Supply and Demand : Measured by Point and Figure Charts

by | Aug 30, 2008 | Asset Management, Point and Figure

There’s a great story I read in the New York Times. It’s part business/part technology. While it delves into some pretty sophisticated topics, I’ll try and summarize it as best I can right here.

The author, Anne Eisenberg, wrote about an experimental website, This is a site where visitors can upload data they want to visualize and use tools to generate displays.

Basically, what they’re trying to do is take a range of data — and instead of leaving it on a spreadsheet for people to interpret, they use images, charts and graphs to “paint” a better picture. The idea being that a picture may tell a better story — a clearer story — than trying to sift through data on a spreadsheet.

I hate to break it to the author, but Charles Dow came up with that concept nearly 120 years ago. Dow was the first publisher of the Wall Street Journal, and the Dow Jones Industrial Average that bears his name. Dow kept listening to all of the “experts” who were giving all of their fundamental reasons why particular stocks “should” go up or “should” go down.

Dow simply came up with a method to plot the price movement. The “image” that he came up with on a chart gave him a much clearer view of stocks that were in demand and stocks that were in supply. Much clearer than what any analysts could ever “predict.” Anything “in demand” must see a price increase. And anything “in supply” will see a price decline. That’s not an economic theory — it’s a law. It’s called the law of supply and demand, and even a fourth grader can explain it.

The article quoted a professor of computer science (Pat Hanrahan) at Stanford, “when analyzing information, no single person knows it all,” he said. This helps dispel the thinking of the “expert stock analyst” following a stock. Rather, a chart shows the “flow” between supply and demand. The chart shows the cumulative votes that people make (on a daily basis) to either get in — or get out — of a particular stock.

One of the founders of the site, Dr. Viegas, mentioned “… why not a visual that gives you some insight into the sea of data that surrounds us? I might find one thing; someone else, something completely different, and that’s where the conversation starts.”

This is precisely the problem when trying to make investment decisions based on only fundamental analysis. The data can be twisted in so many different directions to paint a very good — or very bad — story. Additionally, the fundamental information (supplied by the company… like earnings) can be wrong, or rewritten in the future.

For those of you who have seen these point and figure charts I use in managing the risk in your investments…do they help paint a clearer view of what’s happening? Let’s hear it!

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