Strong hands or weak hands

“Nowadays people know the price of everything and the value of nothing.”  ~ Oscar Wilde

Strong hands are long-term investors, including most institutional investors, who focus on intrinsic value and are insensitive to price.

Weak hands and leveraged investors are highly sensitive to price. They follow the news cycle in an often unsuccessful attempt to to time purchases and sales according to short-term, often random, fluctuations in price.

Weak hands respond emotionally to price movements — making it difficult to be objective in  their decisions to buy or sell — while strong hands focus on dividends and other measures of long-term value.

Strong hands recognize that the biggest obstacle to sound investing is their own emotional response to rising or falling prices. Weak hands submit to the psychological pressure, make frequent buy and sell decisions, and find it difficult to be objective. Strong hands detach themselves as far as possible from the price cycle and the emotional pressures that accompany it.

At the peak of the investment cycle, weak hands pay way above fair value for stocks, while strong hands resist the urge to buy when price exceeds their own objective view of long-term fair value.

Fair Value

As confidence decays and prices fall, weak hands are shaken out of their positions. Margin calls force some to liquidate while others sell through through fear — failing to recognize that anxiety is the primary cause of falling prices. Some try to hold on to their positions but eventually succumb to the pressure. The mental anguish of watching their stocks fall often drives them to sell at way below fair value — just to end the pain.

Strong hands are patient, independent of the herd, and unmoved by the wild emotional swings of bull and bear markets. They wait for stock prices to fall to below fair value, when opportunity is at its maximum. Stocks that are gradually recovering from a steep sell-off and scarce retail buyers are signs that a bottom has been reached.

Recency bias

One of the key benefits of years of investing, through several stock market cycles, is the ability to recognize the familiar signs of euphoria in a bull market and despondency in a bear market. When it seems that the bull market will never end, that is normally a sign that risk is elevated. Conversely, opportunity is at its maximum when an air of despair and despondency descends on the investing public.

Don’t confuse price with value

Price seldom equates to value.

Short-term investors confuse price with value, making them vulnerable to wild price swings which can weaken the resolve of even the most hardened investors.

Long-term investors hold the majority of their investments through several  investment cycles, pruning only those stocks where long-term revenue growth or profit margins have been permanently affected and are unlikely to recover.

Supply and demand

Many readers are familiar with supply and demand curves from basic economics. For those who are not, here’s a quick refresher:

  • The supply curve, represented by the red line on the chart below, represents the quantity available for sale (bottom axis) at any given price (left axis). The higher the price, the greater the supply.
  • The demand curve, represented by the blue line on the chart below, represents the quantity that buyers are willing to purchase (bottom axis) at any given price (left axis). The lower the price, the greater the demand1.
  • Price is determined by the intersection of the two curves, maximizing the value achieved — at quantity sold (Q1) and price (P1) — giving value of Q1*P1.

Supply & Demand

Bear markets

In a bear market, the supply curve moves to the right as weak hands are influenced by falling prices and a negative media cycle. Note that the bottom end of the curve shifts a lot more than the top — strong hands are relatively unmoved by market sentiment.

Price falls steeply, from P1 to P2, as weak hands increase the quantity available for sale. Volume sold increases from Q1 to Q2.

Bear Market

We need to be careful not to equate the price at P1 or P2 with value. They may reflect the marginal price at which you can acquire new stock (or sell existing holdings) but they do not reflect the price at which strong hands are prepared to sell. That is why takeover offers are normally priced at a substantial premium to the current traded stock price. If you had to increase the quantity that you want to purchase to Q3, you would have to move up the supply curve, to the right, and price increases to P3 in order to attract more sellers2.

Market capitalization, likewise, is simply the number of shares in issue multiplied by the current traded stock price and is not a reflection of the intrinsic value of a company.


Investors need to have a clear idea of their investment time frame and adjust their approach accordingly.

One of the worst possible mistakes is indecision. If undecided, you are likely to be caught between two stools, buying late in an up-trend and selling late in a down-trend.

If you are a weak hand, it is far better to recognize that. Resist buying near the top of the cycle; apply sound money management — position-sizing is vital if you are focused on price; sell early, at the first signs of a bear market; and never, ever trade against the trend.

If you are a strong hand, never confuse price with value. Focus on dividends and other long-term measures of value; stay detached from the herd; and have the patience to wait for opportunity when prices are trading at way below fair value.

“The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.”

~ Warren Buffett



  1. Discussion of inelastic supply curves and negative-sloping demand curves is beyond the scope of this article.
  2. P3 will shift to P3′ in a bear market.


Hat tip to RBC Wealth Management for the investment cycle chart to which we added fair value.


It’s a bear market

The S&P 500 broke primary support at 4170 to confirm a bear market. A Trend Index peak at zero warns of strong selling pressure.

S&P 500

The Nasdaq 100 similarly broke support at 13K, confirming the bear market.

Nasdaq 100

Dow Jones Industrial Average, already in a primary down-trend, confirmed the bear market with a break below 32.5K.

Dow Jones Industrial Average

The Transportation Average lags slightly, testing primary support at 14.5K. Follow-through below 14K would be the final nail in the coffin.

Dow Jones Transportation Average

A plunging Freightwaves National Truckload Index warns that we should not have long to wait.

Freightwaves Truckload Index


All major US stock market indices now warn of a bear market. Weak retracement, to test new resistance levels, should not be confused with a buy-the-dip opportunity.

S&P 500

Europe: DAX and Footsie buying pressure

Germany’s DAX is headed for a test of resistance at the 2012 high of 7200. A trough above zero on 13-week Twiggs Money Flow indicates strong buying pressure. We should see stubborn resistance at 7200 but also strong support at 6500 if there is a retracement.

