Up until fairly recently, evaluating a stock’s price action wasn’t such an easy task. In the old days, exchange employees would write prices onto chalkboards on the trading floor. The information was then manually input into crude reporting systems and eventually spewed out onto small strips of tickertape in brokerage offices around the country.

In the ’60s and ’70s, active traders frequently kept charts by hand, noting prices out of the newspaper and plotting data each night on large sheets of graph paper. One could also order charts or price data through research firms such as CRB, which would “promptly” arrive weeks later. “Day trading” just didn’t exist.

Even as late as the mid-1990s, almost all of the electronic stock data was delayed by 20 minutes or more, making it near-worthless for use in actually responding to a market move. For active investors, quotes were routinely retrieved by either calling your brokers’ 1-800 number or using some “advanced” tools like the QuoTrek FM receiver I used to carry around with me to class during my senior year of college. As you might imagine, the two-foot antenna and rudimentary LCD display were a big hit with the sorority coeds.

Nowadays, the task of monitoring markets has become a lot easier, thanks to the rapid advancement of technology that allows pricing information to be immediately disseminated world-wide. And while I’ve since updated my own system to a new top-of-the-line CQG, even nonprofessional investors have access to more instantaneous price data than they’d ever be able to watch, let alone trade.

So if you’re committed to watching price action, what exactly should you be keeping your eyes on? Historically, a stock’s closing price was the most important. It “printed” in newspapers and was what most market observers actually saw. But as the capital markets have become a truly 24-hour affair, many instruments never really close at all. Stocks are traded “after hours” and “premarket,” often making dramatic moves based on earnings or other fundamental announcements. Volume in these alternative sessions has grown quickly, and for the well-known stocks of the Nasdaq or S&P 500, liquidity is usually sufficient to trade at least a few thousand shares.

I don’t necessarily need to trade after hours, but I do need to know how a stock is moving. If a stock drops precipitously, I want to know how far it falls. If it rallies back, I want to know where it spends most of the session and how much of the gain is recouped.

But more than anything else, I want to see how XYZ acts during the day. I put a lot of emphasis into observing intraday patterns, watching to see how different capital markets respond and move with each other. This often helps illuminate the “quiet” trends that are unfolding but not yet newsworthy enough to be splashed above the fold in The Wall Street Journal.

Some correlations are obvious. For example, gold stocks such as ASA Bermuda (ASA) or Barrick Gold (ABX) tend to be highly correlated with gold prices. The S&P 500 and the Dow are highly correlated, as are the shares of Qualcomm (QCOM) and the Nasdaq 100. When the major market indexes are rallying, you can bet the major components of these indexes, like General Electric (GE), Citigroup (C) or Johnson & Johnson (JNJ), will be strong as well. Because they are the largest issues within the indexes, they are what the arbitrageurs trade to get quick exposure when trading against index futures or ETFs.

But I’m most interested in what other instruments are moving in concert with a strong or weak market — specifically those stocks or sectors that may not necessarily be large components of the major indexes. I believe that intraday, this sort of price action is a terrific indicator into the underlying state of various securities.

For example, I remember that when I owned utilities in recent years, I was always mindful that the group would seem to outperform intraday when the general market was rallying. In fact, after bullishly profiling the sector since the fall of 2004, I wrote about my observation in a May 2005 column entitled “Now That’s Amore”: “I’d swear that when the market does rally, it’s lately been utilities like TXU, FirstEnergy and Allegheny Energy that are leading the way. That type of leadership — even on an intraday basis — is a big part of what I like to see when putting money to work.”

Indeed, utilities were in the midst of a strong trend — one that would see them rise double digits even from May, and see the sector end as one of the best performers of 2005.

And even if names like Black Hills (BKH) and Duke Energy (DUK) weren’t great percentage gainers for the day, the fact that they showed positive price action while the broad market was rallying was my sign they were among the strongest equities on the board. To that end, nonprofessional investors will most certainly want to examine intraday charts after the close to observe what groups were rallying, or lagging, as the broad market happened to rise.

And when I’m intrigued by a particular price action, I don’t hesitate to follow up with additional inquiry to either confirm or dismiss my hypothesis. So, if I happen to notice that AT&T (T) seems to be rallying with the broad market, I’ll follow up by looking at similar issues such as BellSouth (BLS) or Qwest Communications (Q), which are also showing recent strength. I’ll look at the company’s exchange-traded debt such as AT&T ABS Corp Bkd Trust Certs 2001-33, 7.25% (XKJ) or AT&T ABS Corp Bkd Trust Certs 2001-21 , 7.40% (CJO) to confirm they’re also holding up.

