Happy New Year
Which stock would you buy? Chart # 1 or Chart # 2?
Doctrader introducing a new stock market term called, Cognitive Pricing Reminiscence.
Cognitive Pricing Reminiscence
This year’s market closing is a lesson in mediocrity at best with the market moves being dictated by the large volume of program trading. Making new highs in the market is dependent upon new retail investor’s money. I just love the excited looks on the teleprompter’s face as the market nears 11,000 for the Dow Jones Industrial Index. The teleprompter’s enthusiasm which is so infectious almost makes me think we went back in time to 1999. Remember 1999, it seemed like every week the Dow Jones Index hit a new century mark. The market moved from 10,000 to 11,000 in only 1 week! Everyday in 1999, the market started off like a NFL pre-game show. Maria creates viewer excitement in the morning. She was walking and shouting above the noisy trading floor when the opening bell rang. The ringing of the bell caused a buying frenzy with the Dow Index up 100 points in 5 minutes. The news reporters are on the floor, screaming above the market’s matrix noise. Ding, Ding, Ding, just as Pavlov’s dog training research dictates, buy low and sell higher before lunch. Traders after a 2-3 martini lunch were back on the floor buying more. The good “ole” days, of buying stocks like Rambus, watching it go higher by $50-$80 a day. The “dot.com” companies hopping on the greed bandwagon with Wall Street’s investment bankers to issue stock with public offerings. The “dot.com” companies had “Performa earnings“, waiting to be transformed into a “blue chip” company with a fairy tale ending. The “dot bombs” would be their names in the future. Those “good ole” days created “Urban Legends” of “day traders” being locked up all year long, only to emerge from their self imposed exile as millionaires. Then there were the commercials, showing a retiring tow truck driver who owned his own island (country) with the savvy skills of day trading. He used a newspaper and traded online to make his fortune! “Microstrategy” (MSTR) stock soared to $300 a share, sponsored “Super Bowl” ads! Yet, by August of 2002, this stock was valued at 44 cents! The dot bomb companies were going broke, dragging into bankruptcy some of the S&P 500 largest employers. Companies like Enron, World Com, and 3000 others. The “dot bombs” quietly faded away, to the dismay of investors who never learned any “technical analysis” sell signals. The long term investor’s motto was “it can’t go any lower” and “it is so cheap now” while the bear market swept through the NASDAQ market. The NASDAQ market lost 87% of it value, from 5000 points to a low of 1200 points. The Dow Jones and S&P 500 Index lost 45% of it’s value Those un-wittingly investors who believed in a “fairy tale ending“, were left holding empty bags of hot air as paper profits turned into lumps of coal.
It hard to believe those days were only 5 years ago…
When at this time of year, red eyed day traders were full of cheer
And their trading accounts had no fear.
They couldn‘t wait to hear the morning bell,
Only to hold for hours, then to sell.
They drove prices higher and higher,
Leaving the short sellers and the bears dryer.
Later that year, the bears and short sellers were the ones to fear,
As the markets sold off, year after year.
In 2003, when all hope was gone and there was nothing but fear,
Everyone climbed aboard the money train with cheer.
Like all bull markets, investors have no fear,
“Buy, buy, buy and hold“, is all they hear.
When Greenspan raises the alarm,
Investors believe they cannot be harmed.
Meanwhile, secular markets will continue churn,
As Harmonic Clock investors have learned.
There is no such thing as buy and hold,
By the time you earn a profit, you will be old.
Follow the Harmonic signal lines and save time,
So you can retire early with plenty of wine.
Pick up a copy of “The Harmonic Stock Clock” before it is too late,
Over the next 3 months, technical analysis will prove to be great!
In my last newsletter I talked about a possibility of the Dow Jones Index reaching 12,400. However, with 65% of the market’ trading volume caused program trading; I don’t see that happing this year. Three weeks ago the Federal Reserve raised rates again, and the Alcazar will raise interest rates again in January, February, and March. I expect the Federal Reserve will continue to raise rates until the Dow Jones moves below 10,000 points. Natural gas has hit an all time high with the first major snow storm to sweep across the country. Gold has hit an 18 year high, just as the Harmonic Stock Clock cycle pattern predicts. The Federal Reserve is not concerned about the stock market; their fear is the housing bubble they have created by lowering rates in the face of deflation. That’s right, the Fed claims to fight inflation, but their fear is deflation. Today, the Feds claims to be fighting inflation, but in reality they are trying to re-inflate the economy and deflate the housing bubble. As usual the Fed rate cycle is behind the curve! The Federal Reserve raising rates higher now is adding fuel to the inflation fire.
