Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Lost Opportunity Cost (by David Kern)

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I received an interesting piece of mail this week.  If you invest/trade the markets long enough, you’ll get these sort of mailings fairly regularly.

It was an invitation to participate in a class action lawsuit over something Apple did between 2001 and 2005.  I don’t really know or care what they were sued over, but Apple settled – and the cash is now available to be claimed.  Essentially, if you bought shares of Apple during that time you might be entitled to some portion of a settlement.  I did a search of my trading records, and sure enough – there it was.  I’d bought AAPL on 11 Oct 2005 and sold on 18 Oct 2005: a quick 4% gain.  However, as I reviewed more of the legal mumbo-jumbo, it became clear that my take on the lawsuit settlement would amount to $0.07 (estimated) per share.  Bottom line – not worth my time to even fill out the class action paperwork.  The 4% I made on the trade four years ago far exceeded any reimbursement that I would receive from this settlement.

The interesting thing was realizing that the price I paid for AAPL at that time was $50.59 per share.  Wow, wouldn’t it be nice to have kept those shares?  My unrealized gain today would be 646%!  That’s not really” go-crazy-retire-to-Fiji money”, but it’s well over 100% gain annualized…  Why did I sell at that time?  Probably a stop, could have been an itchy trigger finger with a desire to book gains – really I don’t remember.  When I look at the chart from 2005, it’s really a facepalm moment.

This has been an introspective moment over the weekend, as it’s caused me to question some of my approach to trading the markets.  I assess that I do above average at picking what to buy, and I’m usually pretty good on when to buy also – but my timing on when to sell has had some sucktastic moments.  I’ve experimented with putting trailing stops on everything – only to be whipsawed out of stocks that continued up-up-and-away.  I’ve bought uptrending stocks that then paused and/or retraced just after I buy  – so I sold (locking in a loss) only to find them explode upward the next week.  I’m starting to think that I need to slow down my timeline a little; step back from every wiggle of the chart and let my trading positions work for me.

I’ve believed for a long time that “buy and hold” is a steaming load of crap.  There are a plethora of market indicators that clearly show market trend, and it’s foolish to go long in a bear market or short in a bull market.  My favorite indicators for trend are the market breadth and bullish percents (which as of this writing still show a bull market).  These work well and consistently.  My issue seems to be finding my rhythm for when to take profits or cut losses, and I’m open to ideas on how to improve my game.  I don’t care to hear the Warren Buffet answer (who has said his time horizon is to never sell), but I feel there’s gotta be a better system for when to sell.

By the way – going back to the question of buy and hold AAPL from Oct 2005 – I don’t think that would have been a good idea at all.  There were a couple of clearly defined downtrends the first half of 2006 and most of 2008.  I think any reasonable trader wouldn’t sit on his hands through that bleeding.  Certainly I couldn’t have, considering the market breadth and bullish percents clearly showed defensive situations during that timeframe.  What do you think?

Screencast: Apple Earnings Preview

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Hello, this is David Kern from AbjectAvarice.com with a guest post regarding Apple stock and Steve Jobs leave of absence.  That would be news enough, but this week should be even more interesting with earnings from AAPL after the bell on Tuesday.

I’ve decided to try something new with a “screencast” instead of the usual blog post.  I’m hopeful this format will help communicate better some of the cross reference sources and web tools I use – and especially my technical analysis observations.  I welcome your feedback!

Rumblings of a Correction (by David Kern)

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I've been quiet on my blog for a good week or so now, just watching the markets. I don't feel the need to post every day if the action doesn't warrant extended commentary. To be quite honest, I've been preparing to write a big "Repent Bulls, for the end is nigh" post… but it's not time for that yet. Not to say that we're not getting closer. There's been a couple fast moving signals that have caught my attention – most notably the McClellan oscillators for a number of the sectors and indexes have shown sell signals. I put a lot of confidence in sector and market breadth indicators, which the McClellan oscillator certainly is. The thing is, Mr. McClellan can say "SELL" when the result is just that the market goes sideways for a while and then explodes up again. I think you have to balance that out against the direction of the overall market's bullish percents – "see the forest for the trees."


