Continuation from yesterday…….TIMING & MATHEMATICAL ANALYSIS:
As was suggested earlier in the book, both the overall stock market and individual stocks tend to move according to their own cyclical compositions. A number of cyclical examples were given, including a 5-year and a 17-18 year cycles. Showing that the stock market moves in clearly defined patterns.
While it is certainly possible to identify the internal mathematical structure of almost every financial instrument, a long trading history is a must. In the case of individual stocks, a 15 to 20 year trading history is necessary. Anything less than that would not yield appropriate results.
Since Chipotle’s stock first started trading in January of 2006, it would have been impossible to ascertain the stock’s internal mathematical or timing composition by either 2008 or 2009. Even today. Yet, despite our inability to figure out what the stock itself would do, we did have the next best thing available to us. The overall stock market.
As Chipotle’s stock price was collapsing in 2008, so was the market. In fact, between October 11th, 2007 and March 6th, 2009 the Dow declined close to 7,500 points or 55%. A massive mid cycle collapse reminiscent of the 1972-1974 and 1907-1908 declines. An analyst working with the overall cyclical composition of the market would be aware of the following facts at the time.
- The overall market is tracing out a 17-18 year secular bear market that started in 2000.
- The 2007-2009 bear market leg represents a mid cycle collapse where 50% or more declines are typical.
- The bull market of October 10th, 2002 to October 11th, 2007 lasted exactly 5 years. Suggesting that the upcoming mid cycle decline would last 1.5-2 years.
- Mid cycle bottoms are typically followed by either a 2-year or a 5-year bull market runs.
In other words, an analyst working with the mathematical and cyclical composition of the stock market would have had a very good understanding that the stock market was likely to hit a bottom in the early 2009, followed by a strong rally. This was further confirmed by a number of other indicators converging on March of 2009 as a high probability turning point. Once again, the methods of analysis that have lead to such a conclusion can be studied further in my other book Timed Value.
When it comes to investing in Chipotle, this type of an analysis would have been of great help for a number of reasons. First, we would have realized that Chipotle’s share price is likely to stage a strong recovery if the market was to turn around and to stage a multi-year bull market rally. Since no fundamental reasons, outside of general overvaluation, existed for the company’s stock price to decline, it would have been logical to assume that Chipotle’s stock price would recover as soon as the market does. Second, the company was growing at a rapid pace despite the economic collapse and was now selling at a reasonable valuation. Finally, an analyst familiar with all of the above would be watching the company’s stock for a clear technical bottom and a confirmation. With a clear intention of purchasing the stock once the confirmation was obtained.
This confirmation was obtained during the 3rd week of November when the company’s stock broke out of its down trending channel at around $42.20. A long position should have been initiated at that time.
The result?
Chipotle’ stock price had appreciated 1,465% (14.7 bagger) between its February of 2008 bottom and today.
To Be Continued Tomorrow…….
