“One Way Pockets”
by Jeffrey Saut, Chief Investment Strategist, Raymond James
July 9, 2012
“When a market fluctuates for several weeks or months within a narrow range, one of these three things is happening: pools and large operators are accumulating securities by absorbing the offerings of tired holders; or they are distributing certain stocks under cover of artificial strength in others; or the market is actually in a state of uncertainty and waiting a fresh impulse.”
... One Way Pockets by Don Guyon (1917)
This quote was taken from the book One Way Pockets, first published in 1917. As stated in the book’s more recent introduction – the author, who assumed the nom de plume of “Don Guyon” to avoid being identified with his wealthy clients – was associated with a boutique brokerage firm that had sizeable business with investors in all sections of the country. In 1915 he began an analytical study of the orders executed for certain active traders with the idea of determining the fundamental weakness, if any, in their speculative methods. The results were illuminating enough to afford corroborative evidence of general trading faults, which persist to this day. While I have found many of the book’s insights helpful to my investment process, and urge investors to study said book, there have been other investment methods of interest.
Perhaps the best way is to emulate some of the trading principles used by yesteryear’s legends, who beat the market no matter the emotions and mechanics of the institutional herd, is to study them. To wit:
Bernard Baruch – Eighty some years ago, he would research a stock, buy it, and then each time the stock rose 10% from his purchase price, buy an additional amount equal to his first purchase. If the stock began declining he would sell everything he had bought when the drop equaled 10% of its top price.
Baron Rothschild – His success formula was centered on the famous quote attributed to him – “I never buy at the bottom and I always sell too soon.”
Jesse Livermore – This legendary speculator profited enormously by calling the vigorous 1921 and 1927 advances correctly. In 1929 he reasoned that the market was overvalued, but finally gave up and became bullish near the top in the fall of that infamous year. He quickly cut his losses, however and switched to the short side. Livermore listed three major points for success: Sensitivity to mob psychology, willingness to take a loss, and liquidity (meaning that stock positions should not be taken that cannot be sold in 15 minutes in the market).
Addison Cammack – A broker from Kentucky, who swore by the two-point stop-loss. “If you’re wrong,” he said, “You might as well be wrong by two points as ten.” He followed this method successfully, and was one of the few bears to make a fortune on Wall Street and keep it.
Have we got you thinking about what trading strategy to follow? Well, we’ve been holding the best system for last. Here is the sure-thing formula for success, “Don’t gamble – take all savings and buy some good stocks, and hold them until they go up, then sell them ... if it don’t go up, don’t buy them!” – Will Rogers
I first heard about One Way Pockets in the early 1970s when Merrill Lynch’s Chief investment Strategist referred to it as his “investment bible.” Since then, I have read the 64-page book a number of times and have always found it insightful. Obviously, the quote I began this report with has stuck in my mind and I think that quote is applicable for the current stock market because the S&P 500 (SPX/1354.68) has indeed been locked in a pretty narrow range since May 5th. Beginning with the June 29th Dow Delight (+277 points), however, it felt like the resolution of the two-month trading range might be to the upside because the SPX traveled not only above its 50-day moving average (DMA @1339.28), but broke above the 1360 – 1366 level that has contained recent rallies. Moreover, the trading action produced a fairly rare event in what a technical analyst would term a “bowtie.” Now a “bowtie” is created when there is a confluence of moving averages into what looks like a “bowtie” (see chart on page 3). In the current case the moving averages in question would be the 10/30/50-DMAs. While such a configuration does not tell us which way the stock market is going to go, it does tell us there is the potential for a move of some substance. For example, studying the attendant chart shows the “bowtie” of August 2011 preceded a ~14.5% decline. The quid pro quo is that the “bowtie” of mid-December 2011 kicked-off an ~18% rally. Regrettably, Friday’s employment numbers clouded the previously improving backdrop, yet participants should still not give up the bullish “ship” because one day does not make a trend. As stated in Friday’s verbal strategy comments, the upside breakout by the SPX had lifted it back into minor resistance and left it somewhat overbought in the very short-term. Therefore, a shallow pullback was not out of the question; and, the employment numbers served as the causa proxima for that pullback.
By Friday’s closing bell the disappointing employment report had pressured the SPX lower by 12.90 points, but off only 7.48 points for the holiday-shortened week. While the selling pressure increased during Friday’s session, it did not turned any of my macro models negative, at least not as of yet. Moreover, my intermediate-term model on the SPX has turned “green” over the past two weeks. As can be seen in the chart (page 3), once this indicator begins to “trend” it does not give you very many false signals (BTW, green is good and red is bad). Ergo, as of now I expect any pullback to be shallow and hence contained by the support level visible between 1335 and 1345 basis the SPX. That said, we still have NOT had the decisive/sustained upside breakout I was hoping for, which continues to leaves the equity markets mired in the now two-month trading range. While I expect the markets to resolve themselves to the upside, they don’t run the various markets for my benefit. Accordingly, I think the best strategy is to continue to accumulate the non-market correlated stocks so often mentioned in these missives. Those names are favorably rated by our fundamental analysts and posses decent dividend yields. That list now includes: Allstate (ALL/$34.79/Strong Buy); Covanta (CVA/$17.28/Strong Buy); Johnson & Johnson (JNJ/$67.64/Outperform); Plum Creek Timber (PCL/$40.00/Outperform); Rayonier (RYN/$45.66/Strong Buy); and Stonemor (STON/$26.25/Outperform).
The call for this week: This morning I awoke to headlines “Asia Signals Drop In Global Demand,” “Euro Zone Fragmenting Faster Than EU Can Act,” “European Worries Send Shares Lower,” and “Investors Brace For Shaky Earnings Season.” Such musings have the S&P 500 futures off about six points. Somewhat offsetting these negative quips are these headlines, “Fed Officials Favor QE3” and “Obama To Seek One-year Extension For Some Of Bush Tax Cuts;” but alas, this morning the negatives are outweighing the positives. If the futures open where they are indicated it would push the SPX into the upper part of the 1335 – 1445 support zone. While I expect that level to “hold,” if it doesn’t more defensive action is warranted.
Click here to enlarge
Click here to enlarge
