Intro to Stocks Lesson 3
Avoid Manic Blow Offs

      During Lesson 2 relating to "MRK", there was one relevant verification step (the Price/Revenues computation) that couldn't be done at the time because I left the stock price analysis for a later lesson.  I simply provided the answer during discussion so as to get on with the rest of the primary learning experiences of Lesson 2.  For that matter, during Lesson 1 I only asked that you "look at" the Historical Prices area on Yahoo to get "some idea" of the way that stocks wiggle around during years of trading, leaving the relevant analysis of those wigglings for a later time.  The time has arrived :).
      You can view a 10 year chart of the price wigglings of "MRK" on the Bigcharts web site.
  To a naive person, such a chart might lead to a very wrongful conclusion "oh golly, this stock ALWAYS goes up even if it has some minor dips".  Such naive "reasoning" was exemplified during the Internet Mania Swindles when a young friend wrote to me on 001006 that her father in law was interested in the wildly "blown off" stock of "JDSU".  Its price had closed that day at $91.38/sh (down from its Mar00 high of 153.42a).  "Oh golly, a BAR gain" as in you gotta be *in* a BAR drinking the brain and liver lethal toxic chemicals they push in order to consider it anything other than DANGEROUS.  The stock proceeded to far worse than DECIMATE, setting a low in May 2005 (not even five years later) at $1.32/sh.  On 061017 the stock was subjected to a 1 for 8 REVERSE split making the father in law's original price equivalent to $731.04/sh for the ongoing shares.  In an effort to cover up its beleaguered history, the company itself on 150810 changed its *name* to Viavi Solutions and was later trading under the symbol "VIAV".  As you can see by looking at the 10 most recent years of its price history on the long term charting site that I mentioned, the stock NEVER AGAIN did anything very interesting and closed 160108 at $5.50/sh.  Rathuh a comedown from the $731.04 at which the father in law was interested in it, eh wot?
      Unlike the Ivy League scholar in my Scholarship Program who has grown and developed into a healthy young human since the Internet Mania Swindles, stocks altogether too often collapse into absurdity.  You certainly would NOT want your hard earned resources to wind up being worth barely 0.75% of their original amount in about the time that scholar has thus far taken to grow and develop, now would you?  And JDSU -> VIAV is actually one of the "lucky" ones from that era of swindle stocks.  It hasn't gone into bunko rapecy, totally wiping out the values of cash paid public stuckholders, as so many others of the dot cons and dot gones have done.
      So yes, Price Analysis is an important survival function even if perhaps not quite as important as the "what the heck is this company?" that you learned in Lesson 1 nor as important as the "is this actually a functional company?" that you got started evaluating in Lesson 2.  I included the 10 year chart in this Lesson so that you could *see* graphically what I'm talking about when I use terms such as "mountaintop high" in this lesson about Price Analysis.  Looking at the chart, it quite clearly looks like a mountain range with peaks and valleys.  The highest highs in each succession of peaks and valleys are the "mountaintop high" of that set of gyrations.
      You can't really get at the relevant details from a graphic picture of a stock.  For the relevant stuff, you do have to go back to the Yahoo web site which provides the monthly highs and lows for "MRK" back to Jan 2, 1970.  During a prior incarnation of Yahoo Finance, you had to watch out for "stock splits" which complicate the evaluation procedure. What "stock splits" do is to alter the number of shares outstanding in the ratio of shares received to shares previously owned (such as 2:1), to alter the number of shares held by any individual holder by that same ratio (2:1), and to adjust the *price* of each share by the inverse ration (1/2) at the moment of the stock split.  At this writing, they are now "adjusting" all prior pricings at the times of stock splits so that the viewer doesn't have to deal with that complication.

      What you wind up with after doing a Price Analysis is a single set of lines added to your "MRK" Notepad file of the format "*Chart high in YYMM was ##.## half ##.##, Blowoff lookback low in YYMM was ##.## Danger Rating #.##x which is" followed by a verbal description of what the Price Analysis *means*.  That single line goes immediately above the "Yahoo Major Holders shows" line that you created in Lesson 1.  "Of course" it complies with the "begin with asterisk, maximum line length of column 77, four spaces at beginning of each successive line" formatting rule.  If there had been a stock split you also wind up with an additional line under the "*addr" lines (in reverse chronological order with most recent at the top and less recent proceeding downward towards the business description lines) of the form "*YYMMDD stock split X for Y effective".