Doing my stock scans this weekend, there will be intensified tax loss selling going into any rally during the first few weeks of January. I used a scan called that I call “cognitive pricing reminiscence.” The Standards & Poors 500 Index has only 266 stocks with a positive gain over the last 5 years. Meanwhile, 234 stocks are negative for the last 5 years. One of the top 5 performers in the S&P 500 Index is Reebok. The shoe company stock is up 616% since 12/31/1999. Now, Reebok is very important to our national economy, right? Which of these two stocks have had the best performance over the last 5 years using cognitive pricing reminiscence, GM or GE? The answer is…. (Keep reading) Where are the big winners from 1999? If you guessed at the bottom of the list, you would be right. Companies like, J D S Uniphase (JSDU) -98%, Amazon (AMZN) -40%, Gateway (GTW) -96%, Intel (INTC) -70%, Motorola (MOT) -82%, Corning (GLW) -83%, Sun Micro (SUNW) -94%, Ciena (CIEN)-94%, Cisco (CSCO) -83%, Merck (MRK) -50%, General Motors (GM) -73%, General Electric (BE) -77%, Time Warner (TWX) -77%, Yahoo (YHOO) -90%, Microsoft (MSFT) -75%), Oracle (ORCL) -89%, and Qualcomm (QCOM) -93% at the bottom 5th of the S&P 500.
What, your charts don’t agree?
There is cognitive pricing reminiscence which can be identified by looking at stock charts without adjustments for stock splits. Most stock charts reflect stock splits by adjusting the prices backwards, in order to make a smooth transition between stock splits and their post split prices. While this is convenient for charting and technical analysis, it doesn‘t reflect the power of cognitive pricing reminiscence. The real prices of stocks before stock splits are subconsciously remembered by investors. Looking strictly at stock price levels, most people don’t realize there have been stock splits unless they actually own theses stocks in their portfolios. The mutual fund holders don’t recognize when a stock has split, regardless if the mutual fund is inside a 401(k) plan or not. It has been said that 80% of the Americans are invested in the stock market through their retirement plans or by direct stock ownership. If you can look at a stock chart using my cognitive pricing reminiscence (CPR) screen, you can see the complete true picture of stock prices.
Looking at the two charts posted in this letter, which stock would you buy, chart #1 or chart #2? I can tell you they are both the same stock! Both charts are of General Electric, one is using the cognitive pricing reminiscence (CPR) and the other chart is adjusted for stock splits. Cognitive Pricing Reminiscence shows you the actual price of the stock. These are the prices that are quoted in newspapers and television.
For example, if I look at a chart of General Electric since 12-31-99 to the present, I have a negative -77% price appreciation over the last 5 years. Now, that is remarkable, because on the same basis, General Motors, which has not had any stock splits over these last 5 years has actually faired better on the rate of return, only down -73%. Now, Wall Street’s motives have to be questioned, because they say that stock splits don’t mean anything. I can’t remember time when the price of General Electric stock has ever traded in the $30’s. Last weekend, the former CEO of General Electric, Jack Welch, was on the financial shows saying the economy is the strongest he has every seen. I didn’t hear an answer about his former company‘s stock lagging performance. The last stock split on General Electric stock was in May of 2000, a 3 to 1 stock split, at $165 per share. Basically, you are given 3 shares of stock for everyone 1 share you owned before the split. Owning 1,000 shares before the stock split gives you 3000 shares after the split. The price of $165 is also adjusted by 1/3 to reflect the increased number of shares you own. The share price of $165 is divided by 3 = new share price of $55! This is where cognitive pricing reminiscence becomes a factor when looking at actual prices of General Electric‘s stock.. General Electric’s stock is currently trading at $35 per share. The current price of General Electric’s stock is still negative from the last post split value of $55 a share. If you would have bought GE’s stock 10 years ago, guess what? The price was higher 10 years ago! In fact, you would have to go back to Jan 1988, to buy GE stock below $35 a share! Throughout the 90’s, the stock never traded below $48 a share the majority of the time. However, if you were looking at a split adjusted chart you would see the price of General Electric’s stock was trading around $8.50 10 years ago, which is False because of stock splits!
See my Chart of General Electric cognitive pricing reminiscence 10 years ago.
Cognitive pricing
The market is experiencing cognitive pricing reminiscence because investors remember these higher prices 5 years ago. They watch television and read a few newspaper quotes in their daily paper. To see GE‘s stock with a 5 year high of $ 55 will not inspire anyone to invest. The general public is suffering cognitive pricing reminiscence because their subconscious mind remembers when these prices were much, much higher than they are today.
Charting Troubling Waters
Using the typical “split adjusted charting,” GE’s stock chart shows trading around $8.50 a share in 1995. General Electric’s stock never traded at $8.50 a share, but that price is used to adjust for stock splits. Using the typical split adjusted software; it appears you have had a big gain on the stock of (GE) over these last 10 years. The total rate of return of 318%! However, the 300% gain is still -50% less than what the post stock splits suggest, being 6 to 1 over the last 10 years. If GE’s stock had a stock value of $50 a share, you would have 6 times the number of shares; your gains should be 600%, not 318% over the last 10 years.
