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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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  • Condition Of The Market - April 2013 39 comments
    Apr 23, 2013 11:49 PM

    One of the most difficult aspects of investing is understanding the Psychology or Condition of the Market, and applying that to our investing strategy. We will take the time and effort to do our due diligence in order to purchase what we think will be a successful business decision. Yet, once in the position, and our money is at risk, some of us don't know how to properly read the market or use market conditions to our advantage.

    A lot of people don't know when to let winners run, or know when it's time to take some profits, provided they aren't buying and holding for the long term. Too many people miss out on good opportunities because price didn't drop low enough for them to get in, and they aren't good enough to read the market and realize they should adjust their entry quickly, because the position is getting ready to hit a Stage 2 uptrend. Stage 2 up-trends is where most of the money is made over the long term.

    All too often, I see where people find a company that is as successful as they hoped it would be, and then fear sets in. They have a fear of seeing some of those quickly earned gains disappear. Or they think the trend has gone a little too long and they are fearful that the price can't keep going higher, so they will take profits off the table without even understanding the current condition of the market. Then they will sell themselves on the idea that you never go broke taking a profit.

    You'll never experience huge gains either if you sell too soon. Raise your hand if a company's stock price has left you standing at the station and gone on without you on board, or because you jumped off too early. (Hand raised!)

    This instablog is going to attempt to help you make better decisions while trying to take advantage of a strong uptrend, so that you'll know when to let your winners run, and you'll have a better idea of what to look for as opposed to guessing.

    For the last year and a half, I've read many comments on SA that say the utility sector was over heated and people have avoided the sector. The utilities kept on going higher last year, and they continue to go higher this year.

    As I type, the SPY is up 10.79% year to date and my 8 utility holdings are up another 16.15% on share price alone. I'm not even counting the dividends!

    I keep seeing comments that we should be taking profits and going to cash. ... Why? ... The market continues to head higher!

    I have read many studies over the years, including those in the book "What Works On Wall Street" by James O'Shaughnessey that state, if you want to outperform the market over the long run, you must ride out what is known as a Stage 2 uptrend. You've got to let your winners run. Yet, I continue to see comments everyday where people are cutting the trend off on their own by selling.

    Let me share the Four Stages of price movement.

    Stage 1

    The phase shortly after a prolonged downtrend is the starting point of Stage 1. The stock price was going down but is now trading sideways, forming a base, or in what we call a trading range. This is the phase where the sellers lose power as the buyers are getting more aggressive.

    Stage 2

    Eventually, the stock breaks out into Stage 2, as it moves into an uptrend, often times accomanied by huge volume. This is the stage where the most money is made in the stock market. In Stage 2 you should be aggressively focusing on taking long positions or adding to them.

    Stage 3

    All good things come to an end eventually. The run in stage 2 starts to run out of steam. The price begins to trade sideways. Buyers and sellers have equal power at this stage and price just drifts along sideways or in a narrow trading range. From here you can see another stage 2 develop or it reverts into stage 4.

    Stage 4

    Institutional Investors decide to start locking in profits. You'll start to see heavier selling volume and then the rest of the market steps in and you start to see price set a series of lower lows.

    ---------------------------------------------------------

    The market is driven by Institutional Investors. It doesn't matter if they are right or wrong about various companies, the amount of volume they bring to market is going to move price in one direction or the other. If you want to know what's going on in the market, watch the volume. If Institutional Investors are buying or selling, they can't hide the volume, it's going to show up on a chart immediately.

    In looking at the current market conditions (April 23), the market is once again experiencing a good year. Many of the companies we own, and some of those where people have already taken profits, continue to hit 52 week highs and seem to be headed higher.

    We need to put our fears aside and try to determine what's going on in order to help us make better decisions. Current market conditions are unlike any we've ever seen in recent history. What ever you think you knew isn't playing out this time. At least not yet.

    As a rule, when the market is getting overheated, it's the sectors that are thought to be high growth that usually lead the market. We usually see PE ratios up around 50 or more as people were willing to pay up for that accelerated growth and the PE ratios get so far ahead, no company can keep up with those expected earnings. I'm not seeing that now!

    According to Morningstar, the best performing sectors of the market so far this year are health care, consumer staples, utilities and telecoms.

    Are you kidding me? Defensive companies leading a Stage 2 bull market?

    Defensive companies are supposed to lag the market during bullish up-moves, not lead it. They are supposed to provide downside protection. That's why they are called defensive companies. Yet, they are leading the market. ... What's going on?

