Saturday, July 21, 2007
Monday, July 09, 2007
L= Leader or Laggard: Which is Your Stock?
Most of the time, people buy stocks they like, stocks they feel good
about, or stocks they feel comfortable with, like an old friend, old
shoes, or an old dog. These securities are frequently sentimental, drag-
gy slowpokes rather than leaping leaders in the overall exciting stock
market.
Let's suppose you want to buy a stock in the computer industry. If you
buy the leading security in the group and your timing is sound, you
have a crack at real price appreciation.
If, on the other hand, you buy equities that haven't yet moved or are
down the most in price, because you feel safer with them and think
you're getting a real bargain, you're probably buying the sleepy losers
of the group. Don't dabble in stocks. Dig in and do some detective
work.
Buy among the Best Two or
Three Stocks in a Group
The top two or three stocks actionwise in a strong industry group can
have unbelievable growth, while others in the pack may hardly stir a
point or two. Has this ever happened to you?
In 1979 and 1980, Wang Labs, Prime Computer, Datapoint, Rolm
Corp., Tandem Computer, and other small computer companies had
five-, six-, and seven-fold advances before topping and retreating, while
grand old IBM just sat there and giants Burroughs, NCR, and Sperry
Rand turned in lifeless price performances. In the next bull market
cycle, IBM finally sprang to life and produced excellent results. Home
Depot advanced 10 times from 1988 to 1992, while Waban and
Hechinger, the laggards, clearly underperformed.
Avoid Sympathy Stock Moves
There is very little that's really new in the stock market. History just
keeps repeating itself. In the summer of 1963, I bought Syntex, which
afterwards advanced 400%. Yet most people would not buy it then
because it had just made a new high in price at $100 and its P/E ratio,
at 45, seemed too high.
Several investment firms recommended G. D. Searle, a sympathy play,
which at the same time looked much cheaper in price and had a similar
product to Syntex's. But Searle failed to produce stock market results.
Syntex was the leader, Searle the laggard.
Sympathy plays are stocks in the same group as a leading stock, but
ones showing a more mediocre record and weaker price performance.
They eventually attempt to move up and follow "in sympathy" the pow-
erful price movement of the real group leader.
In 1970, Levitz Furniture became an electrifying stock market winner.
Wickes Corp. copied Levitz and plunged into the warehouse furniture
business.
Many people bought Wickes instead of Levitz because it was cheaper
in price. Wickes never performed. It ultimately got into financial trou-
ble, whereas Levitz increased 900% before it finally topped. As Andrew
Carnegie, the steel industry pioneer, said in his autobiography, "The
first man gets the oyster; the second, the shell."
Is the Stock's Relative Price
Strength Below 70?
Here is a simple, easy-to-remember measure that will help tell you if a
security is a leader or a laggard. If the stock's relative price strength, on
a scale from 1 to 99, is below 70, it's lagging the better-performing
stocks in the overall market. That doesn't mean it can't go up in price,
it just means if it goes up, it will probably rise a more inconsequential
amount.
Relative strength normally compares a stock's price perfor-
mance to the price action of a general market average like the Standard
& Poor's (S&P) Index, or in some cases, all other stocks. A relative
strength of 70, for example, means a stock outperformed 70% of the
stocks in the comparison group during a given period, say, the last six
or twelve months.
The 500 best-performing listed equities for each year from 1953
through 1993 averaged a relative price strength rating of 87 just before
their major increase in price actually began. So the determined winner's
rule is: Avoid laggard stocks and avoid sympathy movements. Look for
the genuine leaders!
Most of the better investment services show both a relative strength
line and a relative strength number and update these every week for a
list of thousands of stocks.
Relative strength numbers are shown each day for all stocks listed in
the Investor's Business Daily NYSE, AMEX, and NASDAQ price tables.
Updated relative strength numbers are also shown in Daily Graphs
charting service each week.
Pick 80s and 90s That Arc in
a Chart Base Pattern
If you want to upgrade your stock selection and concentrate on the best
leaders, you could consider restricting your buys to companies showing
a relative strength rank of 80 or higher. Establish some definite disci-
pline and rules for yourself.
If you do this, make sure the stock is in a sound base-building zone
(proper sideways price consolidation pattern) and that the stock is not
extended (up) more than 5% or 10% above this base pattern. This will
prevent you from chasing stocks that have raced up in price too rapidly
above their chart base patterns. For example, in the Reebok chart
shown at the end of Chapter 3, if the exact buy point was $29, the stock
should not be purchased more than 5% or 10% above $29.
If a relative price strength line has been sinking for seven months or
more, or if the line has an abnormally sharp decline for four months or
more, the stock's behavior is questionable.