In short, I’ll try to become as informed as possible about the state of AT&T’s securities. Because that’s what we trade. That’s what matters. And as much as it might horrify the fundamental analysts, a company’s actual underlying business doesn’t mean a darn thing. Watch the stock. That’s what counts.

– Originally on Feb 06, 2006 by Jonathan Hoenig

Consider that both planter and money manager need to periodically prune away dead wood. Beautiful gardens aren’t simply grown, they’re continuously clipped and shaped. To raise a healthy garden, experienced horticulturists will rotate crops, clip old foliage and manage the sun. It’s not just about planting the seeds, but tending to the crop along the way.

Same goes for the market, where investment success doesn’t end with simply picking a stock. Ever wonder why most analysts are lousy traders? It turns out there’s a big difference between evaluating an investment and profitably guiding a portfolio. Call me crazy, but in my world there’s more to it than just buy, sell or hold.

We all have losing trades. Professional investors, however, get quite adapt at not dragging them around for years on end. Dead wood won’t sink a portfolio, but will make it significantly less efficient and, over time, less profitable as well.

When clipping my holdings, I always start by looking at the big losers, those positions in which I’m severely underwater by 20% or more. More often than not, these trades tend to be underbrush you’d be well served to simply chop away. As I’ve pointed out over the years, waiting for a huge loser to “come back” tends to be the wrong move. Mathematically, the odds just aren’t in your court. For a 30% loser to get back to even, it must gain more than 42%. Possible? Perhaps. But most likely it’s less probable than taking the loss and moving on to a new, more promising trade. If you’re dragging around old remnants of trades gone bad, either get out now or at least set some stops to get out. That way you can redirect resources toward more timely trades.

Another possibility to prune comes in managing what I call “worthless” positions, the insignificantly sized trades that make up less than 1% of an overall portfolio. The problem with such tiny investments is that, rise or fall, they won’t have any major effect on the bottom line. Yet in every $100,000 portfolio, I always see those $700 positions in Sirius Satellite Radio (SIRI) or Taser International (TASR). Just consider that an investment that size could double, yet it wouldn’t even amount to a 1% increase in your portfolio value. The capital such tiny trades waste isn’t worth the minimum amount of amusement they provide.

So make it a point to regularly review your holdings, paying close attention to the smallest allocations. Positions that amount to less than 1% of overall assets should either be tossed or, if you still favor the trade, bulked up. As I’ve often pointed out, dumping several worthless positions often allows you to cobble together a sizable trade that might actually benefit your bottom line.

Even beginning farmers know there’s a finite period in which any particular crop can be successfully raised. And while I love green beans and think zucchini is one heck of a vegetable, I also know that neither will grow when there’s snow on the ground. So while you would never think to plant tomatoes in November, most people insist on buying stocks at what I believe to be the exact wrong time. Despite all the analysis and hard work, the odds for profitability are stacked against them from the start, simply because they were buying stocks out of season.

As regular readers know, it’s my belief that markets — just like the weather — aren’t chaotic, but rather move in trends that tend to persist over time. Because raising a garden depends on planting seeds at the right time, investors are well served by determining if potential purchases are in season before they buy.

With crude oil hitting new all-time highs, one can’t help but take note of the bull market in energy stocks over the past few years. At a time in which many investors have complained of a lackluster market, the truth is that you could’ve owned almost anything energy-related since 2002 and made money. From pipelines and energy trusts to utilities and even Big Oil plays, a rising tide of crude prices has indeed lifted all boats. This has been energy’s “season,” and investors have had an odds-rich environment in which to participate.

A similar period occurred from 1996 to 2000, when almost any technology stock would’ve earned you money. For several years while tech was in season, the active investor had more than a few chances to make a buck.

And because the best indicator of the market is the market, you’ll be well served by waiting until your favorite stock finds some bids before you take a position. Experienced traders know they don’t have to buy the bottom or sell the top, just be nimble enough to grab a portion of the 60% move in the middle. For my money, it’s always best to wait until an investment shows some element of strength before plunging in with both feet.

