Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

"Stock Market Gurus and Technical Analysis"

I knew nothing about the stock market intelligent investing or trading until I was 36 years old. As a new investor, my first exposure to technical analysis was from the words penned in 1996 by David and Tom Gardner in The Motley Fool Investment Guide, page 226, first edition:

“Next put your hands together for the amazing Phyrum – magician to princes, wizard of the North, prestidigitator extraordinaire! Observe the sleight of hand, the sheer hocus-pocus, the hypnotic influence that this master of mummery exerts over millions….”

This book was also the first in my self-education in stock market investing.  These two young “gurus” in court jester suits were dismissing technical analysis as “hocus-pocus.”  My initial embracement of these gurus and their Investment Guide led me toward additional fundamentally-based stock analysis books, that also dismissed technical analysis, including, The Intelligent Investor, by Benjamin Graham, Security Analysis by Benjamin Graham and David L. Dodd, and three books by Peter Lynch. While the fundamental analysis books provided me with an excellent education in valuing businesses that also trade in the stock market, it kept my portfolio away from part of the most profitable stock market bull runs of all time. In 1997 and ’98, my dentist was making lots and lots of money by holding large cap technology stocks, while my portfolio lagged with stocks like Benihana. At that time, my stock market knowledge universe had no basis for buying or owning technology stocks because their fundamental valuations were totally absurd by any rational measure.

As a lagging investor during 1997, and 1998 within the long and profitable bull market, my second exposure to technical analysis was from words penned by William J. O’Neil in How to Make Money in Stocks:

“The top two or three stocks actionwise in a strong industry group can have unbelievable growth, while others in the pack may hardly stir a point or two. Has this ever happened to you?” (Page 34, second edition)

These words peaked my interest in technical analysis as a potentially valuable tool. May be it wasn’t hocus-pocus! O’Neil provided a practical and somewhat rational basis for explaining why and how to buy and hold absurdly valued stocks that made the most spectacular gains in the greatest bull market of all time. Of course, at the time of the late 90’s there were also a gaggle of other expert market gurus, including the Motley Fools that also had their own rationales for buying and holding these fundamentally way-overpriced technology stocks. What separated William O’Neil from the other gurus was that his “Investors Business Daily” (IBD) paper’s technical approach kept his followers and me out of the stock market just after the market bubble began to burst in early March of 2000.  The appearance of regular distribution of stocks on higher volume seen on technical charts, prompted IBD to recommend that readers lighten up on stocks.

By following O’Neil’s philosophy in late 1998 through 2001, I was able to accumulate Checkpoint Software stock, and increase my net worth from behind the 8-ball to where someone at my age and income should be financially according to most CFPs. More importantly, I was able to preserve these paper gains by deciding when to sell.  Was my 600% realized gain just luck, or hocus-pocus? Was I a fundamental genius? Was it just the bull market making all bullish market gurus and me geniuses?

O’Neil’s apparently remarkable fundamentally and technically-based CANSLIM approach has kept many traders safe and secure over the last 3 years, while also enjoying the substantial stock market gains that occurred since March of this year. The right-on advice of O’Neil beginning in March of 2000 and beyond has rightly served as major sales pitch material for recruiting new subscribers to the Investors Business Daily (IBD), and disciples of CANSLIM. I suspect that this was a very successful campaign over the last 3-plus years. The market bottom made in March of this year corresponded to IBD’s daily market commentary moving from Section B to the front page. At about that time the required bullish large-gain-high-volume “follow-through day” occurred. This is the required ingredient for IBD to proclaim or at least suggest its time to buy stocks. Could it be that the CANSLIM method is a sure fire way of making money and avoiding large losses in the stock market? It has had a very successful track record and has a sound basis. Could it be that easy? I’ve heard it said that every time someone thinks they found the key to Wall Street, someone changes all of the locks.

Words written by Dr. Alexander Elder in Trading for a Living page 18, are relevant to examine:

“A new market cycle guru emerges in almost every major stock market cycle, once every 4 years. A guru’s fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States.

A market cycle guru forecasts all-major rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his next forecast. As more and more people take notice of the guru, his advice becomes a self-fulfilling prophecy. When you recognize a hot new guru, it pays to follow his advice” 

Whether CANSLIM works all the time or not may be immaterial now. On Monday the NASDAQ suffered its 2nd distribution day in recent trading. (A distribution day is a down market day on higher volume than the volume of the previous trading day.) Wednesday the NASDAQ gapped down on healthy volume, although it did not meet the strict definition of a “distribution day.” I’m afraid that the next distribution day may result in IBD-advice to lighten up on their stocks. Remember, “When you recognize a hot new guru, it pays to follow his advice”!

Let me leave you today with a final quotation from a market guru whose popularity peaked in the 1990s, Victor Sperandeo. In his book, Trader Vic II – Principles of Professional Speculation 1994, page 161, Sperandeo describes a corollary to a technical principle known as the “Four-Day Rule”:

“After a long move of intermediate proportions, when you have a 4-day (or longer) sequence in the direction of the trend, the first day in the opposite direction often signifies the top or bottom and a change in the trend.” 

My interpretation of Mr. Sperandeo’s technical theory is that there is an overheating of dumb money in the direction of the secondary correction (and against the primary down trend). I think there is a sound basis to the 4-day rule and its corollary.

Examine the daily chart of the NASDAQ (there are similar characteristics in the DOW, and S&P 500 charts).  Note the recent distribution days. Note the overheating in the direction of the secondary trend that occurred with 7 consecutive up days from August 26^th to September fourth. Note that according to Sperandeo, if this is a move of “intermediate proportions” (i.e., secondary correction in a long term bear market), then the September 9^th down day marked the change from up trend to a downtrend.

Chart courtesy: www.stockcharts.com

The following is for traders and intermediate-term investors. Do you want to go against two market gurus (including the hottest guru around)?

Because of the risk of waiting around for the 3^rd or 4^th distribution day as is typically the advise in IBD, this guru suggests that you sell under performing stocks and stock market index traded funds now. I agree with Sperandeo’s 4-day corollary. I’m afraid that when the stock distribution becomes more obvious, the possible panic selling by hot money including CANSLIM’ers may resemble the scene in the movie “Caddyshack” where someone discovers what turns out to be a Baby Ruth candy bar in a crowded swimming pool.

Folks, its time to sell!

Disclosure:  Mr. Goldberg holds no current position in Checkpoint Software, or Benihana.

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us