Price Stocks Trade
Q: So, you look at the highest and the lowest in 24 months and divide them - did you make the Blowoff Danger Rating thing up and can you explain it better? Like, how did you come to this formula, and what's the time range you look at, etc. I know you look at more than this, but I'm just looking to have one thing explained at a time.
A:
Yup. I made it up. Out of whole cloth. And 41 years of looking at
long term charts of individual stocks. I started looking at charts of
stocks a couple of years BEFORE I started trading any of them.
Thousands upon thousands of charts. I still track 1,936 stocks on a
daily basis on my DOS computers. Of course there's also the 8500 more
or less that my TC2000 provides for me to look at, but those I don't
look at in as much detail other than the couple of hundred that I own or
am interested in. So call it something "made up" by somebody who had
already seen so many examples of what he was trying to define as to make
the definition process quite straight forward.
The whole point of the Blowoff Danger Rating is that when stocks
blow off, get totally out of control pricewise and do ludicrous things,
they damage so many human sorts in the process that they leave tons of
stock lurking *overhead* to stifle, cripple, and maim any attempts at
meaningful rallies for years and years into the future. I don't want to
get involved in being long of a stock that has that many enemies,
injured suckers, durn fools, whatever you want to call them they've all
got tons of stock to sell, lurking above where I'm buying the stock.
Actually, where I'm *not* buying it because the simple measurement of
Blowoff Danger Rating assures me that they *are* there and are going to
stay there for a very long time into the future, even if the company
survives.
There is other damage done by blowoffs, along with all that stock in
unhappy hands. It is not nice of me to say this, but the fact of the
matter is that the management and employees of companies whose stocks
blow off get swelled heads. They want to make believe that it is all
some magical recognition of their incredible egotistical prowess as
business people, rather than the aberration of the market that it
actually is. They do *internal* things which further damage the
underlying company far more than creation of tons of overhead stock.
Things like giving away freebie stock options in egregious quantities to
greedy employees and managers made even more than normally greedy by the
silly antics of the stock price in the market. Things like paying so
much attention to the company stock price as to totally blow off (sorry
for the repetitious use of that phrase but it fits here too) getting the
real work of the company done. So these pyrotechnic moves in stock
prices have *multiple* bad effects not only on the technical structure
of the market but also inside of the very companies themselves.
All of those real injuries that I have been describing are
incredibly difficult to measure on their own terms. But from 41 years
of reading charts and 39+ years of actually trading stocks, I arrived at
my simple little technical measure, the Blowoff Danger Rating, which
summarizes all of those injuries in a *useable* decision criterion. The
Danger Rating gets over 3.00 it is too dangerous to trade. Up to and
including exactly 3.00, it doesn't seem to do any significant harm in my
observation and experience. Similarly the 24 month lookback period
(from the mountaintop high, remember) is also observation and experience
as to what the most relevant measurement period really is.
So there you have yet another detailing of *how* to compute it as
well as an explanation of the historical development process which went
into it and of the fundamental reasons *why* it matters (damamge done
both to the market for the stock and to the corporate culture of the
underlying company). Millstox referring to it as an "ism" doesn't
change any of the important realities that it measures by technical
means, nor does the fact that I developed it and named it, as distinct
from some big important beardless boy or girl in a Wall Street
boutique. Given the blank stares I have tended to get some places while
trying to explain it, I suspect Millstox is accurate in saying that it
is not generally talked about. Like some other tools that I
developed on a similarly ad hoc basis, part of the evidence that went
into developing the Blowoff Danger Rating and the others may very well
have been expressions of elephants acting on much the same or similar
reasoning *without* ever mentioning the decision tool outside their own
circles. In the case of the Blowoff Danger Rating, I do tend to believe
it is founded in the injuries sustained by companies as described above,
rather than mere patterns of behavior of particular groups of market
participants (besides the stranded holders and greedy insiders already
mentioned).
I started trading as soon as the urge to get rich hit me, but I will
sometimes track an individual stock for up to four years before I
do any kind of transaction. I only own less than a handful of stocks
now, and one stock I tracked for a year and half before buying
last November.
Yeah, you know what really happens is you get these wide disparities
in income and goals between employees depending on their start date.
People who started with the company when the stock price was low
have a lot more money than people hired later when the price was
ridiculously high, due to the relative value of their options.
The later-hired people have no incentive from their incentive stock
options because they are worthless and likely to remain so, the early-hired
people have little incentive because they have so much money no matter
what. It is always the case that most of the people working for
a company are hired when the stock is flying high, so you wind up
with a lot of disincented people who resent the early hires and have
venal and disruptive career goals as a result.
I really believe in the THEORY of incentive stock options (besides the fact
I have profited from them), but in reality they don't usually work
according to theory.