Differentiating Between Stocks and the Stock Market

Investors must always differentiate between the stocks they own and general market action, just as they must differentiate between a company and its stock. If you do neither, then now would be a good time to begin. Corrections in the general market create our opportunity to purchase favorite investments at better, if not fair, prices.

What do you see as the upside potential of this stock, J Crew (JCG)? Are we looking for a sort of traditional run of 15-20% above the breakout point or is it the kind of long-term buy and hold that dreams are made of?

Attempt not to confuse your time frame with the market's periodicity; each accords value to time, but stocks merely oscillate whereas we, being human, suffer a tendency to vacillate (oscillate, but with an emotional component). The current charts for the market say one thing -- clearly, to me -- and the chart for JCG says another. Too, I never invest seeking only a percentage gain (99% or less); I invest only for multiple gains (100% or more). Thus, a direct answer: I believe quite strongly that JCG has a destiny that includes a much higher share price. But does the achievement of that objective fall within your time frame...?

Which leads to all manner of possible predictions; the core three being price, time, and trajectory. (The x, y, and z axes on a chart.) When aligning my time frame with the market's periodicity, my objective is to capture the trajectory within the time frame that speaks directly to me.

Having mentioned briefly a winner, I will discuss, equally briefly, a loser - Isis Pharmaceuticals (ISIS). Corporate life continues positively, no worries there, but the stock has proved unable to gain upside traction -- notably not able to break above resistance at ~$10. In fact, it has been turned away a number of times, which argues the importance of this line of declining tops. I recognize the potential -- and possibility -- to re-test crucial support at $8.5 to 8/share. Having breached beneath its 200 day sma today, the picture changes from intermediate term price momentum to possible long term accumulation. I choose not to linger (hold) because I have no idea at this moment how low the shares might decline before turning up convincingly. So I sell, and keep my eyes on that hardened line of declining tops (resistance).

No use crying over spilled milk, I reason. Yes, I retain ISIS on my monitor, watching for another, future setup to purchase. The objective, as always, is not to be right (emotional need) but to make money. The fundamentals for the company, as of this writing, remain bullish; the sole change is a breach of rising support on the chart.

Which brings to mind the objective correlative when investing: while aligning your time frame with the market's periodicity, never lose sight of the market's leaders. Leaders lead. If you choose to pare back your holdings -- and I do not argue you do so; each investor has different objectives and tolerance for risk -- sell first your non-core, non-investment holdings. Keep your leaders; they signal general market direction weeks and months from now. (Leaders are not those stocks with up trends obvious to even the untrained eye. Obvious = near exhaustion.) One leader would be Google (GOOG) -- having just broken above an 18 month high level consolidation, its long and intermediate term trends are now in sync; the only doubt for traders are the short term oscillations.

I do not mean to seem dismissive of short term oscillations, but they provide insufficient reason for you becoming dazed and confused. Or losing track of your primary objective: to make money, consistently and successfully.

Full Disclosure: Long the shares of JCG, no short positions

Comments

[john gaats]

The tricky part is, the market changes just as you think you capture the trajectory. I guess they use the term martingale to describe this property.

[MNRTrading]

Thanks for your thoughtful discussion David. Your review, given the markets' downturn this past week is timely. Time horizons are complicated and vary for investment type and category (including capitalization). I am especially in agreement with you regarding GOOG. However, in general, the logical side of investing yields to the emotional side when the stock market drops suddenly, and investors need a decision rule set that closely matches their financial outlook and needs.

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