a better picture. The idea being that a picture may tell a better story — a clearer story — than trying to sift through data on a spreadsheet.
I hate to break it to the author, but Charles Dow came up with that concept nearly 120 years ago. Dow was the first publisher of the Wall Street Journal, and the Dow Jones Industrial Average that bears his name. Dow kept listening to all of the “experts” who were giving all of their fundamental reasons why particular stocks “should” go up or “should” go down.
Dow simply came up with a method to plot the price movement. The “image” that he came up with on a chart gave him a much clearer view of stocks that were in demand and stocks that were in supply. Much clearer than what any analysts could ever “predict.” Anything “in demand” must see a price increase. And anything “in supply” will see a price decline. That’s not an economic theory — it’s a law. It’s called the law of supply and demand, and even a fourth grader can explain it.
The article quoted a professor of computer science (Pat Hanrahan) at Stanford, “when analyzing information, no single person knows it all,” he said. This helps dispel the thinking of the “expert stock analyst” following a stock. Rather, a chart shows the “flow” between supply and demand. The chart shows the cumulative votes that people make (on a daily basis) to either get in — or get out — of a particular stock.
One of the founders of the site, Dr. Viegas, mentioned “… why not a visual that gives you some insight into the sea of data that surrounds us? I might find one thing; someone else, something completely different, and that’s where the conversation starts.”
This is precisely the problem when trying to make investment decisions based on only fundamental analysis. The data can be twisted in so many different directions to paint a very good — or very bad — story. Additionally, the fundamental information (supplied by the company… like earnings) can be wrong, or rewritten in the future.
For those of you who have seen these point & figure charts I use in managing the risk in your investments…do they help paint a clearer view of what’s happening? Let’s hear it!
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Who’ll Save Lehman?
by Thomas Mullooly on September 13, 2008
That was the headline I found over at CBS Marketwatch. As usual, the news media is whipping (anyone who will read) into a frenzy about Lehman Brothers. More news may be forthcoming about Lehman — between the time I finish writing this and the time you read this.
I have no idea what’s going to be the final outcome for Lehman Brothers. And further — I have no idea what impact that will have on other financial stocks, or the stock market. But what I can tell you is many financial stocks will be reporting quarterly earnings (or write offs) shortly.
And it also happens to be option expiration week. So, expect a great deal of volatility the next few days.
But in which direction? Stay tuned.
It really is pretty amazing to see names like Lehman Brothers and AIG being discussed in the media as possible wipeouts. This really could be the end of an era, or a changing of the guard.
Additionally, the primary indicators I use to determine whether the market is on offense or defense (the bullish percent index) has just signaled a change (this week) from offense to defense.
By definition, this index measures the percentage of stocks in a group which have a bullish pattern. If the number of stocks with bullish patterns shrinks, the market cannot possibly go up. Essentially, fewer and fewer stocks are rising — the tide is moving out.
Over the years, we have seen periods of defense where the market has done nothing, or gone down slightly. But there have also been times in recent years where the market has dropped a fast 6% to 8%. And that kind of move can be accomplished in a matter of days — not weeks. 6% of the current Dow Jones Industrial Average (11,421) is 685 points.
We have seen several 300-point swings in a single day this year.
Moving from offense to defense does not necessarily mean that the market will go straight down. What it tells us is that the risk of losing money is greater today than it has been in the recent past. The average period of time the market stays on defense is a little more than 60 days… some periods are longer, some periods are shorter. Just keep in mind that if you buy stocks when the market is on defense it’s like trying to swim upstream — it’s a tougher direction to go…but it’s not impossible.
What should we normally do when the market flips from offense to defense? In general, we should remove any investments that have poor relative strength, or poor technical attributes. Essentially, weak stocks will fall apart. They should be the first to go.
This is what we need to focus on right now. But remember, moving to defense does not mean “panic.”
Another good practice at this stage of the game is to review stop orders. It’s a good idea to have stops underneath stocks that were purchased recently. If you don’t know where stops are (or should be), call me.
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