GM, Ford and Toyota stock downtrends enforce need for trader mentality
Contrary to popular belief, buy-and-hold strategies for stocks in the Dow Jones U.S. Autos & Parts Index (see weekly chart of $DWCAUP) which includes GM, Ford, Toyota and other auto sector stocks including suppliers, are not working very well.
Even high dividend plays and derivative plays like selling call options as a form of income in downtrends simply do not always pay off when the sell-offs are extended.
So, based on past performance of the past two years, there appears now only one obvious alternative: only a trader mentality provides the skills to deal with today’s kind of market uncertainty.
For example, General Motors Company (NYSE: GM) stock is trading well below its IPO price. Ford Motor Company (NYSE: F) is under 10. And Toyota Motors (MSE: TM) has broken a low set in 2009.
Furthermore, it doesn’t matter which auto stock you choose, GM, Ford, Toyota, even Honda, the general chart pattern is the same, except for the price level. Most individual stocks made their highs in April like the rest of the market. Then there was a sell-off; then a short rally. Then all the stocks took the plunge to lows not seen in over a year.
What to do?
Stock gurus try to find a rational theme in stock value. Tell me, is GM stock a great value at 21? How about book price which is slightly lower? Point is, there is no definite value which defines all truth. Value is whatever the market says it is. Same goes for Ford stock with its EcoBoost F-150 success, and Toyota stock with the upcoming 2012 Camry and a return to full production after the earthquake.
Furthermore, stock value is always a moving target. If it wasn’t, then it would simply adjust to that value on earnings day and stay there for extended periods of time. And speaking of time, hold that thought.
Experienced traders, on the other hand, always tell their young students to always devise a trading plan and stick to it. Easy to say and write, difficult to achieve. Problem is, most plans center on technical analysis which I believe in, but very little on developing personal analysis which has to deal with how you deal with market uncertainties which engage your emotions.
Notice, though, these mentors did not say, devise an investing plan based solely on fundamental analysis, because there is a distinct difference, and they know it. Fundamental analysis deals with profit projections, cash flow and company debt relative to revenues. Those define quality, but not when a stock is about to break out above past resistance, or when a stock is breaking below price support. Only price dynamics as shown with price-time charts can do that.
Time, the prized element in markets
Long ago, legendary trader, W.D. Gann, wrote the following: “Time is more important than price.” Now, I have searched far and wide for some deeper meaning in those words, but I have only come up with something quite basic. I sense that price alone cannot be the basis for triggering an investment. And while there is a price associated where buyers buy more and where sellers overcome buyers, in my own life I have found fundamental analysis lacking the one element that is key to trading success - time.
Gann also wrote about time squaring with price at tops and bottoms. I have yet to fully understand that concept.
According to a recent article by Buff Pelz in Technical Analysis of Stock & Commodities, price is not a constant; and I can see all of us in agreement. But he also added that it is the conviction, emotion and volition of investors, influenced by information, opinions and emotions over time. Ah, there’s that time element again.
So, no matter how good you are at divining your stock picks, how well they manage their cash flow, how much you like the CEO, it is the market and the flow of trading money that determines how much and, more important, when a stock will rise or fall in price. It’s that simple.
Regarding time’s relevance to price, it’s more important because it is one element nobody controls. A huge buyer like a hedge fund or a mutual fund can enter a falling market and turn it around. Problem is, nobody except the fund gorillas know when that is going to happen; and maybe they aren’t sure until they act. That may or may not leave a clue here or there in the option pits and on the tally sheets either. Only their volume really confirms their participation after the fact.
Do not take this wrong. I have witnessed a stock go up on light trading as much as on a high volume day. It is the high volume, though, that defines the commitment and has the power to set a new trend bias.
Still, it is time which is the most difficult to predict. When will the market top? When will the market bottom? Thus, only a trader mentality using technical analysis has the skill and tools to even respond to the market’s internal clock. Again, fundamentals merely define the quality of the stock. If you buy on fundamentals in a falling market, be prepared for a potentially large drawdown.
Time, though, has an aspect to it that is predicitable to a degree. All time gets old after time; meaning, we need to think like insurance actuaries who calculate based on age or time how long your life expectation is. Well, market swings exhibit that same element, and that's the value of price-time charts.
Learn to Awaken Your Speculator Mind
For the record, I have been invited to speak before an investor club’s monthly meeting on September 21st about my book, “Awaken Your Speculator Mind.” What will I say? For certain, I will promote my book and about my articles here at Torque News, but only for about 5 minutes. The rest of the two hours will be dedicated toward helping them realize the value of their mindset in investing; and that mindset deals with training their mind to deal with market uncertainties; and one of those is time. The other is themselves so they can take themselves out of the equation of uncertainty.
In fact, I will introduce some new ideas and concepts that I have learned since I published the book. I will focus on understanding one’s own brain dominance, and how it affects trading in uncertain environments.
The first order of business, however, is to realize the true nature of the market. Then you have to grapple with your own human nature and thinking style. Fundamentals provide the quality of the trade, but the technical analysis avails price support and resistance levels where buyers and sellers reacted before in time. Then there is time itself. But finally, there is the decision to enter the market.
Then there are other factors that engage time. For example, did you know that options expire every month? That man-made event occurs on schedule. Thus, that’s the only time element that we actually do know, besides the time of the opening bell and the closing bell; and now those may go away as we forge ahead with 24-hour, worldwide markets.
This is why I believe the study of the price-time charts is crucial; and that’s where trader’s tend to excel over fundamentalists in high-volatility market conditions as we have today, in my opinion.
That’s why I also believe that understanding yourself as a trader and how you deal with the uncertainties of the market should never be underestimated. Yes, no matter how much you may deny you are a trader, I will adamantly push back. All are speculators; as the only difference between a trader and an investor is time in the trade. The name of the game has always been and always will be speculation.
That definition changes things, especially your paradigm; that is, if you are humble enough to learn from other traders. I did, and it had paid off. Read “Market Wizards” you’ll be glad you did.
That means auto sector investors/traders or whatever they wish to be called, need to awaken their speculator mind; otherwise, they will not accept the simple truth that are not dealing with a rational entity. The market is a crowd; and crowd psychology is involved.
It’s tempting to invest in a stock because some guru gives fundamental reasons. Fact is, anyone can read reports, calculate a P/E ratio and maybe even figure out debt to equity and cash flow. Question will still be, when will the big money guys move the stock, which will get the rest of the market crowd to commit their cash?
Right now, nobody knows when fiscal stimulus will move the market, or which direction. And if it does, there is no guarantee the move will last. Truth is, no market move lasts forever, as the basis for price and value are continually being evaluated by the market crowd. Question will always be, who has the power to move the index or a stock, the bulls or the bears?
Are you prepared to recognize which one will occur; and, moreover, when?
Full Disclosure: At time of publication, Sherosky, creator of the auto sector charts for TN, is neither long or short with the mentioned stocks or futures, though positions can change at any time. None of the information in this article constitutes a recommendation, but an assessment or opinion.
About the Reporter: After 39 years in the auto industry as a design engineer, Frank Sherosky now trades stocks, futures and writes articles, books and ebooks like, "Perfecting Corporate Character," "Awaken Your Speculator Mind", and "Millennial World Order" via authorfrank.com. He may be contacted here by email: [email protected] or via his Twitter i.d. @Authorfranks
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