Using Charts (NVGS)

So if charts have NO FORECASTING ability or, in my humble opinion, no investor/trader can use chart formations like rising wedges, cup and handles, head and shoulders, etc to PREDICT where the market will go IN THE FUTURE. Charts might work for Hindsight Capital, but I have yet to see any research showing the efficacy of chart reading.  Despite that vicious attack on chartists, I do use charts.   Take for example, Navigator’s Holdings (NVGS).   Let’s zero in a bit more:

Note the time period from August 2016 to December 2016.  As the price accelerated downward on larger than normal volume–note in the second week of August the plunge in price from $9.50 t0 $8.10 in one day or about 15%, OUCH!  The price decline occurred on the anouncement of second quarter earnings:

Navigator Holdings misses by $0.04, misses on revenue Aug. 8, 2016

So you have a plunging/falling knife on an “earnings miss” or worse than “expected” news.  Now look at the opposite of the trade. Since I was fundamentally bullish, who was on the other side selling?  First from the holdings, you can see that 41% of the 53 million shares outstanding is held by a private equity firm, Invesco run by Wilbur Ross–a deep value investor. Invesco bought at $9 a share back in 2012, then sold some shares at $20 a year and a half later.  Over 50% of the shares seem to be held by long-term investors.   The NVGS share price had been declining for over two years from $32 per share while it bought more ships, then LPG freight rates declined sharply and the arbitrage shrunk for some of NVGS’s products.  In short, the sudden high volume rapid decline indicated MOTIVATED sellers who were either distressed or late momentum sellers.  Some of the sellers are selling AFTER a long price decline and bad news being announed.  I consider those emotional/weak sellers. Now there is no guarantee that the news won’t worsen and the price won’t keep declining.

I feel confident saying that because NVGS’ balance sheet was not overburdened with debt. See September-2016-Update for NVGS.

INVESCO PRIVATE CAPITAL, INC. 21,863,874 $ 157,201,000 41.05% 53.08% 1 NaN%
PARAGON ASSOCIATES & PARAGON ASSOCIATES II JOINT VENTURE 1,050,000 $ 7,550,000 8.73% 10.85% 4 86,516 NaN%
EMANCIPATION MANAGEMENT LLC 683,422 $ 4,913,000 7.57% 6.95% 3 187,961 NaN%
HOLLOW BROOK WEALTH MANAGEMENT LLC 855,072 $ 6,148,000 3.63% 2.91% 10 489,875 NaN%

Then prices CONTINUED to decline as negative news and research reports came out reporting the known bad news of declining freight rates, over-supply of ships, economic uncertainty, etc.

Let’s set aside that on a normalized basis, I have a value for NVGS above $20, how do I know the price won’t go to $8 or $5 or $2? I don’t!   But I do have context to see if the price is “OVER” discounting the news/fundamentals.

http://seekingalpha.com/research/839737-j-mintzmyer/4912014-exclusive-research-navigator-holdings-cheap-underfollowed-deservedly is an example of several negative research reports that implied, “Yes, the stock is cheap with solid management and the company is profitable, BUT supply will increase next year.” Stay away.

Then for the next two months, September and October, the price chart showed a change in trend from rapidly down to sideways. Why was the price going sideways with negative reports and negative news constantly coming out each day?  Perhaps the chart was showing that prices had ALREADY discounted the known NEGATIVE news and extrapolating a long period of negative news.   Unless the news became much worse–despite frieght rates at 30 year lows–all you needed was slightly less bad news.

Sure enough, the announcement of earnings Nov. 4th 2016 showed that the company could still generate profits in an extremely negative operating environment. The price rallied confirming the prior discounting.  Now I could really start to add to my position.  The chart had helped me “eliminate” one side of the market–the downside.

The combination of fundamentals, the action of majority shareholders (holding firm), extreme negative news coupled with NON-DECLINING prices, gave me a signal that the market had ALREADY discounted negative news.    This is more of an art or combination of fundamentals, sentiment, and human incentives than just looking at chart patterns.

