Simplicity is the Ultimate Sophistication
King of Kiosks
I am on Twitter (my tag name is @cabotdude if you want to follow) and I occasionally tweet about what I'm seeing, but I also enjoy reading opinions from others. The following is an actual chart some investor linked to on Twitter a few days ago:
Now, first, let me say this-I don't know who posted this (it was "retweeted" by someone I follow), and for all I know, the person is a highly successful trader, so I have nothing personal against him or her. But as soon as I saw the chart I saved a copy of it and decided to write about it here.
Why? Just look at it! There are so many lines, notes, angles and indicators it's hard to discover any meaning. Of course, its an extreme example (I've never seen a chart so filled with notes), but my point is that, whether you're dealing with stock charts or systems as a whole, it's usually best to follow the KISS method (Keep It Simple, Stupid).
I think all investors go through a "Treasure Hunt" process when they first become interested in the market. I know I did. For the first two years or so I worked at Cabot I backtested a couple dozen stock and market timing indicators while paper trading a handful of systems. It was fun and a great learning experience ... but I can't say I actually ended up using much of what I tested.
If anything, such a process clarified the fact that there is no Holy Grail-i.e., there is no perfect system or indicator that's going to crank out wins eight or nine out of 10 times. Some people seem attracted to the truly arcane and complex methods (as illustrated by the chart above) but I never found much use in them.
When evaluating stocks, here is what I use: A bar chart with price and volume. I usually include the 25-day and 50-day moving averages. And I also have a relative performance ( RP ) line in there, which graphically depicts how the stock is doing compared to the market.
And that's it! No stochastic readings or RSI or Elliot Wave counts or candlesticks or anything like that. Not that I have anything against these measures; heck, I think fellow editor Paul Goodwin, who sits about eight feet behind me, likes the look of a candlestick chart. But it's not for me.
In my view, there's enough data out there to make your head spin. So I like to keep things as clean and as clear as possible. That reduces the chance that I will be confused by what is actually happening in the market.
As for market timing systems, I also think keeping it simple is your best course of action. That's why I prefer to rely on trend-following market timing indicators-yes, they can give you a few unpleasant whipsaws, but they will always keep you in major upmoves and out of major downmoves. That's most of the ballgame right there.
But time and again I see pundits talking about random indicators like manufacturing reports, the U.S. dollar, overbought/oversold, valuation metrics and the like. Again, to each his own, but what do you do if the market is cheap, but overbought, and manufacturing is weak? I have no idea! I prefer to just follow two or three, red-light or green-light type of indicators and invest accordingly.
The upshot of all this: Investing is not easy, but it shouldn't be mind-bendingly complex, either. Really, the key to success isn't in some exotic, proprietary system, but in sticking to basic principles (cutting losses, holding winners, watching risk, following the trend, etc.) and to always keeping them in the forefront of your mind.
As for the current environment, it's been challenging-in fact, I think the timeframe of February 2011 through June 2012 has been about as tough a 16-month period as you'll find. During that period, there was a little money to be made after the Japan nuclear accident in April and May 2011, and of course, some morsels to be found in February and March of this year. But that leaves about 12 months that have been either trending down or very choppy.
Not surprisingly, the mood among investors I talk to is very glum. Whether it's a subscriber on the phone or an acquaintance at a BBQ, if the topic of the market's future comes up, the words that normally are spoken include "tough," "difficult," and even "minefield." The message ... be safe, keep your head down. Most people are happy earning 3% or so in an income investment.
However, while I won't predict we're now embarking on a major new bull market, I do like the look of the recent market action. Since the top in late-March, the Nasdaq had a failed rally attempt in late April, and another that got going in early June that fell flat.
But the rally that launched Friday, June 29, looks like it could have legs. The timing seems about right--most leaders have had at least two or three months to re-build sound launching pads. And we're finally beginning to see the market's worst sectors (financials, industrials, commodities) come off their duffs, which is needed for a sustained upmove.
My guess is that it will come down to earnings season; if earnings are well received, I think there could be a few dozen high-quality leaders to sink your teeth into. If not … well, we'll deal with that if it happens. The upshot is that, if you've been defensive for the past couple of months like us, you should start coming off the sideline and, if you make money, look to extend your line in the weeks ahead.
My stock idea for today is a stock that is one of the first to reach new high ground during the past couple of weeks. It's Coinstar ( CSTR ) , which has made hay with its coin-counting machines and its popular Redbox DVD rental kiosks. Here's what I wrote about the company in the June 25 issue of Cabot Top Ten Trader:
"Coinstar started many years ago with its namesake coin-changing machines; for a fee just under 10%, people can bring their change to a Coinstar kiosk and get cash back, gift cards to popular retailers like Amazon.com, or even recently, fund their PayPal account. Then came the firm's move into DVD rentals with its Redbox kiosk, allowing users to rent new, popular movies for just $1 per night; the company went from a few hundred locations to more than 20,000 in just a few years. That has been the main driver of the company's tremendous sales and earnings growth in recent quarters. At this point, analysts see earnings flattening out after 2011, as Redbox growth slows and as streaming video possibly takes a bite out of business. However, we're not so sure-the company is aiming to be the King of Kiosks in a sense. Coinstar's next avenue of growth could be its coffee kiosks; called Rubi, there will be 500 placed by the end of the year, offering Seattle's Best coffee (a Starbucks brand) and other specialty drinks, starting for just a buck. Management eventually thinks it could have 15,000 of them around the U.S.! Other than that, Coinstar is testing video game rentals and even "eco-ATMs" that give cash for used, old cell phones. The company clearly has expertise in rolling out these kiosks, so if Rubi is a hit (so far it's garnering more than $10,000 in annual revenue per test machine) expect it to blanket the country in no time. Said another way, we think this growth story has legs."
Interestingly, the day after I wrote that, the firm announced that earnings this year would take a hit because of a recent acquisition; it was a short-term negative, long-term positive sort of announcement. The stock opened down but closed higher that day on good volume, and since then, CSTR has moved to new highs. There hasn't been blowout-type volume on the upside, but there have been solid buying trends.
If you're game, I think you could buy some around here, with a stop near 64. Earnings should be out around the end of the month.
All the best,
Editor of Cabot Market Letter