Why buy an equity whose relative performance is inferior and strag-
gling drearily behind a laige number of other, better-acting securities
in the market? Yet most investors do, and many do it without ever look-
ing at a relative strength line or number.
Some large institutional portfolios are riddled with stocks showing
prolonged downtrends in relative strength. I do not like to buy stocks
with a relative strength rating below 80, or with a relative strength line
in an overall downtrend.
In fact, the really big money-making selections generally have a rela-
live strength reading of 90 or higher just before breaking out of their
first or second base structure. A potential winning stock's relative
strength should be the same as a major league pitcher's fast ball. The
average big league fast ball is clocked about 86 miles per hour and the
outstanding pitchers throw "heat" in the 90s.
The complete lack of investor awareness, or at least unwillingness, in
establishing and following minimum realistic standards for good stock
selection reminds me that doctors many years ago were ignorant of the
need to sterilize their instruments before each operation. So they kept
killing off excessive numbers of their patients until surgeons finally and
begrudgingly accepted studies by a young French chemist named Louis
Pasteur on the need for sterilization.
It isn't very rewarding to make questionable decisions in any arena.
And in evaluating the American economy, investors should zero in on
sound new market leaders and avoid anemic-performance investments.
Always Sell Your Worst
Stock First
If you own a portfolio of equities, you must learn to sell your worst-per-
forming stocks first and keep your best-acting investments a little
longer. In other words, sell your cats and dogs, your losers and mistakes,
and try to turn your better selections into your big winners.
General market corrections, or price declines, can help you recognize
new leaders if you know what to look for. The more desirable growth
stocks normally correct l'/2 to 2/2 times the general market averages.
However as a rule, growth stocks declining the least (percentagewise) in
a bull market correction are your strongest and best investments, and
stocks that plummet the most are your weakest choices.
For example, if the overall market suffers a 10% intermediate term
falloff, three successful growth securities could drop 15%, 20%, and
30%. The ones down only 15% or 20% are likely to be your best invest-
ments after they recover. Of course, a stock sliding 35% to 40% in a
general market decline of 10% could be flashing you a warning signal,
and you should, in many cases, steer clear of such an uncertain actor.
Pros Make Mistakes Too
Many professional investment managers make the serious mistake of
buying stocks that have just suffered unusually large price drops. In
June 1972, a normally capable, leading institutional investor in
Maryland bought Levitz Furniture after its first abnormal price break in
one week from $60 to around $40. The stock rallied for a few weeks,
rolled over, and broke to $18.
Several institutional investors bought Memorex in October 1978,
when it had its first unusual price break. It later plunged.
Certain money managers in New York bought Dome Petroleum in
September 1981 after its sharp drop from $16 to $12, because it seemed
cheap arid there was a favorable story going around Wall Street on the
stock. Months later Dome sold for $1, and the street talk was that the
company might be in financial difficulties.
None of these professionals had recognized the difference between
the normal price declines and the highly abnormal corrections that
were a sign of potential disaster in this stock.
Of course, the real problem was that these expert investors all relied
solely on fundamental analysis (and stories) and their personal opinion
of value (lower P/E ratios), with a complete disregard for what market
action could have told them was really going on. Those who ignore what
the marketplace is saying usually suffer some heavy losses.
Once a general market decline is definitely over, the first stocks that
bounce back to new price highs are almost always your authentic leaders.
This process continues to occur week by week for about three months
or so, with many stocks recovering and making new highs. To be a truly
astute professional or individual investor you must learn to recognize
the difference between normal price action and abnormal activity.
When you understand how to do this well, people will say you have "a
good feel for the market."
Control Data-Abnormal
Strength in a Weak Market
During a trip to New York in April 1967, I remember walking through a
broker's office on one day when the Dow Jones Industrial Average was
down over twelve points. When I looked up at the electronic ticker tape
showing prices moving across the wall, Control Data was trading in
heavy volume at $62, up SV-j points for the day. I immediately bought
the stock at the market, because I knew Control Data well, and this was
abnormal strength in the face of a weak overall market. The stock sub-
sequently reached $150.
In April 1981, just as the 1981 bear market was commencing, MCI
Communications, a Washington, D.C.-based telecommunications stock
trading in the over-the-counter market, broke out of a price base at $15.
It advanced to the equivalent of $90 in the following 21 months.
MCI tripled in a declining market. This was a great example of abnor-
mal strength during a weak market. Lorillard did the same thing in the
1957 bear market. Software Toolworks soared in January 1990.
So don't forget: It seldom pays to invest in laggard performing stocks
even if they look tantalizingly cheap. Look for the market leader.