Hope that helps.

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11 responses to “Using Charts (NVGS)

  1. John, I have a hard time knowing whether it’s your own words I’m reading or you’re copying and pasting someone else’s. Is there a way for me to quickly tell which is the case at any given point? Thanks.

  2. All my words in this post are mine. I try to place in quotes words from others. I will be careful going forward.

    • OK, so I’ll ask you a similar question that I would ask a chart technician: is there any basis to believe that your approach to using charts provides better long-term returns than someone simply calculating a value for a stock and continuously buying it over a period of time when the price is at an adequate discount, without trying to determine if there has been a change in trend?

  3. It always seemed to meet that the charts that the chartists liked the most were the stocks that happened to have the best momentum; and that simply screening on momentum would be more effective than flipping through all those charts.

    Nick de Peyster
    http://undervaluedstocks.info/

  4. Daniel:

    Nick de Peyster has your answer plus the behavior of investors.

    1. MOMENTUM does work in near to medium term because BEHAVIORALLY people are SLOW to adjust to changes. Read the behavioral research–go read Thinking Fast and SLOW by Kahnemann

    2. REGRESSION to the MEAN also works which is what “value” investors tend to focus on. The time horizon tends to be longer. Capital leaves an industry, competitors go out of business or enter an industry, etc. See the cycles in commodity stocks, etc.

    The “secret” to investing is your behavior relative to the behavior of the majority of other investors.

    So I have no evidence that my method using charts is better than just buying scale-down from my estimate of intrinsic value. In fact, it may lessen my performance however, it allows ME to act. I wait more to let momentum extinguish itself but then I pay a higher price. The point is it is a method that I can use and it “works” for me. I am not suggesting ANYONE else do it. I also sell scale up for partial profits, but I don’t wait to get the highest possible price. Psychologically, my approach allows me to handle volatility with calm.

  5. I actually forgot to emphasize that the biggest focus should be on understanding yourself first. NOT EASY. What are your strengths and how can you place yourself where your strengths can shine? You build your philosophy and method around that.

    Study Mike Burry or Walter Schloss.

    In fact, the BEST investor in the world that I know. He dropped out of high school (the teachers didn’t like his impertinent questions), worked odd jobs, and invested in very special situations. He took $2,000 to $1.8 over a decade and how operates out of Panama. No way could I invest like he did–but that’s the point.

    Only remember this, the market is a VERY expensive way to learn about yourself so you have to really do some introspection.

    I would study https://youtu.be/V_ook-hLhio trading psychology not so I can trade in the short-term, but to develop a way of tracking my development. Actually, because of the randomness in the market, learning from your investment mistakes can be very difficult.

    New investors want to learn how to value a business which is a good idea because without a method that has an edge, but in the end, they will realize how important their own psychology is in consistently implementing their approach.

    The most important thing a new investor can find out–are they really interested and passionate enough to pursue investing on their own.

    • “He took $2,000 to $1.8 over a decade”

      Doesn’t sound like a great investor to me 😉

      I definitely agree that understanding your own psychology is indispensable when it comes to investing. Speaking of Mike Burry, I was recently told by a psychologist that I have Asperger’s, which would explain a great deal why I like to invest the way that I do. I oftentimes don’t get why people do what they do, so I have neither the ability nor the desire to try to figure out what people are going to do, which includes how people are going to behave in the market.

      • I meant $1.8 million. Great, you have some insights into yourself. Go where you can use your strengths; don’t spend much time working on your weaknesses. I will never be able to out-dunk Michael Jordan, but I can outskate him.

        They say Buffett may have Asperger’s (who knows–everyone likes to overdiagnose OTHER people).

        If you only pick up one thing from this blog–be the best YOU, not the best imitation of Buffett, Klarman, etc. That is why what works for you may not for others and vice-versa.

  6. Wow, we were on the same trade, similar process, I also bought after the first positive earnings reaction!

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