Newsletter

February 17, 2007

The Mindset of the Trader

Market & Sector Review
Climaxes

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

A very special Thank You to those who took the time last week to make a donation to this site. Rest assured these donations will be put to work in order to make The Prudent Trader site even more useful, and an even better aid to your profitability. Also remember the home page now contains thoughts and notes posted on a daily basis, so check back often. Thanks Again - Bill
The Mindset of the Trader

Way back in the 1960's and 1970's one decision stocks became a popular way to invest. A one decision stock is one you buy and hold on to forever. Along with this philosophy a select group of stocks became known as "The Nifty Fifty". Fifty stocks that were the ultimate one decision stocks; like IBM and GM. If you talk with some people who invested back then you'll sometimes hear them say: "I learned my lesson a long time ago. I put my money in the markets and lost it; Never again!"

They searched for "undervalued" stocks, purchased shares, held them, and waited for them to increase in value. Sometimes it worked, often it didn't. The buy-and-hold strategy often misleads investors. The markets don't go in one direction forever, whether the trend is bullish or bearish. Only by anticipating the twists and turns of the market can you make "significant" profits. If you are striving to become a profitable trader, you must cast aside the buy-and-hold mindset of the long-term investor, and learn to think like a trader.

The buy-and-hold strategy is still viewed as a viable trading strategy even in many business schools. Even in the wild 1990's fortunes were lost when the dot-com bubble burst, by people subscribing to that buy-and-hold strategy. Please note I am not addressing time frame. Had you purchased some of the dot-com stocks in 1995 let's say and sold them in 1998 or 1999 or even 2000, you still traded them. Your time frame just encompasses a much longer time frame than the very short-term trader.

Whether you trade based on technical analysis or prefer fundamental analysis you must try to assess the potential for that company. Are they still growing profits? Does the company have new and exciting ideas they are or will be bringing to market?

We never know for sure what the future holds. Who could have known five years ago the energy crisis was coming relatively soon and what that crisis would do to our domestic auto companies? It's difficult at best to make these forecasts.

Stock prices do reflect the companies' fundamentals most often; however they also reflect market participants perceived notion of what the future holds. Did your holding just report horrible earnings and a not so great outlook? Did their stock price decline? No! Market participants are probably now looking to changing conditions in the not to distant future, hence buying appears in the face of seemingly bad news. Don't be confused by it, listen to the market.

It may be hard to accept at first, but trading requires you to accept risk and uncertainty. It may take time and experience to accept, and you may get hurt along the way, but after a little while, you'll be able to accept uncertainty, and thrive on it.
Market & Sector Review
Climaxes

Each week in this newsletter I outline a thought process that I have personally undergone within the last week or so. Not that my thought processes are any better or worse than yours, probably if anything not as good as many. However we learn by taking notes and studying others. 2007 marks my 40th year in the markets (now that's a scary thought) and yes I'm still learning. The newsletter each week is in a way a quick summary of thoughts, of notes, not necessarily actions. The objective is obviously to reinforce certain things in my mind and perhaps lead you to a thought process that you can use or incorporate with yours in the future.

During November of 2006 I began a new scan which is called; buying/selling climaxes. The scan is based on Don Wolanchuk's definition of buying and selling climaxes, that is:
  • Buying climaxes: “take place when a stock makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.”
  • Selling climaxes: “occur when a stock makes a new 12-month low, but then closes the week with a gain. They are a sign of accumulation and indicate that stocks are passing from weak hands to strong ones.”
Those of you not familiar with Don Wolanchuk may wish to visit his web site: [The Wolanchuk Report] Don also posts on many message boards, look for the moniker Da Chief that is Mr. Wolanchuk.

Since publication of this scan was initiated (published on Friday evenings only) we rarely had more than a half dozen or so issues make the list and most often they were closed end funds, which I tend to discount. However I was a bit stunned when running the scan this past week to see seventy issues appear, a number not seen, even in the brief pullbacks in January. It quickly awoke my curiosity. Is this another warning sign? Let's take a closer look. First, eliminating all the Financial Services Groups, mostly closed end funds and ETF's, twenty nine weekly reversals off a twelve month high remained. This is still the largest number to date.

Initially I was interested in the concentration of climaxes; was there a significant number in a particular sector? A high concentration of climaxes in a particular sector can pre-warn of a potential industry rotation out of a sector. However you will notice from the above chart that seventeen of our thirty-one sectors are represented but we do not have a high concentration in any one particular sector. Is this therefore an anomaly and stock specific, not market or sector specific?

Interestingly enough Investors Intelligence also happens to keep this data, and charts of climaxes against the Dow Jones Industrial Average. Here is a chart courtesy Investors Intelligence of buying/selling climaxes vs. the Dow Jones in 2004. Note: Investors Intelligence utilizes the very same definition as the Prudent Trader.

I think it is painfully obvious that our seventy buying climaxes are not market threatening nor from the first chart above sector threatening. These are stock specific issues alone. Personally I do not own any of these stocks nor do they appear on any watch list of mine. Do you own any? Are any in a watch list of yours?

If you do own one or more of the above stocks or if any are on a watch list of yours: You may want to review Bill O'Neal's definitions on weak breakouts and buying climaxes to see if any fit this as well. You can view his definitions here: Weak Breakouts / Climax Tops. You might spend a little time this weekend in order to determine whether they should be held or replaced with something more appealing.
Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.