      While the Price analysis is only a single item in your overall analysis of "MRK", it is important in these ways:  (1) tells you where the stock "has been" trading, (2) tells you one of the maximum prices which is permissible to pay when and if buying any shares, and (3) warns of a long term DESTRUCTION potential which exists in about one in every eight stock Price Analyses which "almost invariably" take many years to get clear of.  So let's begin gathering the numeric fills for that intended Price Analysis line in your "MRK" notepad file.
      For me, having done this Price Analysis for years even prior to my advice about the father in law's interest in JDSU, it is a trivial matter of perhaps only a few minutes to get the whole thing put together.  I'm so used to doing "in my head" the halving and doubling figuring that is needed that the longest aspect of creating the resulting Price Analysis lines is often simply writing up the results lines and, in this case, recording the stock split information.  Could be more time consuming for you since you aren't so familiar with what you're looking for.
      Yahoo has reorganized their presentation page so that you need to make a couple of adjustments before starting the evaluation.  You need to reset the "Time Period" to "Max" and the "Frequency" to "Monthly" then click on "Apply" to get the actual information brought up.  Then start in the "high" column of the monthly presentation.  What you're looking for is the largest number (remembering to adjust for the stock split if one intervenes) that appears near the top of that column.  Keep the YYMM date of what you found in mind as you continue looking back into the history.  After you find something which "might be" the mountaintop high, what you're looking for is *either* an entry in the "low" column which is half or less of that tentative high *OR* a higher high which displaces your original "might be" as the mountaintop high.
      Once you locate the low which is at or less than half of your tentative mountaintop high, you're ready to start filling in the blanks in your notepad file format "*Chart high in YYMM was ##.## half ##.##, Blowoff lookback low in YYMM was ##.## Danger Rating #.##x which is". The applicable YYMM of the mountaintop high goes in that part.  The identified mountaintop high (adjusted as required for a subsequent stock split if any) goes in the first ##.## followed by the letter "a" if it were in fact an "adjusted" mountaintop high.  Simple arithmetic for the next ##.## and no "a" involved.  Divide the mountaintop high by 2 (and round downward if there is a third digit in the answer) and place that number in the second ##.##.
      Where you find the Blowoff lookback low depends entirely on where you found the mountaintop high.  What you'll be looking for is the lowest low which appears in the LOW column beginning one month prior (in time not table appearance) to your YYMM mountaintop high out as far, but no farther than, exactly two years prior to your mountaintop high.  For example, if your mountaintop high had been in 1506 (not where it is), you would look at the low column for 1505 thru 1306.  Pick out the actual YYMM date of the lowest low that you found in that lookback time range and place it and the lowest low itself (adjusted as required for the subsequent stock split if any) in the next set of YYMM ##.## areas.
      Now you're ready to calculate one of the most serious destructive influences on subsequent stock price behavior, the Blowoff Danger Rating.  Divide the mountaintop high by the lookback low that you found.      Enter the answer in the "#.##x which is" area in your Price Analysis lines.  By the way, "some things" have double and occasional even triple digit numbers prior to the decimal point but "MRK" is only a single digit before the decimal.  If the Blowoff Danger Rating is *less than* 3.00x you would then add the phrase " less than excluding limit," but if it is 3.00x or more you would add the phrase "EXCEEDS PERMISSIBLE LIMIT,"  And yes indeed, JDSU was way the heck over 3.00x when That was interested in it.
      I describe anything 3.00x or more as being "wildly blown off". During my more than 57+ years of trading stocks, I have viewed tens (perhaps hundreds) of thousands of long term stock charts and regularly found that stocks which become "wildly blown off" then go into long term doldrums (or bunko rapecy) while they work off the "overhead resistance" created by suckahs who paid outrageous high prices for shares of the stock and are aggressively eager to "realize their losses" at even minimal opportunity created by efforts of the shares to rise from their nadirs.  Because of that "overhead resistance" it no longer matters how "good" the company's air ninnies (others call them "earnings") may look nor what it's "future prospects" may seem to be.  During its BLOWOFF, the stock itself created what amount to *enemies* who want and mostly need to get rid of the company shares at any reasonable or even unreasonable opportunity.
      Having created the basic parts of the Price Analysis lines, the next question is "what has the stock been doing more recently than that mountaintop high".  If the lowest low subsequent to the mountaintop high was in fact within 10% of the high itself, the answer to be recorded in the Price Analysis lines is " now trading near those long term highs" immediately after the final comma.  If it is 90% or less of the mountaintop high, the addition to the Price Analysis lines reads as "subsequent low in YYMM was ##.##".