Upon finding success in growing carrots, the enterprising farmer might try his skill at onions as well. By closely observing his crop and being responsive to how it behaves, he’s better able to help it thrive. Winning plants should get the water, or at least your attention. If your fern likes being sung to or you find a deep soaking does wonders for your rutabagas, well, hey, whatever it takes.

The point is that in the markets, we learn from observation. Most of our time managing money isn’t spent placing trades but watching how the market changes, acts and responds. I find the most successful traders aren’t those reading annual reports or listening to conference calls, but monitoring what actually counts: their positions in the market itself.

By doing so, I’m often lead back to trades in which I’ve already found early success. For example, recent profits in utilities and real estate have led me to a closed-end fund that focuses solely on those two sectors. Cohen & Steers REIT and Utility Income fund (RTU) sports a 7.28% dividend yield, trades at a 15% discount to its net-asset value, and holds increasingly valuable large caps like Equity Office Properties (EOP), Southern (SO) and Consolidated Edison (ED).

Or upon collecting profits in energy trusts like San Juan Basin Royalty Trust (SJT) or BP Prudhoe Bay Royalty Trust (BPT), the opportunistic trader might focus his bet while diversifying his holdings through one of the recently launched funds that owns the sector. Kayne Anderson MLP (KYN) is a closed-end fund that holds positions in several master limited partnerships, or MLPs, such as Plains All American Pipeline (PAA), Ferrellgas Partners (FGP) and Inergy LP (NRGY). (MLPs are actively managed, publicly traded partnerships that are especially prevalent in the energy sector.) The Kayne Anderson MLP fund trades at a slight premium to its net-asset value, and at current prices it pays a quarterly dividend of around 6.30%. Fiduciary/Claymore MLP Opportunity fund (FMO) holds a similar basket of names, but trades at a slight discount to its net-asset value.

The point is to take your cues from observations made in the market, not in a classroom or line item in a company’s 10-K. And to harvest the best crop, it never hurts to start by watering the plants you already have.

– Originally on Jun 20, 2005 by Jonathan Hoenig

So when putting my money to work, I evaluate not only stocks themselves, but also the stories that go along with them. At issue is determining if the investment thesis, or “story,” has already been played out and picked over by the herd. Like most things in the market, it’s an imperfect science, but the general idea is that by the time the story is out, you already will have harvested your gains and moved on. Watching the media, the message boards and the market can often provide the telltale signs.

If you follow the market, it also makes sense to follow the media, since that’s where stories live and are primarily disseminated. While I try to avoid monitoring the media for investment ideas, I do keep abreast of the coverage of the stocks in my portfolio. A mention on Cavuto or a write-up in Forbes isn’t enough to prompt me to sell, but it is one sign that word is getting around. My job is to find great stocks before they make it on the cover of Barron’s.

The best example is that of the late 1990s Nasdaq bubble. By the time tech stocks peaked in March 2000, the story of their meteoric rise was everywhere. There had been dozens of magazine covers — and even new publications launched solely to cover skyrocketing tech stocks. Bookstores were full of titles about technology investing and how to cash in on the Internet revolution. TV shows like “The $treet” and movies like Boiler Room (both released in 2000) glamorized the fast-money world behind a skyrocketing stock market.

When analyzing the media coverage of one of your holdings, the primary question to consider is whether or not the story is out. So look around: has the bullish case for XYZ been chronicled in the pages of a glossy magazine? Is the stock regularly touted on cable business programs as a safe bet? Does the investment address a news story that has become common knowledge among even the non-professional trading community? Again, there are no hard-and-fast rules, but I consider increased media coverage, especially positive coverage, as one sign of a maturing market. And while it’s not an immediate sell signal, robust media coverage does put me on notice that an investment’s glory days are probably gone.

If the story is written in the media, it’s discussed and dissected on the message boards, a relatively new phenomenon that has become a must-monitor for those getting a bead on their holding’s public exposure. In the space of a few short years, message boards have become the investment community’s virtual town square. Every now and then, it pays to stop by and listen in.

Yahoo Finance’s message boards are probably the most populated and well known, but there are others worth keeping tabs on. Silicon Investor, Motley Fool and Morningstar all host boards, and even Raging Bull, the mid-1990s birthplace of message board banter, is still alive and clicking.