    There are several factors affecting current market conditions, in my opinion. Low interest rates which have helped companies clean up some of their expensive debt. Corporations now have more cash on hand than at any time in recent memory. They are in good shape financially.

    Companies are not only exceeding earnings estimates, but some are even guiding higher. If that's the case, price is going to head higher. After all, it's the earnings stupid. With higher earnings come higher valuations and we're seeing a lot of these companies having price targets raised.

    Low yields on bonds are having an impact as people look for yield elsewhere. Market momentum is playing a role as well.

    As more and more baby boomers are hitting retirement age, all of their life they heard about creating a wealth number and then buy bonds in retirement. Bonds aren't providing enough income for these folks and they are being forced into equities in order to generate income.

    You folks see it everyday in the comment streams where people are going after high yields. As long as they continue to chase yield, the market can head higher.

    I think this is why we don't see Institutional Investors taking profits yet. A lot of them got burned last year by selling early due to the "Sell in May and go away" concept, and the market headed higher without them. I don't see that selling yet so far this year.

    The market is going to need a catalyst. I don't know what that catalyst is going to be, but I do know that the market is about supply vs demand. Right now there is more demand for equities than is supply coming to market.

    Supply = selling. ... Demand = buying.

    With the market at multi year highs, most people owning equities are showing nice profits. I'm sure most of you are. If most people were showing losses, they would be waiting for price to rise so they could sell and get out even. That supply coming to market would slow down or reverse the price trend. Since there isn't any overhead supply coming to market, it doesn't take much demand for price to head higher. So, I ride it out.

    In recent earnings announcements, we saw PG, KO, KMB and JNJ all announce better than expected earnings. All of them guided higher. This is referred to as a "beat and raise."

    If companies are seeing their earnings rising at better than expected estimates, and those same companies are all saying they expect to do even better going forward, then the odds are favorable that share price is headed higher.

    In looking for clues, watch the weekly volume. If you see volume well above the average, and price is down for the week, that's the first sign of Institutional selling.

    In looking at the weekly chart of JNJ, note that there is very little selling volume, thus the uptrend. All the volume bars are black which represents buying and the buying volume is actually increasing.

    http://stockcharts.com/h-sc/ui?s=JNJ&p=W&st=2012-01-01&en=2013-04-19&id=p48090331880

    In looking at the above chart, go back to June 2012 and note the huge buying volume bars. That was a screaming buy signal. Those of you who weren't in because you didn't get your price need to learn to adjust your price quickly when you see buying volume like that. I've provided examples before where that signal tells you price is heading higher.

    At the time, the $64 share price represented a 52 week high. Most value investors, in fact most people period, are scared of buying 52 week highs. When you see volume like that, jump! That's where the money is made!

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Comments (39)
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  • jdhd
    , contributor
    Comments (511) | Send Message
     
    Chowder,

     

    Thanks for giving me a new toy to play with!!!
    My hand is raised.
    Can I put it down now because I'm getting a little sore holding it up and typing one-handed?
    Seriously, this is a great means of helping to determine entry and exit.
    It use to drive me crazy when I'd trim out of a stock that I was sure was rolling over.
    Worse was missing an entry point and then watching a stock shoot through the clouds.
    Hopefully, now the doc will cut my meds down.

     

    All the best,
    jdhd
    24 Apr 2013, 12:19 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2590) | Send Message
     
    Thanks Chowder.
    24 Apr 2013, 01:03 AM Reply Like
  • Youngster11
    , contributor
    Comments (7) | Send Message
     
    Great article. I read it three times and bookmarked it to read again. Thank you
    24 Apr 2013, 08:13 AM Reply Like
  • Youngster11
    , contributor
    Comments (7) | Send Message
     
    Great article. I read it three times and bookmarked it to read again. Thank you.
    24 Apr 2013, 08:20 AM Reply Like
  • 7820771
    , contributor
    Comments (4) | Send Message
     
    Sound advice ... as usual.
    Big help to me (new Chowder Head).
    Thanks.
    24 Apr 2013, 08:36 AM Reply Like
  • Garthilk
    , contributor
    Comments (590) | Send Message
     
    Having a hard time liking the price of my menu items though. Especially when I'm considering a new position.
    24 Apr 2013, 11:12 AM Reply Like
  • Cheesecake7
    , contributor
    Comments (131) | Send Message
     
    My hand is raised and I thank you for writing this. It gives another tell, like the volume over 3 and up to 5 did in JNJ. Glad I saw it and you helped with that. I don't know why you are so generous and honest with your knowledge but it certainly helps people like us. Straight forward and easy to understand writing style.
    24 Apr 2013, 11:31 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (13265) | Send Message
     
