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TheGarcipian (34.33)

Trick? Or Treat?



October 30, 2007 – Comments (4)

The market was all abuzz earlier today about the Fed's meeting this week on Tuesday and Wednesday (Halloween). See this story for relevant details. It was a good day for me in my real world portfolio bumping me up a very healthy 3%, as well as online here within CAPS, though I seem to be stuck around "42". But I'm not complaining! It took me a long time to get here, and besides "42" is the Answer to Life, the Universe and Everything. So, I'm happy...

Anyway, the ubiquitous "they" are expecting a 0.25% cut in interest rates. And I think the Fed will acquiesce to the demand, even though it's putting off the inevitable by (perhaps) making for a softer landing for this troubled market. But like a spoiled Trick-or-Treating child who's looks a gift house in the mouth when he gets one Hershey Big Bar instead of the five he coveted, I expect the market to react staidly to the news, having had its run-up today and pouting later this week that it didn't get more than it expected (ala the last meeting on August 16th). So, yes, I think the Fed will provide the Treat for Halloween, but will Mr. "Fourteen-K Market" react to it as a Trick?  Well, you know how tempermental those teenagers can be...



4 Comments – Post Your Own

#1) On October 31, 2007 at 1:46 PM, JonBarleycorn (66.85) wrote:

Technical Analysis

I’ve looked at some of your recent trades and I am pretty impressed with your analysis of stock fundamentals. But, I wonder if you have considered technical analysis as an aid to market timing?

I don’t have any specifics to offer, but I find that looking at a chart will tell me, for example, that a stock that looked terrific based on fundamentals, has been going downhill and may need another look.

Stock prices are partly based on information but are always the result of opinions backed by money. Flows of money are easier to identify than the underlying opinions, but it is the shifting opinions that are the driver.

Consider, for example, the simple model: Short <-- Bear <-- Neutral --> Bull --> Long and you can readily see how opinion (i.e. bullishness or bearishness) backed by a willingness to commit dollars moves a market.

I’m not talking about some arcane analysis needing an Ouija board or complicated technical tossing of chicken bones or cat entrails. Usually, just a straightforward look at the recent chart is all that is merited and all that is needed. As such, I find that at least a look at a prospective stock’s chart, for me at least, almost constitutes part of due diligence.

Fool On.

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#2) On November 01, 2007 at 5:36 PM, TheGarcipian (34.33) wrote:

Hi JB,

Whaddayatalkinbout? Tossing chicken bones is the ONLY way to go, man!  OTOH, do you get better results with cat entrails? Never thought of that. Now I've got a use for the hundreds of dead cats lying about my office (from all those bad bounces they do) --- cool. Thanks!

Seriously, that's exactly what I do (what you described, not the dead cat bouncing/shredding). I understand some things about Technical Analysis (TA), but in the end, it's just another point on the curve (sorry, bad pun), another arrow in the quiver. Let's face it: the human brain is evolutionarily programmed to search for patterns. Richard Dawkins in his book "The God Delusion" uses a good analogy here. If you'd never seen a tiger before but you come across a live one in the jungle, you'd have a fairly good sense that this animal is dangerous for a number of reasons. First, because you'd experienced house cats being startled and leaping from your lap, you know how their claws feel. Second, you'd seen other animals with large heads and fanged teeth, and know what those incisors can do. So, very quickly via pattern recognition of claws & fangs, you "know" what this tiger is capable of, even though you've never seen one before. The problem is that such pattern recognition doesn't always pan out: why doesn't the chicken or the penguin fly? Afterall, both are winged birds!

So, while I think TA can be useful, I don't think adhering to it as a religion is the way to go either (but I'll admit in a pre-emptive retort to all those TA nuts, er, fanatics out there, I'm not as well versed in it as I could be). The problem is one of "pattern recognition bias". People tend to think just because a stock has followed a specific pattern for 9 out of the last 9 cycles, it doesn't necessarily mean you're gonna get a tenth repeat. Using it doesn't guarantee you success, but it does (I think) help you mitigate loss.

You guessed right, though. I'm right there with you on the use of TA charts and metrics. There's so much more I could learn about TA, but I use it only after I've looked at the financials, after I've decided to buy the stock, and am looking for an entry point (or exit point, if I already own the stock).  For instance, I am doing this currently with PCU, rather successfully. I certainly missed some great run-ups in that stock (if I'd simply bought-and-held), but I also have a definite short-term goal that I'm aiming for with PCU, and that is to generate enough cash for a home improvement task I'm in the middle of. I do not recommend anyone else doing that, and generally I do not "play market timer", but my portfolio is perhaps more rounded, more extensive than others, so I can take a small percentage of that portfolio and try out new ideas, such as using TA to get better starting/ending prices. So, yes, a look at the stock chart should be part of your due diligence, absolutely! But it should not be the first thing or the only thing you look at...

Fool on and don't step on that dead cat!


P.S. Looks like I was right about the market's post-interest-rate-cut recoil, unfortunately. Today, the market shred some 362 points, or 2.6%. Not a pretty day. But I used the over-reaction to add to my ILF and PCU positions. Hopefully, we'll bounce back up a little bit over the next 3 months, making these new purchases look brilliant.

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#3) On November 03, 2007 at 3:44 PM, michaelamanuel (73.65) wrote:

hey gar,
I just wanted to thank you for your comments.  We love doing the videos and love it even more that people appreciate them.  
Take care,michael

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#4) On November 05, 2007 at 11:06 AM, darroj (28.17) wrote:

well written as always Gar.  My portfolio was up almost 8% total the day of the cut, I'm back down to 1% with foreign markets getting slammed today.  With any luck the trend is temporary.  I'd find it hard to believe people are so worried with the results of the real GDP that was announced.  While I realize it's only one number, I'd think it'd be a pretty important one to mr market.

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