Active message boards are populated by a wide variety of participants. There are the new or beginning investors inquiring about a company’s earnings, dividends or future prospects. There are the regular posters, oftentimes sophisticated, well-versed voices who listen in to a company’s conference call or sift through their Edgar filings with a fine-tooth comb. There are the foul-mouthed blockheads who revel in online squabbling over the most insignificant issues, and spammers posting off-topic pitches for thinly traded pink-sheet names. Even a company’s employees or management will participate (often anonymously) in the discussion.

I don’t post to message boards, but I do monitor their activity. Just like analyzing the media, the idea is to assess whether or not an investment story is out or not. Discussion boards provide an excellent, real-time indicator of how information is being received and perceived by a wide range of investors.

As regular readers know, I strive to avoid the herd. So it might not surprise you to learn that most of my favorite stocks have absolutely moribund message boards. The fact that the Yahoo message board for International Power PLC (IPR) hasn’t had a posting in more than nine months doesn’t bother me at all. In fact, I interpret it as a bullish sign that, despite the upward trajectory in the stock, the story isn’t yet out yet. When evaluating a stock, I’m generally dissuaded by those with hugely active message boards and very frequent posts. I want to get there before the story is written, not when it’s already being systematically picked apart.

Quantity of posts is one sign; quality is another. Bull markets are built on doubt, not hope or overconfidence. The more certain the message board community seems about a company’s prospects, the more likely I am to begin planning my escape. So I evaluate the tone of the posts. Are they irrational or emotionally charged? Do participants make grand predictions about a stock’s limitless potential? Are naysayers ridiculed and shouted down? All are indications that the story, and thus the potential, of a particular investment might have already reached its peak.

Finally, in addition to watching the media and message boards, a trader must also watch the market itself. The manner in which a particular stock trades can often give an indication as to how well-known its story has become.

The ideal price action for a stock is a slow, methodical upward trend. As we often point out, big moves in the market take time. A quiet upward climb doesn’t attract the attention of reporters or hot-money momentum players, which is exactly what you should want. Violent surges or big one-day moves usually mark the end of a trend rather than the beginning of one. I want a stock that silently ticks higher with absolutely no buzz — not one that thrashes around as the subject of endless banter and debate. Once a stock ends up on the list of the day’s biggest percentage gainers, the story is already out. By that time, I’ve hopefully begun scaling out of my position, not just starting to acquire it.

– Originally on Nov 03, 2004 by Jonathan Hoenig

Although I’m usually opinionated, I’m never overconfident. In fact, I sometimes feel so completely out of touch with the market that I don’t know what to think. Sorry to disappoint you folks looking for a quick tip, but when it comes to the next move in the market, I often don’t have a clue. Considering the wild swings we’ve seen this year, perhaps in your weakest moments you can admit to the same.

As we often point out, a trader’s biggest strength isn’t necessarily finding winners, but dealing with losers. Still, feeling lost and unsure about an investment approach can be extraordinarily frustrating — and mighty expensive.

It usually starts innocently enough. A few favorite trades fall apart. Then sectors you had previously dismissed seem to spring to life virtually overnight. Your buy list gets smaller, more erratic. And the trading strategy that only a few weeks back seemed foolproof now seems foolhardy. You’re not just losing you’re lost. We’ve all been there at one point or another.

The trick to trading sometimes boils down to avoiding dumb moves. It’s never easier to self-destruct in the market then when we feel lost, or panicked, or begin to lose money. Every wrecked account begins as a tiny loss and a stubborn trader who goes berserk. So let yourself off the hook and keep a cool head. On the road to consistently superior returns, even the best and the brightest occasionally lose their way. But disciplined technique always gets them back on track.

As we’ve often pointed out, trading is first and foremost an exercise in observation. If you’re unsure as to what’s going on in the markets, a good place to start is by recommitting yourself to watching the markets more than even trading them. Because as much as stocks often seem like unpredictable chaos, the truth is that markets, like life, tend to move in trends that persist over time. For example, the recent strong performances in Latin American and Internet stocks are simply continuations of trends highlighted a number of months back. Again, trends tend to persist, and you can’t trade a move unless you spot it first.

The problem is, traders sometimes get into the lazy habit of watching only their own trades rather than the market as a whole. So when their own positions putter out (cough cough, as mine in the bond market seem to have done), they find themselves lost at sea, flush with cash and no idea where to put it.

