Investing Tools for Investors Looking to Excel
10/21/02  

Wave Investing

Let me first make some market observations- some obvious, some not so obvious.

• Money is finite, even if you leverage it, or use options to secure huge nominal exposure (highly ill-advised). In other words, you can not buy everything, you must buy those few equities giving signs of imminent out-performance.

• Great opportunities for the near term are especially finite.

• Stocks make their moves, up or down, in very rapid fashion, and then languish for long periods, creating opportunity costs, and dead money. While these stocks are resting, retreating, or breaking down, there are others just starting their move. 

• Because of this rapid price action in an otherwise dull trading performance, stocks can become quickly extended and overbought, and/or fundamentally overvalued. 

• Regardless of the market's overall direction, there are groups and individual stocks going up and outperforming, and groups and individual stocks, that are going down and under-performing. In other words, the indexes may be going down, but there are always groups and individual stocks going up. 

• Investors generally do not use protective stops. Because reversing stocks break down quickly, you can look away and see your profit turn to a loss very quickly. You can either be victimized or use these tendencies to your benefit. 

• Investors may use market weightings to, in effect, destroy the possibility of outperforming or, for that matter, under-performing the market. Significant outperformance involves targeting specific sectors looking to continue momentum, break downtrends, or trade to the top from the bottom of trading ranges.  

• Investors generally do not set price targets, whether technically or fundamentally derived and therefore can end up holding overbought and overvalued stocks, highly subject to gravity.  

• Tax considerations lead to bad investment decisions and "round tripping" stocks.  Think of all the internet investors who did not want to pay capital gains, who now have whopping unrealized losses. 

• Perversely, many financial advisors, not wanting to appear to "churn accounts" do not get investors out of stocks on a timely basis. This is another example of the law of unforeseen consequences. We've gone from too much churning to not enough selling at the right time.    

• Investors either use hot tips or one style and do not use all the tools at their disposal. Specifically, fundamental investors we site who do not use technical tools to set entry and exit points, targets and stops.

So what is wave investing? It is a method that incorporates fundamental and technical analysis and other styles, but where technical analysis is the ultimate arbiter of stock selection, entry and exit points, targets and protective stops. This prevents catching "falling knives", falling in love with stocks, round tripping stocks, and making investment decisions based on tax issues.

Wave investing inherently creates more portfolio turnover than "buy and hold", but in a era very cheap transaction costs and computerized trade tracking, this is not a big issue.

Wave investing is a methodology for selecting stocks and groups, setting targets for where stocks are technically extended, protective sell stops to prevent more than 8% losses, and rotating in the next group of "up and comers'. Wave Investing incorporates the use retracement patterns on trending stocks to get back into those trending stocks once the overbought condition is worked off.

Wave investing involves using fundamental and technical analysis to identify groups just starting potentially explosive moves and getting out when targets are reached and or momentum lost. You just move on to the next break outs from there. In other words, you ride the wave for all its worth and turn around to ride the next promising swell. 

Wave investing works with groups in trading patterns (buying when they are oversold and at the bottom of established trading ranges), stocks breaking from a basing pattern, and trending stocks.

We will have more, but is critical to study technical investing and trading styles in our ChartWinners.com. as well as the technical section right here. Further, it is important to understand the impact the economy and investor perceptions create for investment groups. Economic timing is discussed here. Having a fundamental view of sectors and individual stocks is important to ratify your technical view.

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