(Excerpt from How To Make Money in Stocks.)
about, or stocks they feel comfortable with, like an old friend, old
shoes, or an old dog. These securities are frequently sentimental, drag-
gy slowpokes rather than leaping leaders in the overall exciting stock
market.
Let's suppose you want to buy a stock in the computer industry. If you
buy the leading security in the group and your timing is sound, you
have a crack at real price appreciation.
If, on the other hand, you buy equities that haven't yet moved or are
down the most in price, because you feel safer with them and think
you're getting a real bargain, you're probably buying the sleepy losers
of the group. Don't dabble in stocks. Dig in and do some detective
work.
Buy among the Best Two or
Three Stocks in a Group
The top two or three stocks actionwise in a strong industry group can
have unbelievable growth, while others in the pack may hardly stir a
point or two. Has this ever happened to you?
In 1979 and 1980, Wang Labs, Prime Computer, Datapoint, Rolm
Corp., Tandem Computer, and other small computer companies had
five-, six-, and seven-fold advances before topping and retreating, while
grand old IBM just sat there and giants Burroughs, NCR, and Sperry
Rand turned in lifeless price performances. In the next bull market
cycle, IBM finally sprang to life and produced excellent results. Home
Depot advanced 10 times from 1988 to 1992, while Waban and
Hechinger, the laggards, clearly underperformed.
Avoid Sympathy Stock Moves
There is very little that's really new in the stock market. History just
keeps repeating itself. In the summer of 1963, I bought Syntex, which
afterwards advanced 400%. Yet most people would not buy it then
because it had just made a new high in price at $100 and its P/E ratio,
at 45, seemed too high.
Several investment firms recommended G. D. Searle, a sympathy play,
which at the same time looked much cheaper in price and had a similar
product to Syntex's. But Searle failed to produce stock market results.
Syntex was the leader, Searle the laggard.
Sympathy plays are stocks in the same group as a leading stock, but
ones showing a more mediocre record and weaker price performance.
They eventually attempt to move up and follow "in sympathy" the pow-
erful price movement of the real group leader.
In 1970, Levitz Furniture became an electrifying stock market winner.
Wickes Corp. copied Levitz and plunged into the warehouse furniture
business.
Many people bought Wickes instead of Levitz because it was cheaper
in price. Wickes never performed. It ultimately got into financial trou-
ble, whereas Levitz increased 900% before it finally topped. As Andrew
Carnegie, the steel industry pioneer, said in his autobiography, "The
first man gets the oyster; the second, the shell."
Is the Stock's Relative Price
Strength Below 70?
Here is a simple, easy-to-remember measure that will help tell you if a
security is a leader or a laggard. If the stock's relative price strength, on
a scale from 1 to 99, is below 70, it's lagging the better-performing
stocks in the overall market. That doesn't mean it can't go up in price,
it just means if it goes up, it will probably rise a more inconsequential
amount.
Relative strength normally compares a stock's price perfor-
mance to the price action of a general market average like the Standard
& Poor's (S&P) Index, or in some cases, all other stocks. A relative
strength of 70, for example, means a stock outperformed 70% of the
stocks in the comparison group during a given period, say, the last six
or twelve months.
The 500 best-performing listed equities for each year from 1953
through 1993 averaged a relative price strength rating of 87 just before
their major increase in price actually began. So the determined winner's
rule is: Avoid laggard stocks and avoid sympathy movements. Look for
the genuine leaders!
Most of the better investment services show both a relative strength
line and a relative strength number and update these every week for a
list of thousands of stocks.
Relative strength numbers are shown each day for all stocks listed in
the Investor's Business Daily NYSE, AMEX, and NASDAQ price tables.
Updated relative strength numbers are also shown in Daily Graphs
charting service each week.
Pick 80s and 90s That Arc in
a Chart Base Pattern
If you want to upgrade your stock selection and concentrate on the best
leaders, you could consider restricting your buys to companies showing
a relative strength rank of 80 or higher. Establish some definite disci-
pline and rules for yourself.
If you do this, make sure the stock is in a sound base-building zone
(proper sideways price consolidation pattern) and that the stock is not
extended (up) more than 5% or 10% above this base pattern. This will
prevent you from chasing stocks that have raced up in price too rapidly
above their chart base patterns. For example, in the Reebok chart
shown at the end of Chapter 3, if the exact buy point was $29, the stock
should not be purchased more than 5% or 10% above $29.
If a relative price strength line has been sinking for seven months or
more, or if the line has an abnormally sharp decline for four months or
more, the stock's behavior is questionable.