Currently, the overall market bullish percents are continuing upward. More and more stocks are being overcome by buying pressure outvoting sellers. That's a situation that can actually last for an extended period of time, and can be a frustrating one to fight. Doubly frustrating if you're trying to call a top. Reference this next chart, showing the relative S&P 500 bullish percentage compared to the underlying index's performance. As you can see, the bullish percent remained "on offense" (that is, above about 30% and increasing – or anything above about 70%) for about a year with only one defensive period at the beginning of 2010. That whole time, the S&P 500 moved up strongly.

Don't you think you would have liked to stay invested the whole time that bullish percent was "on offense"? Me too.

So, for the time being I remain fully invested. I'm watching closely to see whether more breadth indicators will tumble, and especially how the bullish percents will fare.

My investment portfolio has rotated a bit, so if you haven't checked on my pick's performance lately give it a look.

David Kern (@AbjectAvarice on Twitter)

Rumors and the Chart – A Quick Look at BP

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The UK rag The Daily Mail broke a story yesterday that Royal Dutch Shell may be quite serious about a buyout of British Petroleum.  This rumor has been quite profitable for my position in BP (follow that and the rest of my portfolio here) – but I think the chart says that more strength is ahead.

My chart notes (click the image for a better view) show that today’s price action topped multi-year resistance going back to 2008.  Remember how bearish 2008 was for stocks?  Nobody was willing to pay more than about $45 for BP from about Sept 2008 through until May 2009.  Then the oil spill knocked BP back down to the 20′s.

But now, the chart says “all that is behind BP.”  The rumors were a nice catalyst this week, but the real reason for higher prices is increased demand for the stock since July!  The chart tells "WHAT" is happening, the headlines may or may not give some explanation as to "WHY".

Thanks for reading, I blog at AbjectAvarice.com where you can watch my stock portfolio in real time.

David Kern (@AbjectAvarice)

Macroeconomics and the US Dollar (by David Kern)

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I have two charts for your perusal, dear readers – focused on the broader indexes.  Tonight my thoughts go to my TSP allocation, specifically: my over weighting of the international index (the EFA).  This international index will tend to have a bit more volatility than the S&P 500, similar to the Wilshire 4500 (EMW) – but decorrelated at times.  Lately, the EFA and EMW have been rather decorrelated.  Much of this is due to the economic worries in Europe, as the PIIGS national economies (Portugal, Ireland, Italy, Greece, and Spain) have really shown how shaky this debt/leverage house of cards can be.

Exchange rates also have much to do with the relative performance of the EFA and US indexes.  As the value of US currency goes down (and o-how-it-has since 2000), the EFA will get a corresponding tail wind due to the greater currency valuations it represents.  Now lest you think this whole post is just a bunch of hand waving and pie in the sky economic mumbo-jumbo, I offer my first chart: hard core technical analysis of the EFA point and figure chart.  What I’m showing here is an equity clearly being owned by increasing demand that overpowers supply.  Prices can not increase without more buying interest than selling interest – and this chart demonstrates that in spades.  Fair enough, we should expect higher prices on the EFA and I’m happy to hold my investment there.

The natural follow up question is, “will the EFA outperform domestic indexes?”  That question I hope to answer by means of my second chart, showing the value of the US dollar on a weekly candlestick chart.  This proves by observation my earlier premise – that declining value in US currency boosts the performance of the EFA vs the EMW or SPX.  Notice especially the blue outlined timespans: when the US greenback falls, the EFA was killing versus the domestics. Now granted, my chart note about a possible top forming is speculative – but it does fall in line with a descending channel.

I think the more compelling argument for decreasing value in the US dollar is in the headlines.  You may have heard of quantitative easing, which is how my government has chosen to try to stimulate the economy (it really just means printing more money that didn’t exist before – I wish I could do that).  Contrast that with the austerity measures being imposed overseas, and I think it’s a safe bet that there is room for the value of the dollar to fall further.  Bottom line – although the EFA has underperformed the domestic indexes lately, I expect that those roles will reverse.