DAX Index

The FTSE 100 is testing resistance at 5700 while 21-day Twiggs Money Flow bottoming above zero indicates (medium-term) buying pressure. Breakout would offer a target of 5900*.

FTSE 100 Index

* Target calculation: 5700 + ( 5700 – 5500 ) = 5900

Euro Stoxx 50

Dow Jones Euro Stoxx 50 index hesitated in its rally to resistance at 2500 on the weekly chart, but the trend remains upward. Breakout above 2500 would signal a primary advance to 2900* — and end of the bear market. 63-Day Twiggs Momentum is also rising, but recovery above zero appears some way off.

DJ Euro Stoxx 50 Index

* Target calculation: 2500 + ( 2500 – 2100 ) = 2900

S&P 500 hovers near tipping point

The S&P 500 index recovered above medium-term support at 1220/1250, with a short surge in buying pressure, but the situation remains precarious. Breakout above 1300 would indicate that the threat of another bear market has passed, but reversal below 1160 remains as likely — and would warn of another test of primary support at 1100/1080.

S&P 500 Index

The situation is similar to the attempted recovery above 1400 [now here] in 2008. Reversal below medium-term support [1400] in that case tipped us into a bear market.

S&P 500 Index

Nasdaq fails to dispel fears of a bear market

The Nasdaq 100 is consolidating in a narrow band below resistance at 2400 on the weekly chart, suggesting an upward breakout. Follow-through above 2450 would confirm the target of 2800*. 13-Week Twiggs Money Flow continues to signal buying pressure after an earlier bullish divergence.

Nasdaq 100 Index

* Target calculation: 2400 + ( 2400 – 2000 ) = 2800

The Dow Industrial Average is consolidating below 12300. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Breakout above 12300 would offer a target of 12800*. Failure of support at 11600 is less likely, but would mean another test of primary support at 10600.

Dow Jones Industrial Average

* Target calculation: 12200 + ( 12200 – 11600 ) = 12800

The S&P 500 is similarly consolidating between 1220 and 1300. Expect strong resistance at 1350.

S&P500 Index

Comparing to early 2008, the S&P500 displays a similar pattern, with the index testing resistance at 1400. We are close to a watershed: reversal below medium-term support (1220) would be a strong bear signal, while follow-through above recent highs would dispel fears of another bear market.


S&P 500 2008 weekly comparison

The similarity between the current weekly chart and 2008 continues.

S&P 500 Index Weekly 2008

The index is now retracing to test support at 1220, in a similar fashion to support at 1380 in 2008. Failure of support would be a strong bear signal, but confirmation would only come if primary support at 1100 is broken.

S&P 500 Index Weekly

* Target calculation: 1100 – ( 1300 – 1100 ) = 900

Europe rebounds

The FTSE 100 index is headed for a test of its 2011 high at 6000/6100. Rising 13-week Twiggs Money Flow signals strong buying pressure. Expect retracement to test support at 5400. Respect would confirm a primary up-trend; failure would re-test support at 4800.

FTSE 100 Index

* Target calculation: 5400 + ( 5400 – 4800 ) = 6000

Germany’s DAX is testing resistance at 6500. Retracement would test support at 5600. A 63-day Twiggs Momentum peak that respects the zero line would warn that the bear market will continue.

DAX Index

* Target calculation: 5700 + ( 5700 – 5000 ) = 6400

Italy is the latest canary in the coal mine. The FTSE MIB index rallied to test its secondary descending trendline at 17000. Respect would warn of another test of primary support at 13000, while breakout would offer a target of 19000*. The primary trend remains downward despite 13-week Twiggs Money Flow having crossed above zero.

FTSE Italian MIB Index

* Target calculation: 17 + ( 17 – 15 ) = 19

Now for the correction

Several weeks ago, when asked what it would take to reverse the bear market, I replied that it would take 3 strong blue candles on the weekly chart followed by a correction — of at least two red candles — that respects the earlier low. We have had three strong blue candles. Now for the correction.

On the S&P 500 expect retracement to test support at 1200 or 1250. Respect of 1250 would signal a strong up-trend, while failure of support at 1200 would warn of another test of primary support at 1100. A trough on 13-week Twiggs Money Flow that respects the zero line would also indicate strong buying pressure.

S&P 500 Index

* Target calculation: 1225 + ( 1225 – 1100 ) = 1350

Dow Jones Industrial Average weekly chart displays a similar picture. Expect retracement to test support at 11500. A peak on 63-day Twiggs Momentum that respects the zero line would be bearish — warning of continuation of the primary down-trend.

Dow Jones Industrial Average

* Target calculation: 11500 + ( 11500 – 10500 ) = 12500

The Nasdaq 100 is testing resistance at 2400 — close to the 2011 high. Breakout would signal a primary advance to 2800*, while respect would warn of another test of primary support at 2000. Bullish divergence on 13-week Twiggs Money Flow has warned of a reversal for several weeks.

Nasdaq 100 Index

* Target calculation: 2400 + ( 2400 – 2000 ) = 2800

2008 Deja Vu

Early May 2008, the S&P 500 index recovered above resistance at the former primary support level of 1400 on its second attempt. 13-Week Twiggs Money Flow broke back above zero, indicating secondary buying pressure. Breakout was followed by two pull-backs in May. The first made a false break below the new support level; the second followed through, commencing a 50% decline to 700.

S&P 500 Index Weekly Chart - 2008

We are now at a similar watershed. Expect retracement in the week ahead to test the new support level at 1250. Respect of support would strengthen the signal, but beware of any penetration. Follow-through above 1300 would signal that the (immediate) danger is over. Until then, consider this a bear market.

S&P 500 Index Weekly - 2011

* Target calculation: 1250 + ( 1250 – 1100 ) = 1400