    "I don't know why you are so generous and honest with your knowledge"

     

    Because the judge sentenced him to 200 hours of community service, and he's working it off writing instablogs for SA. :-)
    24 Apr 2013, 02:11 PM Reply Like
  • kolpin
    , contributor
    Comments (1043) | Send Message
     
    chowder--stupid question, but do the stages of price movement apply to more cyclical stocks as well? I bought CAT sub $80 the other day on above average volume, but as a much more volatile stock, I'm wondering if the price movement doesn't necessarily adhere to the same fluctuations as some of the consumer staples stocks you listed above.
    24 Apr 2013, 02:20 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » kolpin, the stages apply to all stocks, just some of the stages move more quickly than others.

     

    This message has been approved by my probation officer.
    24 Apr 2013, 04:32 PM Reply Like
  • jdhd
    , contributor
    Comments (511) | Send Message
     
    ....Go directly to jail but with Chowder you get to pass GO and collect 200 dollars..jussayin!
    24 Apr 2013, 04:36 PM Reply Like
  • Cheesecake7
    , contributor
    Comments (131) | Send Message
     
    but what happened to PG and CL and why is Buffet blustering on KO?
    24 Apr 2013, 04:42 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » PG must have missed analysts estimates. I don't know what happened to CL. I haven't looked, I'm not going to look, I'm holding for the long term regardless of what's going on.

     

    I don't know what Buffett and KO are up to either. I don't concern myself with short term noise. If anything important pops up though, please let me know.
    24 Apr 2013, 06:47 PM Reply Like
  • Zalach
    , contributor
    Comments (101) | Send Message
     
    Thanks for the article chowder! Very helpful!

     

    Speaking of PG - I saw it sprint down on the open today and jumped on it, doubling my investment in it to a full position. I had your prior articles and advice running through my head as I mulled it over for a good 30 seconds ha!

     

    Now hopefully this logic doesn't backfire, guess we'll see in 30 years time... :)

     

    Thanks again!

     

    ~Zal
    24 Apr 2013, 09:22 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » Zalach, I need to provide the other side of the story about high volume price movement.

     

    When you see price gap up at the open on high volume, and after 30 to 60 minutes the price is holding or still rising, and accompanied by high volume, you jump on board.

     

    Conversely, if you see price gap down at the open on high volume, as PG did today, and price keeps going lower, you wait. What we saw today was Institutional Investors taking profits and we don't know if they are finished yet.

     

    When you look at the daily chart below, today's candlestick is a wide range bar with price closing near the low. That means nobody was stepping up to support price.

     

    In this case, I usually like to wait about 3 days to let price settle down before entering. The 3 day number is important because that's the day where those who were caught on margin have to settle and you might see some more selling on that day.

     

    If price can remain above $75 in the coming week, I think PG is good to go again.

     

    http://bit.ly/15IK7ml
    25 Apr 2013, 02:38 AM Reply Like
  • Be Here Now
    , contributor
    Comments (3921) | Send Message
     
    chowder,

     

    That 3 day rule is good to know, I was not aware of that particular effect.

     

    Thanks for the extended discussion of volume patterns. In my case it's 'use it or lose it', I haven't paid much attention to volume analysis since I exited stock trading over 30 years ago.
    25 Apr 2013, 03:38 AM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » >>> That 3 day rule is good to know, I was not aware of that particular effect. <<<

     

    I guess you've never been caught on margin. ... Ha! Ha!

     

    I have and it's the most empty feeling I've ever experienced when I was trading. I hated it. The worst part was that you knew the price was going to rebound, but you didn't have enough time to hold it once the margin call was made. Talk about compounding losses! Whew.

     

    Margin works great on the upside, but don't get caught on the downside.

     

    I don't use margin anymore although I do have margin accounts. I learned the best time to use margin is in momentum investing. Jump in as the company announces a beat and raise, and ride it for a few points.

     

    I found that using margin on dip buying was a big mistake, not enough winners to stick with it.
    25 Apr 2013, 04:44 AM Reply Like
  • Be Here Now
    , contributor
    Comments (3921) | Send Message
     
    chowder,

     

    I have copied your entire comment to Zalach into my investing plan.

     

    Luckily I never did trade on margin. One of the few mistakes I did not make.
    25 Apr 2013, 11:15 AM Reply Like
  • Zalach
    , contributor
    Comments (101) | Send Message
     
    Thanks for the insights Chowder. Live and learn!

