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John Tobey, CFA
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I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has... More
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  • Stock Market Clears Resistance and Points Higher
    Green up arrowComing off its recent double bottom (see “Double Bottom? This Powerful, Positive Indicator Could Be Forming”), the U.S. stock market just provided another signal that it is building an uptrend. Here are the details…

     
    Resistance level #1 is an important confirmation
     
    A double bottom necessarily creates a resistance level – the high between the two bottoms. Tuesday and Wednesday saw these highs broken, indicating that a double bottom did occur and an uptrend is in the making. The graphs below show how the three main indexes have performed. 
     
    The Dow Jones Industrial Average (DJIA)…
    (Stock charts courtesy of StockCharts.com 
     
    DJIA chart
     
    The Standard & Poor’s 500 Stock Index…
     
    S&P 500 chart
     
    The Nasdaq Composite…
     
    Nasdaq chart
     
    Next up: Resistance level #2
     
    Surmounting resistance level #2 is the key. It is composed of three closely watched barriers:
    1. The previous support level that was broken in August’s down market
    2. The halfway point between the previous high and the recent low
    3. The nearby 200-day moving average  
    In addition, the DJIA’s resistance level is around 12,000 – one of those even numbers that makes the headlines and, therefore, has a bit of psychological value.
     
    An argument against this view
     
    Some commenters on my previous article correctly noted that most double bottoms do not occur so close together. However, as I answered, my view is that August’s volatility was so great and the drop so quick, that time was condensed. In addition, the shift of investor focus from 2011 to 2012 earnings projections is near, meaning fundamentals are about to be viewed in an improved light, regardless of whether the rest of this year’s growth is slow or not.
     
    A way to see how volatility and movement were packed into August is to look at a point & figure chart for the DJIA. (For an explanation of point & figure charting, see StockCharts.com’s “Point & Figure Charting Workbench.”) 
     
    DJIA P&F chart
     
    Note that August (denoted by “8”) starts in the long drop (“O”s) and lasts through a number of ups (“X”s) and downs ending near the top of the current uptrend. Compare August to previous months in both size of moves (vertical heights) and volatility (number of columns). Clearly, August was “special.” The double bottom and recent rise above resistance level #1 are visible.
     
    A reminder: Charts give us signs, not facts
     
    The value of stock charts comes from the inferences we can draw by seeing the results of investors’ actions. For example, a second drop that doesn’t go below the first drop (i.e., a double bottom), indicates that buyers have stepped in, likely meaning the stock downtrend is ready to reverse. Next, a price rise above the double bottom high (resistance level #1) indicates buyers now are willing to pay up.
     
    However – These are inferences, not facts. Obviously, only time will tell whether the uptrend is based on fundamental improvements or is a short-lived respite from a longer-term downtrend or stagnation. My belief is that fundamental improvements is the case this time.
     
    The bottom line
     
    So far, so good. The stock market appears to have established a base upon which a new uptrend is forming. Clearing resistance level #1 is important, but a more important test awaits - resistance level #2. The timing could be good, with the post-Labor Day change of focus upon us – when Wall Streeters start to look in earnest at next year’s earnings forecasts. Growth is in those numbers, so, with valuations having been made more attractive during the recent stock market drop, there could be an increase in stock investment interest – and more uptrend. Combine a successful rise above resistant level #2 with attractive 2012 fundamentals and improving investor interest could be the result. So, I believe now is a good time to be invested in the U.S. stock market.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Positions: Long U.S. stocks and U.S. stock funds
    Aug 31 6:49 PM | Link | Comment!
  • The 3 C’s Needed for Investment Success – Now More Than Ever
    Graph of market reversalNews reports, pundit predictions, radio talk shows and reader comments have reached loud, negative levels. Unbridled pessimism has sprung up regarding just about everything.
     
    Like last year at this time, events and facts have been blown out of proportion and only negative indicators are taken as the “truth” with which to forecast a trend. For example, the 2nd quarter slow-down, aided by the Japanese tsunami and its aftermath has gone from being (1) a temporary reversal to (2) a signal that global economic growth is slowing in 2011 to (3) an indicator of a permanent slowdown to, now, (4) a precursor of a worldwide recession (read “depression”).
     
    This sort of one-upmanship, seeing who can create the scariest vision, may make for increased readers and viewers, but it is playing havoc with investors’ emotions and causing many to abandon their holdings at artificially low prices. (Artificial because the selling is based on overly dire and fearful forecasts.)
     
    To have investing success in times like these, we need to practice 3 C’s: Contrary thinking, Conviction and Courage.
     
