RE: Retracements after spikes and expectations...
We could probably agree on the premise that gorilla gaming and the types of returns we are hoping to achieve on an annual basis for an extended period of time attracts us. We are encouraged that we might be able to beat the average S&P 500 (Common Stock) return of 11.35% since 1926. The thread focus of trying to stick to the most risk averse method of doing this indeed is one of the most attractive and intelligent reality checks for the majority of our portfolio's content. The reality of the 1990's and the exceptional returns raised the level of investor's desire to increase their risk through the excessive use of margin as well as choosing many investments with much higher degrees of risk in an ever increasing portion of their portfolios.
Why did this happen? Academics refer to this as the 'house-money' effect. In other words, investors become much less sensitive to losses if they have considerable previous gains. The gambling term which academics use is likened to a gambler who hits a stroke of luck early on in the evening which most often leads to taking riskier bets as the night progresses because they feel they are playing with the house's money. Have we seen this in the stock market? I can certainly attest to the speculative portion of my portfolio increasing from its historic 5 - 10% discipline upwards to nearly 20% at times over the last few years. The market decline pretty much knocked it back into line without me having to do anything about it in terms of adjusting the percentage.
Even if we use the historical common stock annual gain percentage of 11.35%, the power of compounding at that rate makes a compelling argument for investing over the longer haul. We've all read or heard the oft quoted time element of doubling one's money every 7 years. Well, here it is:
Year 0 = $100,000
Year 1 = $111,350
Year 2 = $123,988
Year 3 = $138,061
Year 4 = $153,731
Year 5 = $171,179
Year 6 = $190,608
Year 7 = $212,242
Year 8 = $236,331
Year 9 = $263,155
Year 10 = $293,023
Year 11 = $326,281
Year 12 = $363,314
Year 13 = $404,550
Year 14 = $450,466
Year 15 = $501,594
It's no secret that the desire to shorten that 7 year time frame of doubling one's money stirs the interest of many investors. Plenty of risk is added to the equation in an attempt to take the route of the hare, rather than the path of the tortoise. Be it an attempt to do it in one month, three months, six months, a year, two years, three years or five years. We have all taken on various of levels of risk in an effort to shorten that 7 year time frame. I know that my own original goals of growth investing which I started back in the 70's and 80's was to try for a 15 - 20% annual gain. I considered that a very aggressive target and still do to this day even though many times the return has been better than that. Yet, I refuse to alter those goals. To think that there were times in the 70's where I could have achieved my goals from a simple bank CD.
Here are a few tidbits from a recent joint poll conducted by the Gallup Organization and Paine Webber:
- The average investor expects the stock market to rise 15% in 2000.
- That same investor is looking for their mutual fund or common stock portfolio to gain 18% this year.
- Investors expect the stock market's average annual rate of return for the next decade to be about 19% - a rate of return greater than the S&P 500's average annual return for the 1990's.
All of those expectations found by the Gallup Organization and Paine Webber are above historic norms for the equity markets. To use my analogy - too many hares and not enough tortoises. Although my long term goals of 15 - 20% puts me squarely in the team of hares as well.
A few factors combined created the current environment. The broad index return of the Nasdaq (86%) for 1999 has never before been met in one calendar year. The previous 'record' was held by the 12 stock Dow index which had a 73% return in 1915. The quick bullish run from October to March combined with the reality of interest rate directions and valuations of 'new economy' stocks set the stage for retracement.
The last recession ended in the first quarter of 1991 (1990-1991 was a Gulf War and recession based bear market).
I provided the link to a board which often talks about TA at the Fool yesterday. I wasn't attempting to convince anyone as I am not involved in TA with my investing. In fact, I wandered on that board in response to a golf question about hitting a 5 iron shot correctly. I thought some of the information I read on that board and post which includes 'theory' from a couple of respected 'manuals' in the TA field might be interesting to glance at even though many of us are not traders.
