Why the x axis is critical to your trading success

Thursday, 31 August 2017
Melbourne, Australia
By Bernd Struben

  • Time
  • Credit creation
  • Dead stocks

I’m sure you’ve heard of Houston, Texas. Even before Hurricane Harvey put America’s fourth largest city in headline news across the world.

But how about Lufkin, Texas? With a population of only 36,000, you may not be familiar with this town, some 190 kilometres northeast of Houston.

I know them both well. My wife’s family has deep roots in both Houston and Lufkin.

The Houston branch weathered the hurricane safely. Their properties, fortunately, sit on high ground. They’ve been busy though, out rescuing neighbours and wildlife — including an armadillo — from the biblical flooding.

And biblical it has been. AccuWeather reports that Cedar Bayou, Texas got nailed with 51.88 inches of rain. That’s 131.78 centimetres!

The rain and powerful winds have come at a high cost. There’ve been 22 reported deaths, so far. Tens of thousands have fled their homes. And the economic costs are mounting.

The US oil refining capacity is reported to be down over 20%, or around four million barrels per day. And that’s unlikely to come back online for weeks yet. But the economic impact will be felt far beyond the oil industry.

As USA Today reports:

Hurricane Harvey could be the costliest natural disaster in U.S. history with a potential price tag of $160 billion, according to a preliminary estimate from private weather firm AccuWeather.

This is equal to the combined cost of Hurricanes Katrina and Sandy, and represents a 0.8% economic hit to the gross national product…

The Federal Reserve, major banks, insurance companies and other business leaders should begin to factor in the negative impact this catastrophe will have on business, corporate earnings and employment, [AccuWeather president Joel] Myers said.’

When natural disasters strike, insurance companies take some of the biggest hits. Allstate Corp [NYSE:ALL], for example, insures a lot of properties in Texas. Its share price is down 4.6% since last Wednesday. And as the claims in Houston mount, I expect the share price to remain under pressure.

Lufkin, on the other hand, emerged from the storm relatively unscathed. So why am I bringing Lufkin up?

No, not because my father-in-law was a deputy sheriff there. It’s because the small Texas town is the birthplace of a man who had a dramatic impact on Time Trader’s Phil Anderson.

More after the markets…

Markets

 Overnight, the Dow Jones Industrial Average climbed 27.06 points, or 0.12%.

The S&P 500 gained 11.29 points, or 0.46%.

In Europe, the Euro Stoxx 50 index closed up 16.49 points, or 0.46%. Meanwhile, the FTSE 100 gained 0.38%, and Germany’s DAX index rose 0.47%.

In Asian markets, Japan’s Nikkei 225 index is up 160.93 points, or 0.77%. China’s CSI 300 is down 0.66%.

In Australia, the S&P/ASX 200 is up 40.08 points, or 0.71%.

On the commodities markets, West Texas Intermediate crude oil is US$45.91 per barrel. Brent crude is US$50.76 per barrel.

Gold is trading for US$1,306.82 (AU$1,652.74) per troy ounce. Silver is US$17.45 (AU$22.07) per troy ounce.

One bitcoin is worth US$4,666.96.

The Aussie dollar is worth 79.07 US cents.

Time

If you’ve been following along with the Port Phillip Insider, you already know a thing or two about Phil Anderson. As mentioned before, we’ve collected a series of his essays you can read for free on our website.

You may also know that Phil takes a unique approach to stock trading. And, more to the point, a unique approach to how he reads stock charts.

If you’re like me, you probably focus on the price. That’s the Y axis…the vertical one.

Now, I’m no chartist. Far from it. But I know enough to look for certain patterns. A series of higher lows, or higher highs, for example. These won’t guarantee a stock will keep going up in price. But they’re good signals to watch for.

The thing is, these signals entirely ignore the horizontal X axis. That axis represents time. Sure, I’ll take that into account as far as gains or losses go. Like noting a 10% gain in 12 months versus six months. But that’s about it.

That’s what separates Phil’s reading of charts from any technical analyst I know. And it brings us back to Lufkin, Texas.

How?