By regularly monitoring the market, even without actually trading in it, you won’t feel lost once the time comes to put capital to work. And because trends take time to unfold, you’ll often find that a particular stock or sector will perform well over a period of weeks, not days. By consistent observation, you can maintain an awareness of what’s leading the market, so even if your trades aren’t working, you’ll have a sense of which ones are.

In the market, the “fight or flight” response is dangerous. Fighting the market — that is, engaging in dangerous habits like doubling down or refusing to set stops — isn’t the best course of action. But neither is fleeing from it.

When traders feel lost, confused, panicked or paranoid, an all-too-frequent response is to flee to safety, dumping an entire portfolio for the soothing safety of cash. While such dramatic moves can calm nerves, they’ll also wreak havoc on a portfolio, where a crucial component of good technique involves keeping what’s working, not throwing it away.

Finding a profitable trade isn’t easy in any market environment. Yet holding on to winners, especially during periods of stress and mental anguish, is often harder than picking them in the first place. Human nature prompts us to want to sell winning stocks and wait for the losers to “come back.” This is how you lose. I know — I’ve made this mistake myself.

Even when it seems as if your account is falling apart, there are likely to be a few positions that aren’t only profitable, but are still holding their own. Protect these like the family jewels. Because while every position should have an accompanying stop loss, you can’t blindly sell your winners just to feel safe and expect to make money. When you feel lost in the market, prune from your portfolio what’s not working — and difficult though it may be, do your best to keep what is working.

As we’ve written before, you only need a few good trades a year to put together an exemplary return. And because you can’t bet on everything, the trades you do make shouldn’t be passing fancies, but rather your cream-of-the-crop ideas. Trading huge positions in subpar ideas is dangerous — and all too common.

Although the trading high is a hard habit to break, it’s better to preserve capital than to trade it on anything less than your best ideas. There’s something about a trade that should compel you to make it. If you’re unsure about it, don’t do it. We only get a few opportunities with our precious trading capital. It’s best to wait for the perfect pitch before taking a swing.

– Originally on Jul 28, 2003 by Jonathan Hoenig

I suppose I could fix my car, do my own dentistry or reshingle my roof. But since I have neither the expertise nor the time to devote to these critical tasks, I hire professionals to do these jobs for me.

The same holds true for managing money. Just because you can trade for pennies on the web doesn’t mean you necessarily should. The markets aren’t rocket science, but they can be a full-time job. And while most people are perfectly capable of managing their own account, many simply don’t have the interest or the time to do it properly.

In investing, picking the jockey is almost as tough as picking the horse. There are literally hundreds of thousands of mutual funds, financial planners, account executives and investment advisers eager to grab their 1%. Where do you begin?

A good accountant is invaluable, but insufficient — after all, you’ve got to make money before you pretty it up for Uncle Sam. And while the best stock analysts might be able to tell you how many Huggies Wal-Mart (WMT) is going to sell in the third quarter, what can they tell you about improving your portfolio’s bottom line?

While I can appreciate the value of an attentive financial planner, I find that far too many are wet behind the ears. Somewhere along the line, their version of “analysis” became hypothetical, pretax profits based on a 12% annualized return from stocks. We see how well that turned out.

No matter what a person calls himself, from a financial adviser to an investment planner, if he’s managing money and investing it on other people’s behalf, I think the least he should be doing is watching it. I’m always surprised how many investment professionals find time for conferences, lunch, cold calls and golf outings during market hours.

Call it the “index effect.” Because of the popularity (and returns) of index investing during the late 1990s, many investors stopped watching the market, and started simply pitching its virtues. Because of their dogmatic allegiance to stocks, most pros still can’t see beyond the Standard & Poor’s 500. It doesn’t help matters that most money managers’ compensation is based on assets under management rather than performance.

Ask them about the market, and they’ll talk about the economy, Iraq, earnings, Greenspan — everything under the sun except the market. Far too many money managers think they should be panelists on Meet the Press. A money manager’s job isn’t to pontificate about politics or opine about the economy, but to watch the markets.

Of course, nobody knows what’s going to happen in the future. In a sense, we’re all “dumb money.” But the people who put in the most time, in my opinion, are slightly less dumb than the rest. And as we’ve mentioned in the past, trading is less about anticipating what might happen than it is about understanding what’s happening now.

