Stocks - Mon, 08 Mar 2004

Watch those mid points, especially where they bounce off past tops - they can be deadly accurate, see agx.

I picked up an old stock market book in a bookstore the other day - and of course having plenty of other, better things to do, started reading. It was a 1969 book, Capital Appreciation in the Stock Market, by Gordon A Holmes. ( A handbook of sophisticated analysis techniques, no less) There were actually some interesting things withing the pages, and I noted one comment, proved with a good analysis of charts of company earnings versus prices. "On a short term basis, price *does not* follow earnings. Actually, price changes preceed earnings, and usually by about three months." Now you ought to know that already - but interesting to have been noted in a 1969 book. (Followed by a gem of a chapter about how computers are starting to affect markets !)

It is saying that the price of a stock makes final low before the worst of all news is out, or will top out whilst all the good earnings news continues to flow. You could test this for yourselves by relating earnings news to charts, which i have always asked class participants to do. Aristocrat is a recent good example. This stock for all of last year consistently put out worse and worse news, but price was making higher lows all the way. (eg, AFR report 10th feb 04, 'shares in aristocrat slumped almost 4 percent yesterday as investors reacted to news that the poker machine operator is facing yet more legal action'. Lovely mid point retracement, *and a buy signal*.)

The book goes on; "Someone might ask how this could be when no one knows what the earnings are going to be. Well don't be too sure. Many people and organizations are constantly calculating and estimating earnings, and it may be the better informed that are establishing the prices..."

So trade the trend. Insiders have a good idea of performance over the coming twelve months, and somehow the market just seems to know this.

You could even say that's George Soros's 'reflexivity' principle in operation, the players themselves are effecting the prices.

On another level, I noted a couple of questions in an AFR article , 2nd march page 55, "How spying puts us into a spin", asking; "How do you know what you want to know ? How do you know something you don't know ? And when do you know when you have found out what you don't know ? The resolution in each case is: you don't know."
Pity we can't chart the spooks. A chart tells you everything you need to know. Higher tops/higher bottoms, the trend is up, get on the trend. A break into new highs - there is good news coming. Pretty simple, so buy new highs. Price moves before earnings.

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