What I’m going to do in the next couple of months is lay out, in the most straightforward way, exactly how I approach trading and investing. This is what I use to try to simplify the complex. Imagine the entire stock market is like the ocean and we are investing in a surfing contest. I’m going to put my money on the 13 year old kid from Huntington Beach, CA. I’m not going to put my money on a 57 year old oceanographer who can talk endlessly about currents, tides and sand. (And btw, has probably never been in the ocean.) Wall Street is full of oceanographers!

At the core of what I do is follow price trends. [insert clever Geico commercial here - no offense to cavemen] Asset prices are mean reverting. Nothing goes up or down forever. Think of a stock price like climbing a flight of stairs with a landing in the middle. The mean or average would be the landing. The mean is a high probability area where the stock price will pause. Technically, this is an area where buyers and sellers are in balance. This is a price-zone where supply of shares is enough to satisfy demand. If we pull back and look at price on a bigger scale, you will observe that price has a tendency to revert towards an average (mean), pause, and then thrust away from the average usually in the direction of the predominant trend. This relationship can be illustrated by the graphic below.

There is no magic average level for anything. But as the song goes, “if you don’t stand for anything, you’ll fall for everything.” The goal of this missive is for the everyday investor to come away with a greater understanding of how to identify trends, limit losses when wrong and hold on to gains when right. So, I visualize price data through three different time frames. Oh, and before I forget one important concept before we begin. I am nothing more than a gatherer of data. I happen to gather data on the capital markets. But none-the-less it is just data. Up-ticks don’t have any more or less meaning than down-ticks. Your confidence level should not change due to changes in price. That is your ego. 

The three time frames I use most often are: weekly time series, daily time series and 130 minute time series. I can and do flip around 2-day, 3-day, 4-day time series. I also look at 195-minute, 78-minute and 39-minute time frames. Just a note on how I come up with the sub-daily time series- there are 390 minutes in every trading day (not counting pre/post hours of trading). If I divide 390 by 3, I get 130. This will give me 3 bars of data in every day. A 78-minute time frame will give me 5 bars of data per day, for example. I rarely look at data through a monthly time series, which may seem odd, since my overall time frame is quite lengthy.  It may also seem odd that I would spend time looking at sub-daily time frames. Remember, I am in the data collection business and more data is better. I analyze data across multiple time frames to first protect my portfolio against loss and second to identify the signal for purchases within price. 

If I had to prioritize the level of importance, the weekly time series, hands down, is of greatest focus for me. All of my work flow is broken down from the weekly data. To keep the discussion at a high level, I want to see price above an up-ward sloping 50-week simple moving average.  This is about a year's worth of price data. Again, there is nothing magical or unique about this.  This is what I consider the long-term trend line. Above the 50-week, positive sloping average the security can be categorized in an up trend. If price is oscillating around a flattening average, the security can be classified as in no-trend. If the price is below and downward sloping average, then the security can be classified as in a down-trend. I will never use a single time frame and a single input to make a buy or sell decision, but there is also really no need to complicate this any more than necessary. As I roll down to a smaller time-series, like a daily chart, I’d be referencing a 230 period average that would correspond to the 50-period average from the weekly graph.

At this point I am just observing the data. I do not make any buy or sell decisions based on this data point. I use the scientific method approach to this. We have no conclusions just yet. Think of this like a gold miner. A gold miner has his belts, shakers, trammels, and water to strip away the excess material to see what gold shows up in the sluice box.  But what is the first thing that a miner has to figure out? What dirt is miner going to run through the machine. The miner doesn’t throw random dirt through his system. The focus is on “pay-dirt.” And not every piece of ground is gold. The miner is constantly striping away the material to finally get down to the gold.  I’ll let you in on a big part of my process. If a security trades below its 50-period weekly, downward sloping average, the stock is complete garbage. I don’t care how wonderful the company’s products and services are. I don’t care if your son is the CEO. I don’t care if they use 50% of their profits to save baby seals. There will be no gold in my account if I run garbage stocks through my system. 

We are in a difficult investing environment right now. These are not the times to “stay the course and be patient.” Price is one leading indicator that helps me manage risk against large losses.  One paradox in investing is that if you begin to lose a little, this could mean something is fundamentally changing. On one hand, you can’t make a lot if you are not willing to lose a little.  On the other hand you can lose a lot if you don’t change. There are times to stay the course- for me- for example, could be when a security pulls-back to an upward sloping 30-week simple moving average line supported by an upward sloping 50-week simple moving average line. Ah.  You see I threw something else in there for you to think about. If you go back and look at data through this lens, it will become very obvious to you that the probabilities for a significant decline have been in the works for 6 to 9 months. To come out now and say, “the market is down 20% so we're now in a bear market,” is amateur hour. I want you to be better than that. I am brutally patient in an uptrend. Today, except for energy, which looks like it could be an early sign of a breakdown, most everything looks to be somewhere along the downward cycle. Some are farther along in this process than others. We are still in Act 1 of the busting of the credit cycle. It is never too late to risk-manage your hard-earned wealth. Last, whatever you do, don’t ever buy in a, ah-hem, downtrend!

Peace and prosperity!

P. Franklin, Jr, CEO

Franklin Trend Investment Management, LLC