Where’s the action? When it comes to seeking profitable opportunities, a good money manager doesn’t play favorites. The entire spectrum of markets, from stocks to bonds, currencies to commodities, should be considered. When market trends develop, I can’t always tell you why but I know they’re happening, and that’s enough. These days, if you’re getting investment ideas out of a newspaper, you’re arriving to the party awfully late.

The best money managers are the most educated — by the market, not books, business school or the latest musings from Armani-suited analysts. And while I love weekends spent in the tub browsing the collected works of Barton Biggs as much as the next guy, I can’t help but think most clients are looking for returns more than research reports. So even if your manager has the prettiest junk mail of the bunch, at the end of the day, it’s all about bucks. Everything else is conversation.

Don’t trust your assets to anybody who isn’t going to, at the very least, keep a closer eye on them than you will. Like the seasons, stocks move in trends. You can’t game the market without sticking your hand out the window.

The ultimate litmus test for your money manager? Ask him how he’s investing his assets. I wouldn’t even consider a money manager who didn’t invest right along with his clients. There’s no bigger mark of credibility than practicing what you preach. Yet I see money managers happily recommend plenty of stocks they haven’t bought for themselves.

It’s an “ego hedge” you see practiced almost every day on cable business television. From Art Hogan to Ned Riley, experts will recommend a stock they don’t own. If their pick rallies, they don’t benefit financially, but they do look like a genius. If it falls, they might look a bit foolish, but they don’t lose any dough. I don’t know what’s worse — gurus recommending stocks they own, or stocks they don’t own.

Managing money is tough even in a good market. If you’re not watching what’s going on, your investment manager should be. And if he isn’t putting his money where his mouth is by investing along with his clients, perhaps you should find someone who will.

– Originally on Sep 23, 2002 by Jonathan Hoenig

These people, many of them college educated and extremely affluent, play the stock market as you play the lottery: Buy a ticket and hope for the best. The market interests them only up to the point that they actually have to put in some effort. And for such people, “buy and hold” has become “buy and blame.” After all…it isn’t their fault they lost money. It’s the hedge funds’, the analysts’ or Alan Greenspan’s.

As we’ve written before, trading, or “active investing” as it’s now called within politically correct circles, is first and foremost an exercise in observation. In order to see the truth, you must first be willing to open your eyes. Despite the misconception that traders pull the trigger from bell to bell, I spend most of my time watching, not making transactions.

And now more than ever, there’s a lot to watch. Because of the overload of information available at a mouse click, the best traders are good at multitasking. Like a chef, traffic cop or the plate-spinning guy from Ed Sullivan, they’re able to observe, interpret and act upon a large volume of rapidly changing information. Not Tom Galvin’s latest rant or the number of Huggies that Wal-Mart (WMT) sold, mind you, but the signals emitted by the stocks and markets in which they happen to be active at the time. This is the basis for technical analysis: All the information needed to detect what’s happening in the market can be found in the market. Not in the heavens, the message boards or the always-hedged analysis of well-paid pundits.

So what do I watch? As much as I can. I watch oats and orange juice. I watch investment clubs and fund flows. Volume and volatility. Gold and gasoline. The widely followed names and the lesser-traded losers. The more markets I watch, the more prices I follow, the more confident I am in my ability to know what’s going on.

Of course, keeping tabs on over 10,000 publicly traded companies, thousands of market indexes, hundreds of commodities and dozens of technical indicators might be a little time consuming for those with a life outside the markets. At the very least, then, you need to keep a close eye on your stocks. If that seems like too much of a bother, buy a few mutual funds and put the mental anguish in someone else’s hands.

So where should you start? To begin with, watch the stock. As simplistic as it sounds, plenty of people don’t know where their holdings are even trading, let alone how they are trading relative to other securities. When the market was going straight up, they couldn’t take their eyes off the screen. Now I talk to plenty of “traders” who check their smoke detectors more often than their portfolios. Stocks are like your children. You need to keep tabs on them at all times.

So how does it open? If it’s a New York Stock Exchange stock, what time does it open? Where does it trade midday, afternoon and near the closing bell? Watch the volume. Watch how it responds to news, how it closes and trades in the aftermarket. There’s a lot to take in. You’ll want to make some notes. Next, and perhaps most important, watch other names in the sector. As we’ve discussed before, the market isn’t chaotic. It moves in observable and established trends. And stocks are herd animals. They travel in packs. You’ve got to analyze the stock on its own merits and as a member of its industry or sector, along with that sector as a component of the overall market. It’s a common technique known as intermarket analysis.

