Feb 07

Nickels And Steamrollers

Yesterday I saw a few people in my twitter stream say “anyone who buys the market here is picking up nickels in front of a steamroller.” It made me smile as it always does, it’s a great line, you can absolutely picture it, and it perfectly describes certain risk-reward trades. Except I completely disagree it applies here.

We’ve heard ad nauseam how the market is overbought and a huge correction is just around the corner. Let me show you something, and I want to demonstrate it using the uber-beast of electronic payments, otherwise known as Visa ($V). For anyone who doesn’t know, the payments space has seen huge growth, and with the proliferation of smartphones and strong trend of mobile payments, they’re not struggling to pay the bills at Visa Towers.

AlphaCaptureSo look what happens on this daily chart.  We start with a steady climb higher, but it’s quickly overbought, and there’s some bearish divergence, hmm better sell it, big correction coming. Oh. Never mind.

But look it’s doing it again, it’s overbought and there’s divergence. No. Damn, this thing is relentless.

Well now it’s just getting ridiculous, there’s divergence again, and now it’s severely overbought, AND there’s a bearish engulfing candle. That’s it, I’m out.

You idiot.

Now listen up and get ready for the gut punch. Those multiple occasions in the previous chart where you were trying to be smart and pick the top, that entire period is contained in the ellipse shown below.


How do you feel? Which do you think is easier, constantly trying to call the top, or recognizing a trend and riding it?

And please tell me again, which one of us is it that’s picking up nickels in front of a steamroller?  I’m a trend follower, so I think it’s your nickels I’ve been picking up walking behind the steamroller.

Look, if you are repeatedly positioning yourself for a correction in a strong trending stock like Visa or the market in general, then it’s you who’s asking to be run over.

Like the market, Visa has come a long way, but guess what, nothing has changed and it’s still a buy right here. You can never know precisely where you are in the trend. One man’s overbought is another’s entry.

The top-calling in Visa started around $80. It’s now $160.

Or put another way, that’s a move of 1,600 nickels. Per share.


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