     

    Great thoughts on why you should wait those 3 long days. So many things to keep in mind, tough to keep them all in perspective at once. I certainly won't be trying to catch a falling knife should it continue its decent.

     

    This is where I wish I had enough money to make my full positions larger than $2k. Then it would make sense to dollar cost into the position while not getting killed by commission fees.

     

    Watching it trade 25 million shares, triple a normal day's volume, is staggering when you think about the amount of money changing hands on just the one stock. That's almost 2 billion dollars! That always puts the nail in the coffin for me when I think about the chances and impacts a retail investor has in Mr. Market. We're along for the ride, nothing more.

     

    Thanks for sharing your experiences!

     

    ~Zal
    25 Apr 2013, 12:46 PM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    3 days including the first down day, or 3 days after, for a total of 4?

     

    Thanks.
    25 Apr 2013, 11:55 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » I used to get the margin call after the first down day and had 3 days to settle. I think settlement had to be by 2 PM on the third day following the margin call.

     

    When I was trading back then, I would wait until after 3 PM on the third day following the down day.

     

    There were exceptions. If the day following the big down day saw a reversal, then another strategy had to be applied.

     

    For example, CL had a down day yesterday that caused some people concern. Today it bounced back, indicating yesterday was nothing more than noise, profit taking.

     

    PG's price action yesterday and today indicated that it was priced for perfection and the last quarter wasn't perfection. It was good, but not good enough for the valuations being applied.

     

    Today's price action saw a slowdown in price and while volume was quite high and that's a positive, setting up a potential buy scenario by Monday.

     

    With the amount of volume exchanging hands yesterday, you'd expect a bigger price drop than 0.70%. Usually, when you see volume 50% above average, you'll see price moves of 3% or more.

     

    In the absence of that, it indicates that some Institutional Investors were stepping up to buy from Institutional Investors selling. If this wasn't true, you would have seen a larger price drop based on the amount of volume we saw.
    26 Apr 2013, 12:42 AM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Thanks for sharing!

     

    I don't see average volume on stockcharts.com. Am I missing it, or where's the best place to find that info? Do you just look at the volume bars and guestimate? Thanks again.
    26 Apr 2013, 09:01 AM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » The red horizontal line running through the volume bars represents average volume. Additionally, in the upper left hand corner of the volume bar box, they list the number for you.
    28 Apr 2013, 04:09 PM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Thanks very much for your time and help. On the charts I pulled up, there was no average volume info, and I couldn't figure out how to get it. But going back to your link above and comparing, I got it now. Thanks!
    29 Apr 2013, 08:22 AM Reply Like
  • Inzkeeper
    , contributor
    Comments (759) | Send Message
     
    I copied the comment to my 'refer to' folder as well. I don't need to highlight the article, I know they're all worth many reads!

     

    I knew volume was important, but you have provided practical ways to apply it. This is very valuable. I am in real need of the 'Chowder's Step By Step Investment Course" and I'm very pleased that I can not only read it here but ask questions and get feedback! Thank you for your generosity of time and talent, it truly makes a difference.
    9 May 2013, 09:49 AM Reply Like
  • Tbor
    , contributor
    Comments (5) | Send Message
     
    Good advice, thanks Chowder
    24 Apr 2013, 07:26 PM Reply Like
  • FreeStateYank
    , contributor
    Comments (803) | Send Message
     
    Thank you for a very helpful article... I've been guilty of having offers too low... and miss the boat. Of course, many time it works. However, now that I can think about the 'stages' of a share price along with the volume, it will be a great help to me in taking another look at the price I'm willing to pay.

     

    Very best to you, Chowder. I'm sure your probation officer is proud of you! ;-)
    24 Apr 2013, 09:33 PM Reply Like
  • Sir Duke
    , contributor
    Comments (122) | Send Message
     
    Whoa this blog is powerful stuff.

     

    I have been guilty of selling too soon in the past and made the decision to stay 100% invested at the end of last year. Owning quality with a long-term mindset means you rarely have to sell.

     

    The plan is to keep dollar cost averaging along... onwards and upwards. See you at the top.
    24 Apr 2013, 11:27 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3246) | Send Message
     
    I'm sitting on my hands with 80%-275% profits. Anyway, thank you for good blogpost, Chowder!
    SDS
    25 Apr 2013, 12:59 AM Reply Like
  • raykrv6a
    , contributor
    Comments (2590) | Send Message
     
    Lightened up today on 3 stocks that didn't pay more then 2% dividends and looking for 3 higher paying dividend stocks to add.