So if I’m watching Exxon Mobil (XOM), you can bet I’m also keeping an eye on BP (BP), Chevron (CHV) and Sunoco (SUN) — plus some of the smaller integrated drillers that make up both the Amex Oil Index (XOI) and CBOE Oil Index (OIX). I’m also watching the SPDR Energy fund (XLE), the exchange-traded fund that follows the energy component of the S&P 500. Put together, these indicators give me a better idea of what’s happening in the sector better than Maria Bartiromo ever could.

What should you be looking for? As much as it’s human nature to want a bargain, the bottom line is that you want to be in strong stocks and strong sectors — nothing but. So when you’re evaluating stocks within a group, find the pick of the litter. Don’t buy the weak name expecting it to play catch-up. The one you want to own is the leader of the pack.

By watching more than just your pick, however, you’ll have a keen sense of the group’s overall price tendency. What you’re looking for is confirmation. Some stocks will perform better than others, but strength in one name should be confirmed by strength in its peers. The group leader moves first, followed by the other members of its peer group. The respective index or exchange-traded fund, being the most diversified, usually moves last.

You’ll also want to isolate a “sister stock,” a second-choice favorite within the particular sector. So if you’re long Barrick Gold (ABX), watch Newmont Mining (NEM). If you own Citigroup (C), watch Bank of America (BAC), HSBC (HBC) or another large money-center bank. UAL (UAL) and AMR (AMR), Corning (GLW) and JDS Uniphase (JDSU)…you get the idea.

The advantage of watching a stock and its pair is twofold: First, you’ll again have a better sense of group dynamics. If Compaq Computer (CPQ) starts perking up, then Dell Computer (DELL) shouldn’t be too far behind. The biggest benefit, however, is that you’ve got a ready-to-go tax swap in your back pocket should the need occur. So if you’re shaken out of a position in FedEx (FDX) but want to keep your exposure to the sector, take the loss and swap into United Parcel Service (UPS). Both names move in a similar fashion.

The Web’s never-ending stream of market data leaves most traders feeling overwhelmed, not informed. The best way to cut through the clutter is by focusing on what’s important — the price action of the stocks and groups you’re interested in. By sticking to what matters, and keeping track of a sector’s overall action, you’ll be more knowledgeable than the pundits, experts and market commentators, most of whose miserable performance speaks for itself.

– Originally on Oct 02, 2001 by Jonathan Hoenig

Like my well-pedigreed colleagues, I too have a price at which I’d like to buy Cisco: $81.82 a share. In fact, I would love Cisco at $81.82, its all-time high. I’d adore it. I’d be all over it.

Seem strange? Perhaps. After all, if Cisco ever got back up to the high it reached last March, plenty of people — especially those sitting on losing positions — would sell, anxious to recoup their losses or protect profits before the stock took another dive. It’s what I hear when I talk to prospective clients about reallocating some of their assets away from tech. Everyone is waiting for a bounce.

That thinking is understandable, but flawed: The truth is that if the stock ever did rebound back to its old highs, it would be a signal to increase, not decrease, your exposure. It’s a question of timing, and from baseball cards to Brocade Communications (BRCD), trading is all in the timing.

“Timing the market” is usually shorthand for buying XYZ after it’s plunged and hoping it immediately darts higher from that moment forth. The word for that isn’t timing, but delusion. True market timing isn’t a flawless passport to profit, but an intuitive and logical way to approach allocating your assets. This week I’ll discuss timing in the market; next week, in your individual portfolio.

Among financial planners, market timing might as well be a four-letter word. They argue that it’s a dangerous and fruitless endeavor, that the prudent and wise investor simply buys solid companies when they’re cheap (read: weak) and holds onto them for the long term. And maybe that worked back in the 1950s when the market yielded 5% in dividends and traded at 10 times earnings. It’s hard to make the same argument, however, with stocks like Cisco, which, despite its breathtaking fall, is still trading at a hefty premium to the market while paying no dividend.

Because you aren’t getting paid to hold a stock, you’ve got to get paid through capital appreciation. Not just buying XYZ, but buying and selling XYZ at the right time. As I’ve written before, what moves Cisco, JDS Uniphase (JDSU) or any other stock higher is the liquidity situation for the company’s shares. Stocks go up because there’s more demand than supply at current prices, and that means there is, in fact, a “good” time to get in to or out of XYZ.