In 1995, the share price of General Electric’s stock price was at $50 a share, today the price is at $35. General Electric’s stock price is still down 30% after 10 years using cognitive pricing reminiscence. Stock Market cognitive pricing reminiscence affects people who are not shareholders, because they are seeing the prices quoted everyday in the newspaper. Hence, no one wants to own a stock if the high price was $165 a share 5 years ago and today is at $35 a share today. The cognitive pricing reminiscence can be seen on all stocks which have had multiple stock splits during the last secular bull market. Stock market cognitive pricing reminiscence is reflected by the small numbers of retail investors over these last 5 years. While program trading, (using a basket of 15 or more stocks with over 10,000 shares,) is ruling the market’s trading volume. Program trading is creating huge commission for Wall Street’s brokerages houses. Most of the program trading is being conducted by foreign investors and hedge fund managers, who may not, recognized cognitive pricing. These fund managers have never been involved in a secular bear market, like the one we experienced from 1966 to 1984. These foreign investors may also be using the typical split adjusted charting software, giving them false trading signals.
Harmonic Stock Clock Cycles Overcomes Cognitive Pricing Reminiscence.
Let’s take two examples of investors, one using the “buy and hold” strategy, the other one using the Harmonic Stock Clock signal lines. First the buy and hold investor.
You buy 1000 shares for $50,000 10 years ago, and with stock splits of 6-1 you now have 6,000 shares today. General Electric had 2 stock separate stock splits in those 10 years; the first split was on 5-12-97 for 2 to1. The next stock split was on 5-08-00 for 3-1, totaling 6 shares for every one that was held over those 10 years. (2 for 1 and 3 for 1 = 6 shares)
Total gain is 6000 shares X $50= $300,000 shortly after the last split. However, the value of these shares dropped to a new low, below $25 a share. If you multiple the shares by the low price, your account value would drop from $300,000 to $150,000. (6000 shares X $25= $150,000) At this low point of “maximum pain“, most people would begin to liquidate those shares… Most “buy and hold” shareholders are in “shareholders houses of pain“. Currently General Electric stock is trading at $35 a share times 6000 shares (post split) = $210,000. Now the buy and hold investor has seen his account draw down between $300,000 and a new low $150,000. Recently, the share prices have moved the account value up to $210,000 as GE’s stock is trading at $35 per share. The long term “buy and hold” investor might be tempted to continue to hold his stock, he is almost back to even. Now, every dip in stock prices reinforces his resolve to hold even longer into the house of pain. Sometimes, this conditioning is so great, that people will ride a stock down to bankruptcy.
However, active traders who are using The Harmonic Clock Signals lines would lock in any profits knowing that a cyclical bear market is approaching and no new highs will be reached over the next 18 to 36 months.
The second investor, The Harmonic Stock Clock investor, using the Harmonic Stock Clock signals, could have bought GE’s Stock at $50 a share and participated in the secular bull market. General Electric had 2 stock separate stock splits in those 10 years. The first split was on 5-12-97 and the next stock split was on 5-08-00. Harmonic Investor would have 6 shares for every one share that was held over those 10 years. (2 for 1 and 3 for 1 = 6 shares) As an active investor, using the Harmonic Stock Clock signal lines, he would have bought GE’s stock at $50 a share, then sold them after holding the stock from 1-1-95 to 5-09-2000, collecting his stock split’s the just as the “buy and hold investor“. However, since the Harmonic Stock Clock signal lines were flashing a warning signal for the end of the 18 year bull market, he would take profits at $50 a share. If he has sold his 6000 shares at $50 he would have $300,000 in cash. The Harmonic Stock Clock investor has two choices at this point in time. He could continue to sit in a cash position until the long term Harmonic Stock Clock signals another short term bull market or he could be more aggressive with his account.
Shorting Stock
Everyone that says shorting a stock is risky has never done it before. The purpose of buying any stock is to buy low and sell high. The only way you make money with this approach is when prices are going higher. What happens when prices move lower? You loose money, right. What if we could sell higher first, then buy low when the prices are lower? I know, you say you don’t have any stock to sell first, so let’s borrow some stock from our friendly broker. If we borrow the stock first, we are free to sell it to someone else in the market who wants to buy it, right? After a few days, months, or years, we buy the stock in the market at a lower price. If we sold GE’s stock for $50 two years ago, then we can buy the stock in the market for $25 dollars, right?
Sold high first for $50, then buy low for $25 = $25 profit. We are just reversing the adage, “buy low and sell high“, now we are “selling high and buying low.
Selling high and buying low is how we make money in bear markets (declining) markets.
This is called “shorting stock“.