WD Gann was the first person to bring the time factor into stock charts. Born on 2 June 1878 in Lufkin, Texas, Gann started trading in 1902 when he was 24. And he went on to make a fortune in markets.

He also penned numerous books on his trading methods. The best known, and one that’s still on my ‘must read’ list, is Truth of the Stock Tape.

Here’s what Phil has to say about Gann and time:

The X axis, time, is the most important part of reading a chart and successful trading.

The first market person — and still the only trader I’m aware of — to ever have studied the time aspect to charts was WD Gann. It’s a bit unbelievable really.

I have looked at hundreds, if not thousands, of charts from the early days. I even hand-drew some myself before the introduction of computer software — without giving any consideration at all to that other axis. The time axis.

That all changed when I began to study Gann. And I’ve never traded the same way again.

Credit creation

Yesterday we discussed the importance of credit creation. Phil tells me that easily available finance or bank credit is what to look for at this stage of the cycle.

I showed you a few examples of how this is playing out in yesterday’s Port Phillip Insider. Here are two more.

First, the following headline is from today’s Australian Financial Review, ‘Borrowers slash fees and rates to attract Springtime property buyers’. The article continues:

Aggressive non-bank lender Pepper Money has slashed mortgage and legal fees worth more than $1800 as competition for market share hots up, in the countdown to Springtime property sales, which remains the hottest time for deals despite regulatory attempts to cool the market.

Lenders are lowering rates, raising loan-to-value ratios, waiving fees and launching lucrative promotional offers in a bid to attract lower risk property buyers…’

Then there was this, from Agora founder Bill Bonner:

We also notice that stock market margin debt is at an all-time high — at $539 billion. This is money investors have borrowed from their brokers using their shares as collateral.

And as Dan Denning reported in the latest issue of our monthly publication, The Bill Bonner Letter, there is also more than $100 billion of “shadow margin.”

This is where investors borrow against their stock market portfolios to buy houses or take vacations.’

All this is precisely as Phil expects. And, indeed, was able to forecast years in advance.

As Phil writes:

There’s an erroneous belief that markets are random. They are not. You only have to start looking at the world in terms of the 18.6-year real estate cycle to know how misleading this view is.

In the end, all of this led me to formulate some very effective charting rules, which have stood me in good stead over the years.

‘200-plus years of cycle history are still playing out as anticipated. That’s because the rules of the game remain in place. These rules — the rules of land enclosure — are most unlikely to change anytime soon.’

You can find out exactly how Phil applies these rules in his trading here.

Dead stocks

In Tuesday’s Port Phillip Insider, we discussed the fallacy Phil sees in going bargain hunting in the stock market. In short, don’t do it.

But there are many other pitfalls in trading. Like stocks that can trap your money. Phil calls these ‘dead stocks’. Here’s what he writes about them:

The dead stocks are those that go sideways, or don’t have a lot of volume in them. And you don’t want to be in those, either.

Now, if you can read a chart effectively, which I can do, then you can avoid the dead stocks by just not getting into the stocks that are going sideways.

That the last thing you want to be doing, because then your money just does absolutely nothing.

And, these days, you’ve got to put your capital to work. You don’t want your money in stocks that are doing nothing. You’ve got to avoid that.

The ASX 200, as you know, has been in a tight sideways trend since mid-May. And though there was some more promising action earlier in the year, the index is up only 0.84% in 2017. Essentially, doing nothing.

That’s a difficult market to trade. But that hasn’t stopped Phil and his team at Time Trader from recommending some stocks that most definitely are not dead.

They recommended   , for example, on 8 March. As at yesterday’s close the trade was up 12.17%. During that same time the ASX 200 lost 0.08%.

Then there’s   , tipped just over three weeks ago on 8 August 2017. As at yesterday’s close the trade had gained 13.75%, while the ASX 200 lost 0.06%.

That’s what T.I.M.E.D. stock trading is all about.

As you may know, Kris Sayce got Phil to agree to take on new members in Time Trader. But that offer ends on 15 September. And Phil’s trading service won’t open to new subscribers again this year. Perhaps not again until this time next year.

So don’t delay.

You can get all the details on Time Trader here.

Cheers,
Bernd