Regular readers know that I often talk about “listening” to the market. Simply put, this means that I am bullish on XYZ when the stock gives me reason to be bullish, not the analysts, the news or the latest talking head. Conversely, when XYZ falls from $100 to $25, chances are that it isn’t because the stock is taking a breather on its way up to $300. A weak stock is weak for a reason. It doesn’t always mean we know what the reason is, nor does it even matter what the reason is: The point is that the stock is moving.

Stocks aren’t chaotic, and although it might seem like it, the Nasdaq didn’t move from 5000 to 2000 in a day. The markets move as the seasons do, in observable and traceable trends. In short, there’s a method to the madness. Let’s say you were shipwrecked, “Cast Away”-style, on a remote island without any access to the outside world. Even if you didn’t have a calendar, you would, after a time, get a sense of what season it was. You’d observe the slightly shorter amounts of sunlight or cooler temperatures. You’d watch the birds fly south for the winter. And while you might not be able to nail the exact day, eventually you’d begin to realize that summer was becoming fall. The colder and darker it got, the more evidence you’d have that, in fact, winter was coming. Prediction from observation. It’s a guess…but not a gamble.

The same logic applies to the markets. It’s called persistence of trend. A stock that has been strong for a period of time will tend to remain strong. Likewise, while there’s no guarantee, weak stocks tend to remain weak.

So no matter what timeframe you are trading in, as a rule of thumb, the best time to buy a stock is when it’s strong. Keep in mind that “strong” refers to a stock’s price action. It’s got nothing to do with the news, economic fundamentals or comments from the peanut gallery.

How do you know if a stock is strong? One of the easiest and most intuitive ways is to wait until it trades above a previous multiperiod high. I specify multiperiod because buying “the breakout” is a technique that can be utilized within all trading timeframes.

While scared money might cringe at buying the top, if a stock is revisiting a historical high — especially a long-term historical high — it’s a reason for bullishness. Combined with good position size and order-placement technique, it’s an ideal way to get in at the best possible time.

Consider this: In February of 1973, IBM (IBM) traded at a split-adjusted price of $23 a share, just as equities began the worst bear market in history. And although you could have picked up Big Blue at the “bargain” price of $13 a share just one year later, it wouldn’t have done you much good. As late as 1981, some eight years later, the stock still traded at a fraction of its early 1970s high. Some bargain!

The best, or at least the safest strategy, would have been to buy IBM as soon as it eclipsed its pre-bear-market high of $23, in December 1983. And while we can be certain investors were frightened buying the stock as it hit those 10-year highs, it proved an opportune moment to get in. IBM marched on to a 100% gain from those seemingly lofty levels.

What was the signal to buy IBM? It wasn’t an analyst, or an overwhelmingly positive bit of corporate news, but the stock itself. When IBM was able to break out from the decade-long trading range, the stock was, in effect, “telling” us that it was ready to move even higher. Value-oriented fundamentalists hate this sort of analysis because it ignores all the actual economics going on within a company. Buy a stock when it’s cheap, they cry, and wait around for the market to realize its error. Alas, those who’ve bought the dips on stocks like Cisco over the years have now come to realize that while markets are never wrong, opinions often are. When a stock is dropping, let it drop. It isn’t your constitutional duty to stand between Cisco Systems and a new 52-week low.

To that end, those wishing to play Cisco from the long side might develop a trading plan more detailed than “buy and hope.” To start off, wait for some strength. With ammo in short supply, you’ve only got a limited number of bullets. The price action should get bullish before you do. If the trade moves your way, stick with it. As long as you use proper diversification and risk-management techniques, you’ll want to follow the trend, not fight it.

Past performance is no guarantee of future results, of course, but it’s a pretty effective indicator. Buying the breakout isn’t foolproof, and just because a stock makes multiperiod highs doesn’t mean it can’t fall just as fast. But generally speaking, you want to buy stocks that are getting up from the mat, not falling down onto it.

To everything there’s a season. And when a stock is about to bloom, it will tell you. But as long as it’s snowing outside or the rain is coming down, stay indoors. The yard will still be there next spring.

– Originally on Aug 09, 2001 by Jonathan Hoenig