Thanks for reading, I blog at AbjectAvarice.com where you can watch my stock portfolio in real time.

David Kern (@AbjectAvarice)

Where Do We Go From Here? (by David Kern)

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As I fought off the crippling effects of tryptophan poisoning this weekend, some brief moments of lucidity gave me opportunity to look at some charts.  What I saw inspired me to get out the crayons and make some annotations.  Whether or not all this rumination will help my stock portfolio remains to be seen.

As the ancient Chinese proverb goes, “may you live in interesting times.”  Indeed we do.  There are currently some significant contradictory signals within the world of technical analysis, and some pretty attention-getting headlines as well.  There are plenty of ominous headlines:  “S.Korea’s Lee: North to ‘pay price’ for attack“, “Saudi king urged US to attack Iran: leaked documents“; but then there is also encouraging news: “EU agrees on $89 billion bailout loan for Ireland“, and “Black Friday: More shoppers, modest sales“.

I think the only reasonable response by traders is to look at the charts, for all the news/sentiment/seasonality/astrology/etc is contained in the movement of the price.  In the end, it doesn’t truly matter why the price moved — all that matters is what movement occurred and what is likely from here.  I spent some time cuddled up to the S&P 500 chart, and my notes are summarized in the picture embedded in this post.  I thought it was especially interesting to take a step back from the daily chart to see the forest for all the trees in the weekly.  Three observations I thought worthy of mention:

  1. Until the wheels came off the bus in Aug/Sep/Oct 2008, a support level was established in the 1200 – 1225 range.  Then the bottom dropped out.
  2. The markets digested a lot of bad news between Sept 2008 and Sept 2009 (and the bears had a massive party).
  3. Support has been established over the last year at around 1010 to 1045, with resistance near 1220 as we bump up into the previous 2008 support levels (which is where we happen to be now).

So — what now?  Based on the current readings of market breadth and bullish percents, with a clear uptrend in place: I think it’s very risky to short the market here. The “Minority Report” in favor of a bearish stance right now is the McClellan Oscillator (posted to the right), which did move to a sell signal recently.  Note that market breadth and bullish percents could swing quickly to show supply back in control, and that would change this non-bearish opinion rapidly. Even then, I would hesitate to short the market aggressively until the support at 1010 had fallen.

The least risk, of course, is to sit in cash/bonds and wait for a clear opportunity to strike.  (But that carries lots of opportunity risk…) I think with the market sitting on its 200 day moving average, plus market breadth and bullish percents showing buyers in control, there’s a lot of reason to suspect a healthy bounce higher this week.

Of course, it’s equally likely that Wall Street suffered the same tryptophan hangover I had.  Then it might be 2011 before we see any real movement bullish or bearish!

Check out the rest of David Kern's trading blog, AbjectAvarice.com

Top 10 Considerations when Picking a Stock

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CRAMER-STEWARTIf you are actively involved in
trading or investing, it’s inevitable – someone will ask you, “How do
you pick a stock?”  The corollary is that those who like to watch Jim
Cramer won’t wait to be asked.  They have stocks they want to tell you
all about.  Followed by a “booyah” or two.

If you’ve been trading for any length of time with any measure of
success – then you likely have your own system.   Maybe you’ve taken the
time to write it down for meditation and refinement.  This is one man’s
hack at that.  My system uses a trading timeline of usually at least a
week, but the position could last much longer or be closed quickly.  It
could be called swing trading, it could be trend following.  I’m
not a day trader – I have a real job that I really enjoy and can’t/don’t
want to follow every tick of the market.

Notably absent from this discussion will be when to close the
position.  Profits, of course, are locked in at the close of the trade –
but really they are set up when the trade is initiated.  Entry into any
position must also include firm and clear expectations, with
contingency plans if things turn out otherwise.  Those considerations
will have to be the topic of another article.

