The Forest To Trees Approach
This comes from long-time technical analyst Stan Weinstein
Forest to Trees Approach:
The first thing I look at is the major trend of the market. That is the “forest.” Before I pick up my Mansfield chart book, I want to know, “What is the likely trend over the next 6 to 12 months?” That is an important starting point. I try to keep it simple. If the market is real bullish I don’t want to be short; I want to be a buyer. Then I work towards the trees. The trees are the sectors. I want to get into the individual groups which look best. I don’t want to buy laggards, I want to buy leaders. The little leaves on the trees are the individual stocks. When I am looking at individual stocks, it sounds crazy, but I really think the individual stocks are the least important of all.
Going back historically, if you catch the major moves, like buying almost anything when we turned bullish in July or August of 1982 or selling almost anything when we turned bearish in August 1987, it’s hard to be wrong. So the market is the most important determinant, the sectors are second, and stocks are certainly important but in a pecking order, they are the third thing I look at. Then you can say, “Okay, the market is bullish, this XYZ sector is the best sector and within the XYZ sector, this is the best stock.” Conversely, when the market is turning negative, you look for the most negative sectors and then the weakest or most vulnerable stocks within that sector.
Determining the trend is the starting point but you really have to keep an open mind. I am never going to get bagged into a scenario. One of my strengths is that if I am wrong I admit it. Believe me, I have been wrong and I will be wrong again in the future. That is part of the market. I know I am going to have interceptions but I think I am going to throw more touchdowns than most anybody else. I just want to keep the interceptions to a minimum. If I have made a mistake, I want to cut it quickly and get back into the game. After I go through my “forest to the trees” approach, even though I have a little scenario going on in my head, I let the charts talk to me. There have been a couple of times over the years where I may have been bearish but as I look through the charts, I see more and more stocks shaping up. So I simply switch gears and become more positive.
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