     

    Heck of a market run.
    25 Apr 2013, 01:55 PM Reply Like
  • Market Map
    , contributor
    Comments (214) | Send Message
     
    Good analysis Chowder !
    My work suggests minimal downside as the "map" shows 2013 to be a favorable year ( column J; favorable years having best risk to reward for upside price appreciation as per SP500 index). I'm waiting for a lower risk "pullback" entry (as shown in the table) during this favorable year to add positions.

     

    http://tinyurl.com/d6d...
    27 Apr 2013, 11:05 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » Jstr, I tried to get access to the link you posted, but it denied access to me.
    28 Apr 2013, 04:11 PM Reply Like
  • Market Map
    , contributor
    Comments (214) | Send Message
     
    Sorry about that... try again, I allowed "public" access
    29 Apr 2013, 11:18 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » Thanks Jstr, I got it.
    30 Apr 2013, 08:50 AM Reply Like
  • Canadian Dividend Growth In...
    , contributor
    Comments (887) | Send Message
     
    Chowder, appreciate your taking the time to write your articles. As usual, I learn so much. Just wish I had known the implication of that volume bar on JNJ back then.
    1 May 2013, 01:54 AM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » You'll know going forward. You'll get more opportunities like that.
    1 May 2013, 07:40 AM Reply Like
  • Nathan Kemalyan MD
    , contributor
    Comments (512) | Send Message
     
    perhaps you'd consider writing some more about the buy and sell volumes.
    In any market where shares are trading, there have to be both buyers and sellers. In between them stand the brokers. In all likelihood the brokerages hold some shares so they can execute orders when they come in. So, they're in the business of buying and selling too.
    I can understand that the big market place may place more buy orders or sell orders at any given time. However, no trade can be complete until someone on the other end completes the transaction. So, how does the buy/sell volume affect your decision to make a trade? do you pay attention to this on an intra-day basis? do you check the status of orders on your stocks before you reinvest? Do these volumes track with price fluctuations? What are the best sources to track orders? I don't recall reading any really clear article on this topic in the recent past.
    7 May 2013, 01:23 PM Reply Like
  • chowder
    , contributor
    Comments (7422) | Send Message
     
    Author’s reply » I might do that Nathan. Give me some time. I just posted a private message to you on this same question. I think I'll go get it and post it here for others to see.

     

    Here we go!

     

    >>> So, how does the buy/sell volume affect your decision to make a trade? <<<

     

    Good question. Yes, there are buy and sell orders offsetting each other, but where the price ends on the day, week, month, etc. determines if the bulls or bears get credit for the volume. If price finishes up, the win goes to the bulls. If the price finishes down, the win goes to the bears.

     

    Since we're in an uptrend, I'll address it from the bull point of view.

     

    Supply = selling. ... Demand = buying.

     

    When you see above average volume and the price finishes up on the week, it means there was enough demand to absorb that supply coming to market, and enough demand to buy even more. It's why price went higher.

     

    If demand can't absorb the supply coming to market, the price will decline. Current market conditions have demand not only absorbing the amount of supply coming to market, the demand is even greater, which is why prices keep going higher.

     

    If Institutional Investors decide to start taking profits, there won't be enough demand to offset that amount of supply, thus your correction will be underway.

     

    I usually watch weekly volume patterns unless I'm getting ready to make a purchase. If I'm getting ready to make a purchase, I'll watch daily volume patterns. I usually buy in the last hour of trading after price and volume have established themselves for the day.

     

    I don't keep up with intraday patterns anymore since I've given up trading.

     

    Sometimes volume will be a leading indicator for price, but most of the time it simply confirms price action. There's no easy answer here. It's something that is learned through experience, at least for me it was.

     

    A book I found helpful back in my trading days, and one I haven't reviewed in a while is "Trading On Volume" by Donald Cassidy.

     

    I simply watch volume bars on Stockcharts, which is a free service. I also use a Quote Tracker through TD Ameritrade that allows me to see Raw Data/Time and Sales for any company I may wish to track.

     

    If I missed anything, get back to me. ... Ha!
    7 May 2013, 02:52 PM Reply Like
  • Norman Tweed
    , contributor
    Comments (7377) | Send Message
     
    Thanks Chowder for this detailed explanation of the existing market and pointers on trading. I, too have questioned why this market is not going down. However, I came up with a strategy of dollar cost averaging into the energy sector and have seen my yield on total portfolio rise continually this year. The price appreciation is something that I have always felt to be here today and gone tomorrow.
    8 May 2013, 05:28 AM Reply Like
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