Today, I’ll write from the bullish perspective – but this method can
be inverted to identify shorts also.

1. Market Supply and Demand: I always start here. 
Are buyers or sellers in control right now?  Is the tide changing?  My
tools for measuring this are bullish percents and cumulative market breadth.  If the New York Stock
Exchange bullish percent is rising, then demand is overpowering supply
and prices must rise over time.  The reverse is also true – a falling
NYSE bullish percent with supply overwhelming demand will lead to lower
prices.  The turning points take some care to navigate, but established
trends (especially as they pass the 50% mark in either direction) make
for high confidence.  By the way, if you don’t understand how bullish
percents work I highly recommend Tom Dorsey’s excellent book “Point and Figure Charting“.  I also mention
cumulative market breadth, of which McClellan breadth is a variation.  This is a faster
moving indicator than the NYSE bullish percent, and serves as a good
confirmatory reference.  Again, the trend is key: I prefer the weekly
chart of cumulative market breadth compared to a 5 to 10 week moving
average.  Cumulative market breadth above the moving average shows that
buying pressure is causing stocks to rise.  These indicators should
tell me which side of the market to be on: long, or short.
If
supply is in control, I don’t want to look to buy long positions – I’d
be swimming upstream!

2. Sector Supply and Demand: Same method and tools
listed above for the broader market, applied to the sectors.  Just
because the broader market is controlled by demand or supply, doesn’t
mean that all the sectors are experiencing the same bull or bear
market.  The exercise of looking at bullish percents or cumulative 
breadth trends within each sector often doesn’t so much identify which
sectors to invest in, as which sectors to currently avoid.

3. Sector Relative Strength: Having determined which
side of the broader market to trade on, and narrowed down which sectors
are of immediate interest – I want to focus on the best and strongest sectors.  Better and stronger
sectors will gain value faster than the overall market, as well as their
peers.  Put another way, if you’ve got a sector that shows demand to be
in control within a bull market – but it’s not outpacing the market –
maybe you should put your money elsewhere.  I should note that this
isn’t an eternal chasing of performance.  I don’t want to be late to the
party, but I’ll try to figure out which one looks like it’ll be more
fun and then hang out there.

4. Screen for Fundamentals: Quality over penny stock
speculation here.  You may have your own fundamental criteria for
ratios like P/E, or you may prefer to use the ratings of a research firm
like Standard and Poors.  Although the suspect and capricious debt
ratings of S&P may be partially to blame for the housing bubble and
subsequent recession, their company reports can help to weed out
companies with obviously bad balance sheets.  It can be a bit of a
beauty pageant to determine which of several leading companies have the
strongest fundamentals, but the rest of the trailing pack is often
easier to sideline.  Many online brokerage sites will give you access to
these sorts of reports, I like to look at (on the long side) S&P
four and five star rated companies.

5. Individual Supply and Demand: By this time I
generally have a short list companies to consider, from a few to a few
dozen within any given sector.  Here I like to look at all the charts
iteratively and in somewhat quick succession.  This helps me to identify
trends within the group, and also outliers.  The first thing I’m
looking for is a buy signal on the point and figure chart.  I like
P&F charts, as they clean the noise out of a chart and help “see the
forest for the trees.”  I’m also starting to eyeball if there are clear
entry/exit points on the chart, but there will be more on that in #7,
“Support and Resistance”.  Before moving closer to buying, I really
would like to see that the chart is on a P&F buy signal, for that is
a clear and unambiguous identification that demand is overpowering
supply and driving prices higher.