Continuing on with the Harmonic Stock Clock investor…
He would sell short GE’s stock after the last stock split, because we are entering into a secular bear market. The trend is your friend; in this case, we have been in a long term bear trend which will continue for some time. He will only short 3000 shares of stock at post stock split at $50 a shares keeping the rest of his profits in reserve. Over the next 27 months, GE’s stock price moved to a new low below $25 a share. Shorting GE’s stock at $50 a share with 3000 shares and “buying stock to cover the short sell” at $25 a share would make a nice profit of $25 per share, or $75,000 profit on his 3000 shares he sold short. Now he has 150,000 in cash, plus $75,000 profit from shorting the stock, In addition he has the original $150,000 he used to short 3000 shares of GE’s stock. Total in his account is now $375, 000 in his account! The Harmonic Clock short term bull market began in March, 2003, he will use his money to buy long in the next mini bull market. He could go long, after GE’s stock traded to new lows below $22. Using his $375,000 to buy shares of GE’s stock at $25 per share, would give him control of 15,000 shares of General Electric’s stock. ($375,000/$25= 15,000 shares)
The 10 point move from $25 to $35 would make create another $150,000 of profits.
Now his account has $375,000 plus $150,000 more in profits should he sell his 15,000 shares at $35 per share? (15,000 X $35 = $525,000)
Should the Harmonic Stock Clock investor choose not to short the stocks, he would still have $300,000 in cash to buy long the stock of GE at $25 per share, giving him control of 12,000 share of General Electric stock. ($300,000/$25= 12,000 shares) After GE’s stock moved higher from $25 to $35, he could sell those 12,000 shares for $ $120,000 profit. This would bring his account up to $420,000 in cash. In both situations, the Harmonic Stock Clock investor has much more money in his account than the “buy and hold” investor. He has also avoided the sharp down drafts in his account, unlike the “buy and hold” investor. The Harmonic Stock Clock investor is able to profit in bear markets, accumulating more shares as prices fall. Notice, by shorting the GE’s stock at $50, and buying to cover, the Harmonic Stock Clock investor also earned money while everyone else was loosing money.
Meanwhile, the buy and hold investors is simply floating in a row boat, without a paddle subjected to the rising and falling tides of the market. Everyday, he wakes up hoping that prices will move higher. The buy and hold investor has significantly less shares than the Harmonic Stock Clock investor. (6000 vs. 15,000) The active Harmonic Stock Clock investor can control 12,000 to 15,000 shares of GE’s stock, whereas the buy and hold investor can control only 6000 shares of GE’s stock.
What happens in 2006?
If we are entering into a bear market, which type of investor do you want to be?
Investor A
$50,000 over 10 years, 6,000 shares X $35 = $210,000
Harmonic Clock investor
$50,000 over 10 years, 15,000 share X $35=$525,000
Ok, so the moral of this story, is stock splits do make a difference by diluting your actual rates of return. Hence Warren Buffet’s stock has never had a stock split. Number two, market timing is everything and the Harmonic Clock will help by identifying bull and bear market trends. Three, by understanding Cognitive Pricing Reminiscence, you will be able to identify truly the best stocks to own for the long term.
To help you with start off the New Year profitable, I have discounted the Harmonic Stock Clock book by 30% and have included 10 free bonus books to help you make smart investment decisions. This special pricing is only limited to the first 300 new orders only!
The free bonus books are:
Discovering Who You Are
Psychology of Trading
Day trading Mindset
Emotional Free Trading
Psychology of Trading
Winning Psychology
Forex short Trend Trading
Market Profile Basics
Intro to Candlestick Charts
Candlestick Charting Basics
Basic Fibonacci Principles
The Harmonic Stock Clock
Plus over 160 of my personal trading charts with notes on
Buy and sell signals on the Dow and E mini
I have also included a free month in my special “chicken straddle options and stock” premium site. Using options turbo charges profits when combined with the Harmonic Stock Clock Signals.
Notice, I have included books on the psychology of trading because the difference between trading and investing is only time. The trader’s time horizon is minutes to days, while the investor’s time frame my by months to years. The mental skills needed for day trading are the same skills needed for long term investing. There is always a battle in your mind about making the right decisions to buy, or sell, and that is where 90% of the traders and investors fail. Investments for long term are a bigger gamble than day trading. Did you read that right? I said long term investments are a bigger gamble than day trading!
Short term traders will know within minutes if they are right about a trend. Unfortunately, long term investors will not realize if they are right for months, years, and decades! If you have a “buy and hold” mentality, you are truly gambling on the future. Just looking at the past performances of the wining stocks 5 years ago and how they have performed in a bear market. The missed opportunity of time for long investors is the biggest gamble of all.
To receive the special package of trading and investing tools for 2006 click here:
http://www.freewebs.com/docsstockclock/harmonicclockbook.htm
God Bless
Doc
Hurry, this special pricing is only limited to the first 300 new orders only!
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