Market Dynamics 

Relative Strength In A Long-Term Point & Figure Chart Format

 

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Discover The Amazing Power Of Point & Figure Charting

SUCKER 101

The instruction that most college professors use to indoctrinate their students about the use of charts in the stock market has the unintended consequence of making their students future suckers about investing in stocks.

Many, if not most, college finance professors spend quite a bit of valuable time and will use higher math and statistics to thoroughly "brainwash" their impressionable and inexperienced students that the use of charts in the stock market is a complete waste of time because stock prices are totally random, and therefore unpredictable. In the strongest version, the argument that the market is unpredictable leads to the conclusion that an un-managed and passive approach to stock investing is the best way to go.

The data that shows that 80% of professionally managed portfolios fail to perform as well as a major market index is offered as proof that the market is unpredictable and therefore unbeatable. However, it is an inescapable fact, that 80% of professionally managed portfolios failed to beat the market because those portfolios held stocks that under-performed the index. It is very common for professionally managed portfolios to be constructed solely through the application of fundamental analysis that provides the basis for predictions of the future performance of those stocks and then no attempt is made to manage the portfolio on the basis of how well those stocks actually performed in the market.

 

As President Ronald Reagan said "Trust but verify."

That advice applies to stocks as well.

The most effective way to verify that a stock's performance is acceptable is through the use of charts. These charts should be long-term in nature and show the relative performance of the stock versus a major market index. The structure of the chart should remove the random component of the stock price variation and the long-term trend of performance should show clearly. The Market Dynamics system uses long-term point and figure charts of relative performance to remove the noise and let the true long-term trend of performance show clearly. The design of the computer program that produces the Market Dynamics relative performance charts also has a built in feature that changes the color of the chart to bright red when certain conditions are met that indicate that the stock's performance has fallen below acceptable levels. This feature is called a Performance Alarm and it has been constructed to give the investor a clear warning that the performance is not "up to par."

There are many examples of the effectiveness of the Performance Alarm on the Case Histories tab of this web site.

Experience shows that there are three kinds of stocks; stocks in strong up trends, stocks in strong downtrends and stocks that are not trending much at all. The only way to know when the trend changes direction, is to watch the charts and act accordingly. The future shape of these trends of performance cannot be reliably predicted, but the change in the direction of these trends can be recognized when it occurs. The investor should watch the charts, not to make predictions, but to recognize when the trend of performance changes direction.  The almost total acceptance of the idea to avoid the use of charts by undergraduate finance students has created a whole generation of suckers, who are almost completely vulnerable to Wall Street's hype about stocks.

College finance professors are usually fond of using gambling analogies when discussing stock investing and the randomness of stock prices. In my opinion, to hold a stock without the verification of the trend of performance offered by the use of long-term charts, is truly a major gamble with the odds stacked against the investor.

Don't stick your head in the sand because of a little randomness.

Face up to the randomness - deal with it.

The rules of successful investing are really quite simple. Know as much about your stocks as you possibly can - develop the most informed expectations regarding the stock that you possibly can - but use the charts to verify that the actual trend of performance is what you want it to be. Participate in the winners for as long as they are winners. Avoid the losers - and don't expect a trading range stock to suddenly become a big winner,

it probably won't be.

W. Clay Allen CFA - Developer of Market Dynamics

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