Forum Archive Index - July 2001

[Phaedrus <Phaedrus@techemail.com>]

Hugh, 
     Some answers to your questions :-
  "The part that puzzles me is that if charting doesn't predict, then what is 
the point of it?"   One of the main objectives of charting is to identify 
trends, with a view to participating in them. Charts show us if a stock is 
trending up (or down), and when that trend ends. 
  "It doesn't analyse in terms of the things that matter i.e. the quality of 
the management, the product, the market characteristics,the gross yield %, the 
nta per share, the p/e, the yield on shareholders funds, the growth of earnings 
per share."  All of these things are reflected in the share price. The price 
discounts everything. By studying the shares price movement, we are following 
(albeit indirectly) changes in the underlying fundamentals, as well as changes 
in the markets perception of those fundamentals.
  "Is the apparent info that the 'uptrend has ended' useful?"   Absolutely. 
Since I am only interested in holding stocks that the market is in the process 
of re-valueing, I need to know when the market considers that a stock has 
reached a fair valuation, and the uptrend ends.
 Consider TLS. This stock listed at a discount to its true value. The market 
proceeded to re-value it at a rapid, but steady rate. It went up about 8%/month 
for month after month. For about 15 months. Then it stopped rising. No-one was 
prepared to pay more than $9.20 for it. This was the absolute maximum value the 
market was prepared to place on this stock.   
  "So what's the point of saying the uptrend had ended if the stock then 
resumed its upward movement?" Stock prices generally move in a zig-zag manner. 
Uptrends tend to be followed by downtrends, or perhaps trading ranges. Since we 
are not interested in holding on to this stock should it be moving sideways or 
down, the end of the uptrend is a sell signal. Surely you do not think this 
stock could have continued going up forever. As a fundamentalist, at what level 
would you consider TLS fairly valued (or overvalued) and sell? I would be 
really interested in your answer to this question.
   Consider TLS again. Say you or Snoopy analysed this stock in terms of the 
things that matter, such as the quality of the management, the product, the 
market characteristics,the gross yield %, the nta per share, the p/e, the yield 
on shareholders funds, and the growth of earnings per share. You concluded that 
TLS shares were valued at say $8.50 which made the issue price an absolute 
steal. You backed up the truck, buying 30,000 shares for $100,000 as soon as 
they came on the market. Following a simple trend-following system, you would 
have exited 15 months later at $7.78 yielding $233,400. But you didn't. You 
held, because the fundamentals were good. In fact they are still good. Only 
trouble is, the market now values your holding at $161,000. You have lost well 
over $70,000 by not selling when the uptrend ended. It is actually far worse 
than that, because had you sold, you would have had the use of more than 
$233,000 for over 2 years. Is the info that the uptrend has ended useful?   I 
would say so!
    Look again at the TLS chart below. See how easy it is to see the uptrend, 
and where it ended. See how it was followed by a very clear trading range, and 
then a definite downtrend. Yes? 
              Phaedrus.


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