Ian Woodward's Investing Blog

Identifying Tops and Bottoms in Market Indexes are always difficult.  However the High Growth Stock Investing (HGSI) software has a unique set of indicators of unusual events in the ebb and flow of the market that give early warning to sit up and take notice. There are three such indicators which all use the proprietary Visual Filter Back Test (VFB) function which enables showing when a specific set of conditions is met.  The appropriate color coding can be used to highlight positive and negative conditions with green and magenta/red, respectively. 

The three indicators featured below are the Eureka, Kahuna and Tsunami as discussed briefly below.  I have used the latest pictures for the Nasdaq to show how these proprietary Indicators were flashing red these past few weeks and should be followed as the days and weeks progress: 

The Kahuna: The first unique indicator provides “one-day” snapshots of major up or down days in the market, i.e. Volatility, as depicted by the long green and red candles in the Price window.  Those conditions are captured by the Kahuna Indicator which has four conditions depending on the extent of the 1-Day change in both Price and Volume.  We use light green and dark green to indicate Little or Big Kahunas on up day and magenta and dark red to indicate the reverse, respectively.  The value to the user is several fold in visually depicting the Volatility in addition to Price and Volume in the market.  Clusters of these green and red bars give clues to market topping or the beginning of a new move, as shown in the chart below:

Note the light green, dark green, magenta and dark red in the window above the Price Window showing the various types of “Kahuna days” over the past year.  When the bars are closer together that depicts heavy volatility and a sense that the Nasdaq Composite Index is running out of steam and may be due for a correction.  This is apparent from Jan. to late Feb. and again in mid-May to July in 2007. 

The Eureka: The second type of unique Indicator works hand-in-glove with the Kahuna and is called the Eureka.  It is shown in dark grey in the Volume Window on the same chart above.  The Eureka uses a totally different set of conditions based on the ARMS Index than the Kahuna, and is aimed to depict unusually strong accumulation, primarily at the start or continuation of a bull run.  When green Kahunas and grey Eurekas appear closely in the same week it usually signifies the start of a new rally.  However, when a Eureka signal appears towards the end of a Rally as it did in mid-June, it invariably signals caution of a potential correction to come.   Please note that these Indicators can be placed in any window at the whim and fancy of the user.

The Tsunami: The chart below shows the VFB indicator being overlaid on the Price sub-window to show a particular market index condition identified and named as “Tsunami” by Ian Woodward. Tsunami conditions were met where you see the chart color coded green and magenta, representing a bull run or a correction, respectively. Once an Index like the Nasdaq has shown signs of choppiness, the Tsunami will first show alternate green and pink zones and then a long downdraft of pink denoting a broken Index. 

The Tsunami conditions that give the above visual effect are essentially triggered by the Index or stock falling below or rising above the middle Bollinger Band (BB) as shown in the above chart.  Note that when the Nasdaq Composite Index is rising, it sits between the middle and upper BB and is shown in green.  When the Index falls between the middle and lower BB it is shown in red.  The panoramic “pictograph” immediately conveys the feeling of a rally or a correction in the Nasdaq Index and information to the user to either buy, or hold or sell depending on their investing style.

Investing, Trading or Playing in the stock market is like playing the game of “Snakes and Ladders”.  I remember as a little boy playing Snakes and Ladders – they call it “Chutes and Ladders” in this country.  I’m sure you remember it; you throw the dice and if your marker counts over to the bottom of a ladder you trot up to the top of the ladder.  If you hit a snake (or a chute), down you go the length of the snake.  It was frustrating in trying to get all the way from 1 to 100 on the board, too many snakes!  Somewhat analogous to the chances being few and far between of finding a stock surviving to deliver $1 million, 15 years from now, off your initial bet of $10,000 today.  Also some snakes are longer than others meaning corrections can vary, but can hurt you if they turn into a bear market.

Some prefer that the bird in the hand is worth more than two in the bush; never allow one’s hard earned profits to vanish.  I like to have my cake and eat it too.  With that in mind, if a stock has made 50% gain I will invariably take 70% off the table and let the rest run as long as it does not turn into a loss.  Likewise, I need hardly tell you that if a stock is 100% above its 200 Day Moving average (200-dma), it is invariably very extended and most fund managers as a rule of thumb will take half off.  Both examples take your Capital off the table, and what remains is profit to do as you wish.

My so called “Mattress Stuffers” portfolio comes from stocks that have proven themselves over time, but not before I have taken some profits along the way and I then let the rest ride as long as the stock continues to rise.  They remain so until the company, stock, and market tell me to take profits and have the discipline to get back into the same stock when the coast is clear.  Never let your Mattress Stuffers get lumpy.  Let me elaborate:

We must find ways to avoid the snakes and run with stocks when they land on ladders.  At the start of a fresh game, a fresh bull market, one can be more daring in letting one’s profits run.  When the bull gets tired, play it closer to the vest.  Likewise, if a stock or the market has had a good run, the odds increase that it will correct.  It may be a perfectly good company, but if the stock gets ahead of itself or has a climax run, why give up the profits of a sure fall?  Take the money off the table, wait for the pause to refresh, and hop back on when the coast is clear.

This “pause” may be 6-8 weeks, 6-8 months, 16-18 months, or never; depending on the behav­ior of the market, stock, and company. It is easier said than done.  It takes discipline to stick with such a strategy – our biggest enemies, fear and greed, lead us to mistakes.  I believe the High Growth Stock (HGS) discipline enables one to hop on and off the ladders fairly successfully.  Off the ladder, one’s money is parked safely waiting for the stock to refresh, the market to turn from -MMM to +MMM, i.e., from a heavy correction to a new bull rally, or the company to regain its footing.

Of course the best of us can’t time things that perfectly.  But my point is when you give me 15 years to play the ball game with a fresh and young star of a company like XRX or IBM in the early 1960’s and 1970’s, a WMT or HD back in the 1980’s, or an AMGN, MSFT, CSCO and INTC in the 1990’s, having spotted them in their formative Growth Period there comes a time when either the Market or the Stock or both have matured and then turn sour.  It makes no sense to sit tight through Bear Market Corrections that can eat all one’s hard earned profits up in a short period of time.  We don’t have to go back that far; think about QUALCOMM (QCOM) at $960 back in its hey-day before the dot.com bubble burst in March of 2000, or even Google (GOOG) which is the biggest star of this new century, which will surely do as well in time to come. The major dips one avoids will make up for the few rungs of the ladder one may have missed – by far!

As the song goes, “Learn when to hold them, and learn when to fold them”, but always come back to play another day, especially with stocks that have been profitable for you and are just pausing to refresh.  All the more reason to sell, hopping on again later.  Let your profits run or you never get hurt taking profits are old adages in the Stock Market, but don’t play Snakes and Ladders with your money.