Stock Market Video
Read the Stock Chart!
This Week's Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, Editor of Cabot Market Letter and Cabot Top Ten Trader Mike Cintolo gives his current thoughts on this topsy-turvy market—he's generally cautious but sees one particular index showing tremendous strength, and a gaggle of small and large growth stocks doing the same. Watch this week's video to find out Mike’s suggestions on how to handle more than 10 potential leaders including Tesla Motors and Priceline.com, and what you should look for going forward. Click below to watch the video!
Read the Stock Chart!
Lots of analysts work hard at trying to figure out what equity markets are going to do. These people pore over interest rates, unemployment figures, inflation (both producer and consumer), GDP growth and a grillion other statistics to try to predict how the U.S. and global economies will perform in the short, medium and long terms.
It’s a fun exercise.
The trouble is that, to quote George Bernard Shaw again, “If all the economists in the world were laid end to end, they still wouldn’t reach a conclusion.”
If you listen to the shouting heads on financial TV shows, you can hear just about any opinion you want, from reassuringly rosy to depressingly dire, although the pessimists are certainly in the ascendant at the moment. Large institutional investors actually make investment decisions based on this data-heavy guesswork, shifting their allocations to regions, countries, sectors and stocks to take advantage of what their crystal ball tells them. Some of them even make money at it.
There are also many analysts who base their investment recommendations on statistical trends in the companies themselves. These fundamental analysts look at trends in the company’s revenues and earnings, using these numbers to generate a swarm of statistical measures (and their acronyms), including return on investment (ROI), return on equity (ROE), return on assets (ROA) and their accompanying ratios (and their acronyms), like price to earnings (P/E), price to earnings growth (PEG), and price to free cash flow (PFCF).
These analysts evaluate a stock primarily based on its value (versus the company’s future earnings), figuring that an undervalued stock will eventually be sniffed out by investors, who will then bid it up to its fair market value.
If there is one way in which the Cabot approach to growth investing (as opposed to value investing) differs from that of most advisors, it is that we pay more attention to what investors are actually doing. We do that by looking at the chart that shows stock price movement, moving averages (we use the 25- and 50-day moving averages) and trading volume.
Leaving out the double bottoms and tops, heads and shoulders, cups with handles and other classic chart patterns, here are a few basic principles of chart reading.
• Stock with rising price on increasing volume = bullish. This shows that an increasing number of buy orders are being processed, indicating a positive change in investors’ appetite for the stock.
• Stock with rising price on decreasing volume = caution. A stock that is rising for a few weeks, but has falling volume, is losing sponsorship. You need to be careful about buying into such an advance.
• Stock with falling price on increasing volume = warning. Once a stock starts to decline, investors can get nervous and sell, swelling the volume and accelerating the drop. If volume is significantly higher than average, it may also indicate institutional involvement in the flight. A big decline on volume that’s triple a stock’s average is a classic sell signal.
• Stock with falling price on decreasing volume = mildly hopeful. This can be a useful signal in deciding whether to sell a declining position. If volume is dropping and/or below average, especially if the stock is near a price support level, a downmove may be losing steam. You don’t want to ignore your loss limits, but if a decision is marginal, this can be a good clue.
• Stock with stable price and calm volume (especially within a tight price range) = base-building. This kind of chart often indicates accumulation by institutional buyers.
Remember that high-volume trading often indicates moves by institutional holders, and they’re the ones who really control the market. They also tend to take much more time than individual investors to enter or exit positions, so intense buying (or selling) tends to persist.
It’s always useful to go back and look at the charts of stocks that have made big moves, either up or down, looking for the volume clues.
The bottom line of chart reading is that it’s a pretty easy way to get visual confirmation of the strength or weakness of a stock, or a market for that matter. You can see at a glance a summary of what investors are feeling about it.
For more insight on reading stock charts, check out Mike Cintolo’s series of Chart School videos here.
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Tim’s Comment: Warren exaggerates, of course. With a mind like his, he'd still be a great success; it just might not be as an investor. My guess is he'd be in insurance. In any event, Warren recognizes that because markets are created by mortals, who are influenced by hopes and dreams, fears and uncertainties, they are by nature frequently inefficient, and it’s these inefficiencies that offer opportunities.
Paul’s Comment: Warren Buffett and his crew at Berkshire Hathaway are diligent about researching the companies they’re interested in, giving those companies the corporate equivalent of the physical the life insurance company gives you before you’re sold a big life insurance policy. By the time they’re done, Buffett and his team have a firm hold on how much the company is actually worth, and is likely to be worth, and how much it might be worth if they took it over ran it themselves. The market probably doesn’t know all of this, which just shows how inefficient the market’s estimates really are. Inefficiency is a great thing to exploit.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue:
In this issue, Roy Ward of Cabot Benjamin Graham Value Investor outlines the benefits of using Price-to-earnings-growth (PEG) ratios as a way to identify fundamentally attractive value stocks to buy. Stocks discussed: Deutsche Telekom AG (DTEGY) and Fortress Investment Group (FIG).
In this issue, I tried to put the recent market selloff into perspective by looking at longer-term trends. I also wrote about the potential for 3D printing to have a major impact on the parts manufacturing business, cutting out suppliers, transporters and warehouses. Stock discussed: ExOne (XONE).
Tim Lutts of Cabot Stock of the Month looks at the controversy surrounding a TV pundit’s acceptance of $50,000 to tout a stock in his “Next Big Thing” newsletter and reminds readers that Cabot doesn’t do that kind of thing. Stock discussed: HomeAway (AWAY).
Have a great weekend,
Editor of Cabot China & Emerging Markets Report
And Cabot Wealth Advisory