However, for investors who do invest on a monthly or a quarterly basis and are always looking for attractive entry points for additional shares of our favorites, I don't see the harm in at least being aware of what happens when a market becomes a technically traded market following a US index setting record run such as the Nasdaq experienced. This doesn't mean that one should be trading their holdings, but the awareness factor might provide a level of assurance that it is all 'part of the process' for long term holding of our favorite companies.
Here are a few elements of that Fool post:
As you may already know, the most commonly used retracement percentages are 33%, 38%, 50%, 62% and 67%. From The Visual Investor:
Prices normally retrace the prior trend by a percentage amount before resuming the original trend. The best known example is the 50% retracement. Minimum and maximum retracements are normally 1/3 and 2/3, respectively. Elliot wave analysis uses Fibonacci retracements of 38% and 62%.
Qualcomm
I calculate the beginning of the up trend for QCOM at about $6.50/share in January, 1999. I calculate the top to be about $160.00 in December, 1999. I ignore the few days above $160, as it was just a brief, hype-driven explosion. Realistically, the stock topped at about $160.00.
Jan '99: $6.50
Dec '99: $160.00
Change = 160-6.50 = $153.5
38% Retracement = 0.38*153.5 = $58.33
50% Retracement = 0.50*153.5 = $76.75
62% Retracement = 0.62*153.5 = $95.17
67% Retracement = 0.67*153.5 = $102.84
Therefore, subtracting the retracements from the $160.00 top gives the following prices:
38% Retracement = 160.00-58.33 = $101.67
50% Retracement = 160.00-76.75 = $83.25
62% Retracement = 160.00-95.17 = $64.83
67% Retracement = 160.00-102.84 = $57.16
Mike wrote:
Here's something to chew on: I won't be surprised if Siebel falls farther than the 40% it's fallen. Maybe the reason it hasn't fallen farther is because Oracle, much more of a bellweather stock, has only fallen 25%. I dunno. I don't predict short-term movements.
True, nobody can predict short-term movements and that is why we make the case for longer term investing. However, plenty of TA folks are applying their favorite manual's theory of retracement percentages from the spike tops and realistic tops of our favorite investments. I recall seeing several of the more 'noted' TA experts being rolled out on CNBC over the past few months with their data as well. It's all part of the process. Whether one looks at it as a self-fulfilling prophecy, a return to trend lines, a valuation reality check or any other view - it has been and is happening. For the long term, this is a healthy process in spite of the short term pain that always brings out the 'woe is me' thoughts.
Every brokerage house and institutional investment organization has their own TA department. They are plugging all of their data into the equations they use to get the calculations which provide the signals they respond to and use for their long term success. We know they make money in both directions and are pretty aware of the situation. How many of them are accurate with their results? I don't know. We don't have to know to be successful long term investors. However, a little awareness on our part certainly doesn't hurt. I also don't know the accuracy of the data above which was provided/calculated by a non professional TA Fool in terms of Qualcomm's price. How would it compare to the professional's version of where the top was for Qualcomm and where the retracement points were? It's probably in the ball park, but I don't want to speculate because I'm writing about something I know nothing of at the moment. I'm sure there are others who know much more and could respond to the numbers used in looking at Qualcomm's trend, top and retracement levels.
Then, we mix in the news releases of the CDMA, the holy wars, investment sentiment and the picture becomes even more blurred. Yet, if there is any accuracy to how and why the retracement theories that the technical analyst community follow - as a long term investor in Qualcomm (or any stock) I might find it interesting. Why? Simply to know what the 62% to 67% maximum retracement points that TA folks are looking for in the share price and how that information might be used by the major brokerage houses or investors. It might all be wacky theory, but it might also provide some insight to support levels so I don't have to go to bed at night with the fear that Qualcomm is going to $20 a share. (I'm not saying it couldn't for some unknown reason, but I'll stick to the context of the retracement theory.) It might also be of interest to me if I wanted to buy more shares of Qualcomm (which I did - all at various points that I now know in retrospect were pretty close to some of the retracement points). It might also be a big load of BS, but there are a lot of people that follow that big load.
Sorry for all the OT chat, but realistic market expectations for long term investors - even for gorilla gamers - are certainly in the ball park for discussion.
BB |