6. The Trend is Your Friend: From the point and
figure chart, I’ll move to looking at a weekly and then a daily
candlestick chart.  This part isn’t voodoo, it’s just being able to note
the intermediate and short term trends.  I don’t want to fight the
trend.  If I’m looking to buy, I want a weekly chart that shows
steadily increasing prices.  Perhaps the chart fell recently (right
now, most have).  Since the fall, has the bleeding stopped?  Has it
established an unambiguous uptrend since bottoming out?  Is the overall
line sloping up or down?    Here’s my favorite: if I didn’t
believe the market was currently controlled by demand, would I be
willing to short this stock?
That question right there can
really shake up the decision process and weed out “wish trades.”  This
step and the previous is where I dismiss a lot of charts.  It’s common
to be afraid to miss out on a lucrative entry – but lost opportunity is
always preferable to lost capital.

7. Support and Resistance: This step could also be
titled risk vs reward.  It is key to identify where I want to enter and
then eventually leave the position.  Chances are (and I’ve made this
mistake often), RIGHT NOW IS NOT THE BEST TIME/PRICE TO INITIATE THE
POSITION.  Think about it – what are the chances that this process of
research has not only identified the right stock, but you are also
coincidentally poised at the ideal time to buy it?  This occasionally
happens, or you could be near the right price.  In this game you want
every advantage possible.  Again, lost opportunity is always preferable
to lost capital.  It’s far better to have entry orders never execute
because the stock never met your limit price, than to buy immediately
and find that it was really at an inflection point and now in a
downtrend.  Bottom line – if the stock has been wiggling in a channel, I
should wait and try to grab it at the next swing low.  If it’s in a
steadily plodding up trend, then I don’t wait for a dip that may not
happen.

8. Insider Trading: I don’t start my process at
insider trading, but I like to look here to identify potentially hidden
gems.  The only insider trades that will really catch my attention is
unusually large purchases – I don’t care about award of options, small
purchases, or even sales.  On the bullish side, insider buying can be a
real confirmatory signal.  Look, if some director or vice president
recently parked a large amount of personal cash in their own company’s
stock – then I’ll share some of that confidence and possibly prioritize
this trade.  If there are no insider buys on record, or even just sales,
that won’t stop me from buying.  Why don’t I care about insider sales? 
It’s doesn’t send the same clear message as buying.  Who knows why they
sold (perhaps even a large amount of shares)?  Maybe she’s buying a
McMansion, perhaps he has to pay his kid’s college tuition, or somebody
just bought a yacht.  Can’t tell from the SEC filing.

9. News and Rumors: Has there been a recent,
dramatic price move by the stock I’m considering?  A gap up or sudden
cliff, followed by trading in a tight range?  Check the headlines.  It
could be that there’s something that the market knows about this company
that you don’t.  These events could drive it to temporarily outperform
the market, but that pace may not be sustained.  You have heard the
axiom, “buy the rumor, sell the news”.  That’s great if you’re in a
position to know the rumor in advance.  I don’t try to find those “hot
tips”, but I do try to have a general idea of what’s driven unusual
price activity.  If it’s not abundantly clear, I’ll avoid initiating
that position.  Many times a crisis could have driven a stock way down,
but once the storm has cleared the chart will pick up its previous
uptrend.  That’s actually a really nice setup, because that publicity
spotlight serves to expose many of the dark corners of the company’s
operations – and they could be stronger after the housecleaning.  For
this reason I’m watching BP.

10. Company Calendar: This is one last sanity check
before initiating a position.  Is the company about to release a
quarterly earnings report, and do those reports have a history of
driving large price moves?  Is the company involved in a widely
publicized class action lawsuit with a verdict expected any day now?  Is
the stock I’m considering shorting a big dividend payer, and about to
go ex dividend?  Those first two considerations may actually be reasons
to initiate the position before the news release, but then I have to ask
whether I’m gambling or trading.  The dividend question is one to
consider on both the long and short side – and it could be the decision
point, or no big deal.  A few minutes research can prevent being left
holding the bag.

You’ll note that nowhere in this list is “company was the topic of a
cover story”, “bottom fishing at the new 52 week low”, or even
“mentioned by Jim Cramer”.  Especially not the latter.

I welcome your comments and insights, thanks for reading.  Please
feel free to subscribe
to my writing at AbjectAvarice.com
.