Michael Covel

Jake Carriker manages money for clients. He is a trader. He forwarded me an exchange he had recently with someone who had sent him an email. This individual wanted to know Jake’s “opinion” on the stock CNC. Jake’s response:

“First, the tiresome explanation of my logic, then the bottom line. Much of my analysis of securities prices is based on rather blunt, possibly inappropriate, application of some principles from Newtonian physics to the markets. Objects (and if you buy what I am selling, stocks) in motion tend to stay in motion until they encounter an opposing force of sufficient magnitude to slow or reverse the current momentum. Keep in mind that much of the time there is an absence of momentum and stocks just kind of drift aimlessly sideways until some force kicks them off high-center. That’s the “objects at rest” part of that little ditty.”

“Counterintuitively, I believe that one of my edges is my view that I can’t predict where, when, or how such a force might occur. Therefore, I tend to go with the flow. Luckily for me, since I didn’t go to MIT, the basics of “the flow” are pretty easy to measure. Broadly, it is: Price_Now - Price_BeforeNow = The Flow. The rub is that there are a lot of “before nows”. Different trends exist depending on which comparison point you pick. 5 minutes ago, 20 years ago, something in the middle? My cop out solution is to use multiple reasonable points of reference, and sometimes even average or otherwise combine them if I want to get fancy. I stay away from 100 year trends, because I don’t want to wait that long to find out if I am right or wrong. I stay away from 1 minute trends, because I don’t enjoy clicking the mouse and paying commissions all day long. As a reasonable compromise, I am usually interested in what price is doing over time frames ranging from the past few of years (maybe out to 10 years if I want to get an idea about “secular” trends) down to a timeframe of the past few weeks. So… all this stuff applied to the chart of CNC…I wouldn’t be trading it. It had a good strong uptrend going for the first few years of its existence. Price leveled off starting about the beginning of the year, and it has been pretty much going down ever since. In the short term, it jumped off its recent lows and is right now at a point where it would be typical to see the downtrend reassert itself. If it is really going to start going up, it has to stop going down first. That means that it probably retests the recent lows, or at least dips back toward them. If it then established a series of higher lows and higher highs, a good case might exist for a temporary interruption to a long term uptrend. If all of that sounds like a description of the price chart, and not much else, it is. I always have trouble giving advice to people that are holding stocks that are going down. Not because there is something inherently evil about it, just because it isn’t my way. Warren Buffet has lost more money than I will likely ever see by stubbornly holding onto a short dollar position (approximately $20 billion worth) for the last year as it goes against him. He seems to have done alright overall though. I tend to just get out if something is going down. If it starts going back up, I get in again. This costs me commissions and sometimes it costs me medium sized moves in a stock. However, it keeps me from ever getting wiped out when I am wrong, and I don’t miss the really big moves. That is a good tradeoff for me. It has the added bonus appeal that most people hate doing it, which means that given the zero sum game that is the markets, those folks might pay for all my losses and give me some nice profits to boot. Probably more information than you wanted, but I can never resist an opportunity to preach my gospel.”