My Map of the Market

In the investment world, our analysis is our map. The market can be dynamic, confusing and seemingly impossible to understand. It's our analysis that turns chaos into harmony. In this game, the scenery is always changing. When you're lost in the market, it's disciplined analysis that helps you find your way.

Of course, there's no shortage of indicators, reports and data points to consider. If you follow the fundamentals, there's everything from revenue to price/earnings ratios. Technicians watch moving averages, relative strength, Fibonacci and other market minutiae too numerous to name.

The truth is that trading can be as complicated as you want to make it. And because of the sheer volume of statistics to consider, analysis can become paralysis real fast. But because you can't focus on everything, you've got to focus on what matters, and that's price — end of story.

I watch prices. Not the company's breakthrough product, insider selling or the Strong Buy issued by the talking head who doesn't own a share for himself. The price is what we trade, so the price is what I watch.

My basic premise is that the best way to determine a security's future is to evaluate its past. So I ask, where's XYZ trading now? Where was it last week? Last month? Last year? For me, prices are the market's tea leaves, Ouija board and crystal ball all rolled into one.

Amateur traders watch prices too, albeit for exactly the wrong reasons. They are innately attracted to low-priced stocks, for example, lured by the prospect that a $1.25 stock will jump to $2 just a few hours after they've bought in. Conversely, they hate buying higher-priced stocks simply because they can't buy a large number of shares.

Yet a stock's price, the numerical cost per share, really doesn't mean much. Using stock splits, a company can peg its share price just about anywhere. Without a reverse split back in 2002, for example, AT&T (T) would now be trading in the low single digits. And because Berkshire Hathaway's (BRK.A) stock has never split, it trades at a hefty $89,000 a share. So a stock's price in the abstract is meaningless; rather, it's a stock's price history that counts.

When I'm evaluating XYZ, I want to know its history better than a pair of well-worn flannel pajamas. Not just the current price, mind you, but everywhere it has traded in the past. What did XYZ look like during the bubble? The bust? How did it weather the collapse of Long Term Capital Management, the 1987 crash and other major events? By looking at price history, I try and determine when it was loved, when it was hated and when it was forgotten about altogether.

And because stocks tend to move in groups, any analysis of XYZ must include looking at similar companies within the same industry. Is the group's price action bullish, bearish or somewhere in between? Have any similar companies blown up or recently become weak? What's the strongest stock in the group? Is it in the sector leading the major stock indexes, or is it lagging behind?

There's a reason it's called "speculation." Because no matter how much analysis we do, nobody knows what's going to happen. While trading isn't science, it's not witchcraft either. For my money, if you're going to analyze the market, then the best place to start is with the market itself.

The times in which I'm most successful are those in which I feel unequivocally knowledgeable about exactly what's going on. The more intimately I follow prices, the more confident I am in my trades, because what's reinforcing my market opinion isn't an analyst or research report, but the market itself. It seems simplistic, but in an age when "research" has come to mean a positive mention by Lou Rukeyser or blurb in BusinessWeek, closely following a stock's price history, for many investors, is a big step.

And the current market? Although I look at dozens of price charts every day, I still see little that inspires me to put new money to work. Stocks are up, but not in the consistent and orchestrated pattern upon which I believe strong trends are based. I'm not gaming the election or commenting on the war in Iraq; I'm watching prices. What I see is the choppy sort of environment in which both the longs and shorts end up churning themselves to death.

So although my eyes are wide open, my powder is still dry. When there's money burning a hole in your pocket, the waiting is often the hardest part. I hate to be lost. So until I find a path I like, I'm resigned to stay out of the woods altogether.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.