Stock Charts Are Top Tool for Investors

THEY SAY THAT men are visually stimulated, which is likely why I spend so much time staring at stock charts. More than earnings announcements, new product launches or star CEOs, a security's price action, as evidenced by the stock chart, is the data point you simply can't ignore. Every fundamental factor that's known about a stock is reflected in the chart, which is why it's the first thing I look at when evaluating an investment and the single most important criteria I weigh.

To that end, I now present seven heartbreaking charts and, more importantly, the trading lessons to learn from them.

Long before Michael Phelps began collecting Olympic medals, iShares FTSE/Xinhua China 25 Index (FXI) became an immensely popular way to play the growth story of the century: China. And for most of 2006 and 2007, the prevailing wisdom was that Chinese stocks would rally through the Beijing Games, spurred on by the enormous commerce and publicity generated by the competition. As is often the case, however, Chinese stocks appeared to have anticipated the news, rallying sharply in 2007, only to drop by more than 50% in 2008. By the time of the opening ceremonies, FXI had retreated 44% from its October 2007 high.

Stillwater Mining (SWC) was a $10 stock when I highlighted it last September, and more than doubled in less than six months as the commodity boom heated up. But as I noted last week, that boom has all but evaporated, with shares of Stillwater falling toward $6. In other words, the palladium miner will have risen 100% — and fallen 72% — all in the span of less than a year.

You rarely see a downtrend as persistently methodical as you have with newspaper stocks such as McClatchy (MNI), which has broken to new lows almost every month for the better part of two years. When I dismissed the sector in March, McClatchy was a $10 stock, down from $40 a year earlier. It has since fallen another 50%-plus, proving once again that market trends tend to persist longer than most of us would think.

Washington Mutual (WM) is one of those names that surprised many by the severity of its decline. After all, this is a large and widely owned bank with real assets, not some worthless dot-com with a business plan and a few servers. Again, however, we see how from the summer of 2007 to present day, the stock gave almost no comfort to the bulls, the majority of whom were downright shocked to see this multibillion-dollar bank drop from $45 to below $5 within one calendar year.

A true heartbreaker, ultra-short bond fund Schwab YieldPlus (SWYSX), which has been touted by many as a higher-yielding alternative to money-market funds, was crushed as the fund's nearly 50% allocation to mortgage-backed securities was marked down during the credit crisis. The fund, which was one of the top-selling mutual funds during 2006 and 2007, has seen its assets dwindle from $13 billion to just a few hundred million, and is the subject of numerous lawsuits from understandably angry investors.

In an age of ETFs and sector allocation, we've become accustomed to assuming that stocks within a certain industry will move in concert. Comparing Johnson & Johnson (JNJ) to Pfizer (PFE), however, illustrates how this isn't always the case, with the two stocks showing a one-year performance gap of over 30 percentage points. And as health stocks such as Barr Pharmaceuticals (BRL), Teva Pharmaceutical (TEVA) and others power forward, it remains to be seen whether Pfizer will turn out to be a value play or a bear trap.

No money manager has felt the brunt of falling financial stocks as much as Bill Miller, the Legg Mason figurehead whose star has been tarnished by large bets on names like J.P. Morgan Chase (JPM) and Freddie Mac (FRE). Investors in the previously celebrated Legg Mason Value Trust (LMVTX) have seen the fund drop by nearly 30% year to date, pushing its NAV not too far from 10-year lows. The lesson here is that, when it comes to money management, nobody is beyond a misstep now and then. And unlike most any other business where experience and tenure matter, in the investment game you're truly only as good as your last trade.

The Project for Excellence in Journalism, a Washington, D.C.-based research group, analyzed 48 different news outlets and 5,000 economic stories to find that media coverage of the economy tends to be behind the curve of most major trends.

Most media outlets rely on government statistics, which are, not surprisingly, lagging indicators, meaning that many news outlets end up writing about an economic development just as it's beginning to reverse.

As just one example, I highlighted the weakening banking and credit industry in June 2007, long before the crisis became a front-page story. To truly scoop the competition, journalists would be better served by watching the price action in the markets rather than relying on stale government data that, for the most part, only tells us what we already know.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.

Also See:
Keep an Open Mind About Closed-End Funds
Long-Running Commodities Boom Goes Bust
Stocks Anticipate News Rather Than React to It