    Contrary thinking
     
    I previously covered this key practice for investing success (e.g., see ”5 Steps to Successful Contrarian Investing”). “Contrary” doesn’t mean “ornery” – rather, it means going against popular opinion when common sense says it is overdone. In both good times and bad, we can see cycles of investing fads and fears that overdo price moves. By maintaining our own counsel, we can avoid the added risk and poor returns that come from following the crowd.
     
    Conviction (1): Investment plans and strategy
     
    “Conviction” covers many levels of investing, but primarily it applies to sticking to our plans and actions regardless of what others say or what the market does. This perseverance does not mean ignoring facts that alter our analysis. Rather, it means not taking action because we are not currently being rewarded or because our feelings are telling us to give up on our previous plans.
     
    Conviction (2): Capitalism and democracy
     
    Normally, this level doesn’t require discussion. Most U.S. investors believe that the country’s approach to capitalism and democracy is appropriate - even in bear markets. However, there are times when worries surface that the U.S.’s principle foundations are lacking and need fixing or outright replacement. Two previous periods when conviction flagged were the Great Depression and the late 1970s/early 1980s. Today is reminiscent of that latter period.
     
    The lack of conviction today shows up particularly in discussions of the economy and business leaders, the banks and bankers, the regulatory process and legal system, and the investment markets and Wall Street. Overlaying all of this, made especially evident during the debt/deficit debate, is the belief that the political process is broken.
     
    Rarely (never?) is anyone happy with all aspects of the U.S.’s systems. However, predicting failure or collapse is a losing game when it comes to investing. This is the time to remember J.P. Morgan’s instruction:
    Remember, my son, that any [person] who is a bear on the future of this country will go broke.
    Courage
     
    It’s all well and good to say, “be contrarian and have conviction.” However, when everything and everybody seems to be going the other way, that is a daunting instruction to follow. We are in one of those times, and the solution is to be courageous.
    Definition of courage: mental or moral strength to venture, persevere, and withstand danger, fear, or difficulty.
    Put more simply, it means holding our positions, refusing to sell our holdings at today's low prices just because others are screaming, "Sell!"

    The bottom line
     
    For investing success we must be able to get through extreme times, both good and bad, without being enticed or frightened into changing our investment plans. Contrary thinking, conviction and courage are the traits that allow us to accomplish that goal. With today’s scary forecasts and the stock market’s wild ride, we need to practice those 3 C’s more than ever.
     
    Another J.P. Morgan observation might help. When asked what the stock market will do, he said, “It will fluctuate.” The last two weeks have certainly proved that statement.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Positions: Long U.S. stocks and U.S. stock funds
    Aug 11 8:04 PM | Link | Comment!
  • Apple’s Publisher Rules Changes – Wise Strategy, Not an About-face
    Judging by media reports, Apple’s (NASDAQ:AAPL) App Store just took a hit. Apple was unable to make its publisher (AKA, "digital content provider") rules stick. Apple was described variously as “relaxing its guidelines,” “retreating,” “reversing,” “backtracking,” “about-facing,” and “caving in” – and that’s just in The Wall Street Journal article ("Apple Retreats in Publisher Fight").
     
    However, this change is a step in the right direction – away from an action reminiscent of old Apple’s “my way or the highway” strategy - when Steve Jobs said (in 1983), “What makes you think a dull PC guy like yourself can appreciate an elegant machine for artists like the Macintosh?” Back then, Apple's comeuppance came when PC competitors with flexible designs and multiple software vendors rose to dominance, leaving Apple-centric users existing in an ever-shrinking world.
     
    Déjà vu came last October when Steve Jobs made dismissive comments about competitors. Then came this February's unveiling of the new subscription service with proposed publisher rules having Apple get it all: Best price, subscriber information, payment flow and no publisher website competition. With implementation set for June 30, there were expectations that publishers would balk. My concern was that Apple’s success was resurrecting its old feelings of superiority.
     
    However, this week's announcement shows that Apple’s strategy is to negotiate from strength. The “retreats” etc. are actually sensible compromises that respond to publishers’ chief issues. This negotiation has given Apple a strong position with many (most?) publishers pleased. Importantly, the subscription service now looks to be a success, providing another source of steady income outside of product sales.
     
    So … we may ignore the reports of Apple caving in. The company appears to have introduced a new service using a wise strategy. Apple’s mistaken 1983 arrogance? That seems to be a lesson well learned.


    Disclosure: I am long AAPL.
    Tags: AAPL
    Jun 11 12:35 PM | Link | Comment!
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