Mr. Joseph Silent,
I only recently received your message that was addressed to me so please allow me to reply to it:
Surely, you cannot be suggesting that background conditions
(which now can't be compared with the previous earnings
season(s)) can be ignored in favour of a graphical pattern?
Yes and no. It's really contingent on having a clear understanding of what exactly "graphical patterns" are telling us. Why do I look at charts? Is it because I can't work with the numbers? No, but is because of something greater.
You see Mr. Silent, fundamental analysis is very effective. I've used it for a number of years and I continue to use it today. But "graphical charts" help me because they compensate for something fundamental analysis doesn't cover.
Take the example of Oxford Health. In 1996, the stock was among the hottest of Wall Street. Their numbers were superb and every analyst was pleading with their clients to buy shares. The fundamentals were impeccable: Great Earnings growth, Sales Growth, strong cash position, return on equity, profit margins, cash flow, etc. You name it, Oxford had it.
A very unfortunate thing though occurred in late 1997. It was revealed that the company was flying blind and wasn't really sure how accurate their numbers were.
Bamm! In one day, without warning, the stock fell 70%. It was in the 70s one day and the next in the low 20s. Was there any warning? Could of it have been seen??
From a fundamental perspective, certainly not. Why? Because fundamental analysis comes in assuming that all numbers are true. If we remove that assumption, the basis of Fundamental Analysis falls. Therefore, I contend, Oxford's problems could not have been seen from a fundamental perspective.
On the other hand, let's examine the chart. You see, when corporate executives realized how bad the impact would be of their "false" numbers, they began telling people. Their friends, their family, fund managers, etc. They were hinted to insiders and others before actually announcing it. People "in the know," whether they were doctors who were working with Oxford or the Joe Shmoe across the street from the Headquarters, they knew before everyone else something was terribly wrong. SO they sold shares or shorted. By doing that, their actions were recorded in, you guessed it, the chart.
You see charts are used to assess the strength of bulls and bears and determine who is the dominant force. A dominant force is rarely out of the information loop. They know things before we can ever know them, but we can learn from them through their actions in charts.
Now there's nothing mystical or hocus-pocus about chart reading. Stocks trace various patterns for reason soundly based in human psychology - and it's psychology that determines stock movements.
Thus, to predict the action of a stock, it would be ideal to have all the hard, economic facts, plus an accurate insight into the minds of the public. That recalls the sad old jest, "If I had some ham, I'd fix me some ham and eggs, if I had some eggs." The fact is nobody can know everything that may affect the price of a stock. To be sure, it's an enormous advantage to have advance knowledge about earnings, dividends, stock splits, mergers, oil discoveries, or new products. But to profit by such knowledge, the insider - and his sisters, and his counts, and his aunts - must buy stock. In so doing, he increases the demand for the stock, just as when he is ready to sell, he increases the supply of the stock. In either case, his action must register itself in the marketplace, where the alert investor may observe the signal.
So to answer your question, I don't ignore background info, but I take it into consideration. It, however, will not by itself determine by decision to buy or sell a stock.
How the heck does one ignore all these conditions? I'm reluctant
to close my eyes to these in favour of a graph.
Hopefully, the above answers this as well. I don't ignore them, but I know there are things I don't know which should have their proper weight as well. In any analysis, we have to compensate for that which we do not know. Charts help us measure how much to compensate.
Conservatively Yours,
Raymond J. Norris |
