The main mistake most investors do when adding stocks to their portfolio is to act on hunches or convictions about the performance of the companies they are investing into. One can be convinced that a company is going to do well for many reasons, such as because of the previous stock market history that has offered long term return to its shareholders, or because it is a big name with a robust long term strategy that may also be paying good dividends, because a startup that has developed a fantastic product or technology in an emerging sector is called to become the next unicorn company, or maybe because of convincing calls from your preferred financial analyst or investment advisor that appears to be a knowledgeable market specialist (or maybe not).
These are just a few examples but one thing is for certain: most predictions based on the above criteria (and there are more) will erode the investor’s nest egg into a miserable financial sink. In the end most companies end up being taken out from the stock market for various reasons or failing in bankruptcy. The stock market indices are always going up not only because of the global long term economic growth but also because there is an active turnover of stocks that compose the market indices, which act as smoke and mirrors to the individual stock pickers (but also to professional advisors, investment funds, market professionals and the like).
Therefore it is always wise not only to check some fundamental aspects of a company, such as its financial situation and book of account, the reality of its activities and portfolio of products or services, its strategic development plan or the quality of its communication.
It is also worth comparing its performance or promise of performance compared to its peers, the strength of the market sector in which the company is intervening compared to the general market, the general sectors rotation cycles to optimize the best time for investing (i.e. buying at a market cycle low and selling at a market cycle top), and last but not least considering the position of the broader indices in terms of market peaks and troughs in order for example to avoid investing close to a historical top just when a major market correction is going to happen.
But even when the checklist has been reviewed and all items have been checked it remains to control the market trend for an individual stock. Its market price (like the price of any individual financial asset) is a compounded average that aggregates the opinion of all investors at a specific point in time and the resulting longer term trend reflects the broad market view of the said stock and which can be depicted graphically. This is the fundamental basis of charting techniques. Even when everything appears perfectly rosy from a fundamental perspective the charts don’t lie and the market price trend tells the true story. As an individual investor I always rely on visual techniques and technical analysis to shore up any market scenario before acting.
Here below are a few recent examples of market trends showing diverging stock market paths in a few selected sectors.
MAZOR ROBOTICS LTD. vs. MICROBOT MEDICAL INC.
Both Mazor Robotics (NASDAQ: MZOR) and Microbot Medical (NASDAQ: MBOT) are both developing robotic technologies for the medical sector and their activities are really very similar. When I recently posted an analysis about $MZOR I received some comments referring to $MBOT as a similar investment target. Not even looking into the fundamental aspects the charts tell a completely different story: downtrend, extremely weak relative strength and almost no volumes of exchange for $MBOT vs. uptrend, brilliant relative strength and breakout with massive volume increase on $MZOR in March 2017, which is the time when I entered into position on the stock while concomitantly $MBOT was breaking down. Of course at the time I made this investment decision I had checked the other companies in the sector and with the blink of an eye discarded $MBOT as an investment target.
EXXON MOBIL INC. vs. SINOPEC
Recently I posted an analysis mentioning that EXXON MOBIL CORP. (NYSE : XOM) is rather a sell than a buy. As the charts show, while $XOM is breaking down with a negative weekly trend and a decreasing and negative relative strength, SINOPEC (NYSE: SHI) is trending upwards with a rising (although still negative) relative strength. Obviously for investors in the oil sector $SHI is to be preferred over $XOM.
TESLA vs. FORD
In a recent post I mentioned that while challenger TESLA INC. ( NYSE: $TSLA) has been on a tear over the last few years the old champion FORD MOTOR COMPANY (NYSE: $F) on the opposite is in a long term bear market. The comparative charts tell it all: downtrend and declining relative strength in case of $F versus uptrend and positive and rising trend in case of $TSLA, which is even more obvious on the yearly chart (not presented here but included in the original post).
Charts And Trends will never let you down. Check the trend before anything else and especially before deciding to click ‘buy’ or ‘sell’ for the health of your portfolio, your peace of mind and the wealth of your family.