      When there is a meaningful subsequent low, now look at where that subsequent low is in relation to the Half Level that you computed originally.  If it is above 110% of the half level, add the phrase "which is nyet half level".  "Nyet" is not the Russian word for "no" but an abbreviation of the all too common phrase that I have to use for many purposes "not yet".  If it is close to the half level but not at or below it, enter the phrase "which is not quite half level".  If it is at or below the half level add the phrase "which is less than half level".
      Last little piece of busyness for completing the Price Analysis lines is to look at how long ago that subsequent low appeared.  If it's quite recent, last few months, nothing gets added.  When it's very much longer than that, it helps to have a pointer to how much of the stock history you actually saw when you did your Price Analysis, so add the phrase "nothing further thru YYMM" and fill it in with the most recent complete month that you had available to you when you did the analysis.
      Bingo! you've got a useful Price Analysis completed for your stock of interest, in this case "MRK", but exactly the same procedures apply for every other kind of stock you might want to analyze.  We'll talk at length about how to *use* that information for pricing any potential purchase of shares when we get to the lesson about Order Pricing, although for "wildly blown off" stocks you already know there ain't gonna be any legitimate purchases for many years into the future. So, if you want to, email to me the current version of your "MRK" notepad file for review and we'll proceed to the next lesson.
      Looking forward to some future time when you might want to *update* an existing Note File, there are some special rules which apply to how to do such an update.  This isn't something you'll be doing now but simply for future reference.  The first questions during an update are whether the "subseq low" has gone lower since your original Pricing Analysis AND whether that Pricing Analysis has been "completed" by creation of a new mountaintop high at least double the "subseq low" seen.  So you start the update process at the previously identified date of the "subseq low" and move forward in time towards the present information.
      Several different kinds of things can happen during an update. The simplest version is that you locate a lower low, so change the date and price of the "subseq low" to that date and price.
      A more complicated thing that can happen is that you see a more recent high which is either above the mountaintop high (on an analysis which didn't get below the half level) or which rose to double the identified "subseq low" (on an analysis which did get below the half level).  Taking those possibilities in turn:
      If the "subseq low" was less than 110% of the half level originally computed, establishing a higher high creates an entirely new mountaintop which obsoletes the original Pricing Analysis.  What you do with such "obsoleted" Pricing Analyses, along with starting an entirely new one, is to copy and paste the old Pricing Analysis into the "below the *addr lines" area in the appropriate timeline location after appending the phrase ", then higher high in YYMM at ##.##".  If that "subseq low" was a fair bit higher than 110% of the half level, the subsequent higher high vacates the original analysis and requires "starting over" at the newly established mountaintop high.

      Now to the situation of finding a subsequent high which is at least double the "subseq low".  The question here is whether that subsequent high was *durable* enough to qualify as a new mountaintop or whether it is only a "dead cat bounce".  There were a plethora of dead cat bounces during the months leading up to the general market lows in 0903 which mostly completed the BARE market beginning in 0710 (when the criminally corrupt SEC authorized the illegal seizure of all stocks into the permanent adverse possession of their puppeteering criminal cronies in the fraud and theft industry) ending generally in 0903.  The definition of a dead cat bounce doubling is that it occurs *inside* of six months from the date of the identified "subseq low".  When you see a dead cat bounce it is recorded as ", then high in YYMM at ##.## (not durable enuf)" either following the statement of subseq low (or other intervening dead cat bounces and their subseq lows), or in place of the "nothing further thru YYMM" that you created originally.  If there is a low following the dead cat bounce which is no higher than 50% of the highest of the dead cat bounce, it then gets recorded as " then low in YYMM at ##.##".  If instead of dropping back from an initially identified dead cat bounce, the stock then proceeds higher than the dead cat bounce price in six months or more beyond the identified subseq lows, the actual established date and price of that "then higher high" are changed to the actual new mountaintop, the "(not durable enuf)" is eliminated and the language is changed to "new mountaintop".
      As with the earlier "higher high" situation, a "new mountaintop" calls for copying and pasting the older Pricing Analysis into its appropriate date position beneath the "*addr" lines (based on the date of the mountaintop high) and beginning a new Pricing Analysis as of the located new mountaintop high.  Those copied and pasted Pricing Analysis histories can be informative over longer periods of time.
      Once you have completed your first go at doing a Pricing Analysis for "MRK" or your other chosen stock and have shown me your Note File as it then exists, if you want to, I shall provide you with a prior Pricing Analysis of "MRK" which I did for addition to your Note File.  Good luck with handling the mental gymnastics of locating mountaintop highs and lookback lows for "MRK".
      Bob Grumbine    :-)##               Onward to Lesson 4               back to Bob Grumbine's Central Blogging Site