Lesson 28: Individual Stocks
The art of managing investments is the art of acquiring and
disposing of stocks and other securities so as to maximize gains. When to make a move in
the investment field is more important than what issue to choose. Stock selection is of
secondary importance compared to timing. It is relatively easy to select sound stocks in
essential industries if that is what one is after, but the question always to be weighed
is when to buy them. To be a winner in the stock market, one must know the direction of
the primary trend and proceed to invest with it, not against it, in stocks that
historically have tended to move in unison with the market as a whole. Fundamentals alone
are seldom a proper justification for investing in stocks. U.S. Steel in 1929 was selling
at $260 a share and was considered a sound investment for widows and orphans. The dividend
was $8.00 a share. The Wall Street crash reduced the price to $22 a share, and the company
did not pay a dividend for four years. The stock market is usually a bull or a bear,
seldom a cow.
Somehow the market averages develop trends which unfold in
Elliott Wave patterns regardless of the price movements of individual stocks. As we shall
illustrate, while the Wave Principle has some application to individual stocks, the count
for many issues is often too fuzzy to be of great practical value. In other words, Elliott
will tell you if the track is fast but not which horse is going to win. For the most part,
basic technical analysis with regard to individual stocks is probably more rewarding than
trying to force the stock's price action into an Elliott count that may or may not exist.
There is reason to this. The Elliott philosophy broadly
allows for individual attitudes and circumstances to affect price patterns of any single
issue and, to a lesser degree, a narrow group of stocks, simply because what the Elliott
Wave Principle reflects is only that part of each man's decision process which is shared
by the mass of investors. In the larger reflection of wave form, then, the unique
circumstances of individual investors and individual companies cancel each other out,
leaving as residue a mirror of the mass mind alone. In other words, the form of the Wave
Principle reflects the progress not of each man or company but of mankind as a whole and
his enterprise. Companies come and go. Trends, fads, cultures, needs and desires ebb and
flow with the human condition. Therefore, the progress of general business activity
is well reflected by the Wave Principle, while each individual area of activity has
its own essence, its own life expectancy, and a set of forces which may relate to it
alone. Thus, each company, like each man, appears on the scene as part of the whole, plays
its part, and eventually returns to the dust from which it came.
If, through a microscope, we were to observe a tiny droplet
of water, its individuality might be quite evident in terms of size, color, shape,
density, salinity, bacteria count, etc., but when that droplet is part of a wave in the
ocean, it becomes swept along with the force of the waves and the tides, despite its
individuality. With over twenty million "droplets" owning stocks listed on the
New York Stock Exchange, is it any wonder that the market averages are one of the greatest
manifestations of mass psychology in the world?
Despite this important distinction, many stocks tend to
move more or less in harmony with the general market. It has been shown that on average,
seventy-five percent of all stocks move up with the market, and ninety percent of all
stocks move down with the market, although price movements of individual stocks are
usually more erratic than those of the averages. Closed-end stocks of investment companies
and stocks of large cyclical corporations, for obvious reasons, tend to conform to the
patterns of the averages more closely than most other stocks. Emerging growth stocks,
however, tend to create the clearest individual Elliott Wave patterns because of the
strong investor emotion that accompanies their progress. The best approach seems to be to
avoid trying to analyze each issue on an Elliott basis unless a clear, unmistakable wave
pattern unfolds before your eyes and commands attention. Decisive action is best taken
only then, but it should be taken, regardless of the wave count for the market as a whole.
Ignoring such a pattern is always more dangerous than paying the insurance premium.
Despite the above detailed caveat, there are numerous
examples of times when individual stocks reflect the Wave Principle. The seven individual
stocks shown in Figures 6-1 through 6-7 show Elliott Wave patterns representing three
types of situations. The bull markets for U.S. Steel, Dow Chemical and Medusa show
five-wave advances from their major bear market lows. Eastman Kodak and Tandy show A-B-C
bear markets into 1978. The charts of Kmart (formerly Kresge) and Houston Oil and Minerals
illustrate long term "growth" type advances that trace out Elliott patterns and
break their long term supporting channel lines only after completing satisfactory wave
counts.
Figure 6-5
Figure 6-6
Figure 6-7
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