Volume 8, Issue I32
August 28, 2009
Stock Charts Ask The Right Questions At The Right Time Management
Portfolios heavy One of the primary uses for the fundamentals it may be impossible to
long-term relative performance charts discover the true causes for the downturn.
is to ask questions. The questions can Experience shows that when the
under- be framed as “If this stock is so great, financial performance of a business starts
performing why is it under-performing the to deteriorate, the management of the
stocks almost market?” Or “If this stock has so little company will probably do one of two
never going for it, why is it outperforming things. They will either “clam up” or they
outperform the the market? These are extremely will lie. This can make it even more
valuable questions for the portfolio difficult to determine the causes for the
manager to answer. downturn in performance.
The long-term relative If the trend of poor performance
Ignat’s Law performance charts set up these continues, it must be assumed to have been
questions by showing the long-term caused by real factors even though those
trend of the stock’s performance. It is factors may remain unknown and the stock
important to try to answer these can be sold. This is one of the most
A primary use of questions when the trend of important uses of long-term performance
long-term relative performance changes direction. That is charts. To identify stocks that should be
performance charts the most important time to try to apply sold.
is to know when to these questions. Many “fundamentals only”
sell a stock. This is The performance shown on the portfolio managers have difficulty with the
especially important relative performance charts reflects sell decision. The charts ask the right
because the relative investor expectations. When the trend question at the right time when the trend of
performance of a of performance changes direction, it is performance turns down. Charles Ellis
stock usually leads a direct indication that expectations suggested in a 1975 issue of the Financial
fundamental are changing. The stock market, since Analyst’s Journal that to win “The Losers
developments. it is based on investor expectations of Game”, portfolio managers should develop
the future, is forward looking and the their skill at knowing when to sell. That
trend of performance almost always suggestion has been confirmed many times
leads the disclosure of the fundamental over the years in my experience in portfolio
A collection of recent developments that account for the management and stock research..
newsletters is available on change in trend. Better sell decisions begin with
the web site. Many times the trend of better questions and the best question of all
performance will turn down for a is “if this stock is so great, why is it under-
Please visit the web site highly popular stock that has been a
at performing the market?” First of all, you
http://www.clayallen.com/ leader in the market. Analysts are still have to be able to know that the
rating the stock a buy and yet its performance of the stock has turned down.
Market Dynamics performance is faltering. The charts This is the primary use and application for
7325 S. Jackson St. are most helpful when this situation
Centennial, Colorado charts of a stock’s relative performance.
develops. Critical research should be Charts should be used to record and
applied to try to discover the causes measure performance, not to predict the
Phone: 303-804-0507 for the downturn in performance. future movements of the market.
Since the trend of performance leads W. Clay Allen CFA