Why buy an equity whose relative performance is inferior and strag-
gling drearily behind a laige number of other, better-acting securities
in the market? Yet most investors do, and many do it without ever look-
ing at a relative strength line or number.
Some large institutional portfolios are riddled with stocks showing
prolonged downtrends in relative strength. I do not like to buy stocks
with a relative strength rating below 80, or with a relative strength line
in an overall downtrend.
In fact, the really big money-making selections generally have a rela-
live strength reading of 90 or higher just before breaking out of their
first or second base structure. A potential winning stock's relative
strength should be the same as a major league pitcher's fast ball. The
average big league fast ball is clocked about 86 miles per hour and the
outstanding pitchers throw "heat" in the 90s.
The complete lack of investor awareness, or at least unwillingness, in
establishing and following minimum realistic standards for good stock
selection reminds me that doctors many years ago were ignorant of the
need to sterilize their instruments before each operation. So they kept
killing off excessive numbers of their patients until surgeons finally and
begrudgingly accepted studies by a young French chemist named Louis
Pasteur on the need for sterilization.
It isn't very rewarding to make questionable decisions in any arena.
And in evaluating the American economy, investors should zero in on
sound new market leaders and avoid anemic-performance investments.
Always Sell Your Worst
Stock First
If you own a portfolio of equities, you must learn to sell your worst-per-
forming stocks first and keep your best-acting investments a little
longer. In other words, sell your cats and dogs, your losers and mistakes,
and try to turn your better selections into your big winners.
General market corrections, or price declines, can help you recognize
new leaders if you know what to look for. The more desirable growth
stocks normally correct l'/2 to 2/2 times the general market averages.
However as a rule, growth stocks declining the least (percentagewise) in
a bull market correction are your strongest and best investments, and
stocks that plummet the most are your weakest choices.
For example, if the overall market suffers a 10% intermediate term
falloff, three successful growth securities could drop 15%, 20%, and
30%. The ones down only 15% or 20% are likely to be your best invest-
ments after they recover. Of course, a stock sliding 35% to 40% in a
general market decline of 10% could be flashing you a warning signal,
and you should, in many cases, steer clear of such an uncertain actor.
Pros Make Mistakes Too
Many professional investment managers make the serious mistake of
buying stocks that have just suffered unusually large price drops. In
June 1972, a normally capable, leading institutional investor in
Maryland bought Levitz Furniture after its first abnormal price break in
one week from $60 to around $40. The stock rallied for a few weeks,
rolled over, and broke to $18.
Several institutional investors bought Memorex in October 1978,
when it had its first unusual price break. It later plunged.
Certain money managers in New York bought Dome Petroleum in
September 1981 after its sharp drop from $16 to $12, because it seemed
cheap arid there was a favorable story going around Wall Street on the
stock. Months later Dome sold for $1, and the street talk was that the
company might be in financial difficulties.
None of these professionals had recognized the difference between
the normal price declines and the highly abnormal corrections that
were a sign of potential disaster in this stock.
Of course, the real problem was that these expert investors all relied
solely on fundamental analysis (and stories) and their personal opinion
of value (lower P/E ratios), with a complete disregard for what market
action could have told them was really going on. Those who ignore what
the marketplace is saying usually suffer some heavy losses.
Once a general market decline is definitely over, the first stocks that
bounce back to new price highs are almost always your authentic leaders.
This process continues to occur week by week for about three months
or so, with many stocks recovering and making new highs. To be a truly
astute professional or individual investor you must learn to recognize
the difference between normal price action and abnormal activity.
When you understand how to do this well, people will say you have "a
good feel for the market."
Control Data-Abnormal
Strength in a Weak Market
During a trip to New York in April 1967, I remember walking through a
broker's office on one day when the Dow Jones Industrial Average was
down over twelve points. When I looked up at the electronic ticker tape
showing prices moving across the wall, Control Data was trading in
heavy volume at $62, up SV-j points for the day. I immediately bought
the stock at the market, because I knew Control Data well, and this was
abnormal strength in the face of a weak overall market. The stock sub-
sequently reached $150.
In April 1981, just as the 1981 bear market was commencing, MCI
Communications, a Washington, D.C.-based telecommunications stock
trading in the over-the-counter market, broke out of a price base at $15.
It advanced to the equivalent of $90 in the following 21 months.
MCI tripled in a declining market. This was a great example of abnor-
mal strength during a weak market. Lorillard did the same thing in the
1957 bear market. Software Toolworks soared in January 1990.
So don't forget: It seldom pays to invest in laggard performing stocks
even if they look tantalizingly cheap. Look for the market leader.
(Excerpt from How To Make Money in Stocks.)
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