‘Channeling’ Is Latest Trading Fad
The idea sounds enticing enough. In a commercial that runs regularly between CNBC’s stock market reports, a twentysomething who presents himself as an investing success reveals his secret: “Buy low, sell high--the same stock, again and again.”
The ad is from ChannelingStocks.com, which offers investors a seemingly simple way to make money in today’s dicey market: Play stocks that can be traded as they travel up and down through an established price channel. The concept is to repeatedly buy at the low end and sell at the high end.
But some Wall Street “technical” analysts, who interpret stock price charts and track other market trends, say ChannelingStocks, which is owned by Stock Firm Inc., has a pitch that vastly understates the difficulties of trading successfully.
“That guy on the commercial, I’d like to reach out and smack him every time he comes on,” said Bill Ryder, an analyst at First Union Securities in Richmond, Va. “The premise that a stock will continue to move in a channel, like it’s physics or something, is ludicrous.”
Though stocks often can be stuck in a particular range for a while, Ryder said, “That’s no guarantee the pattern will continue.” At some point a stock’s price will break out of that range, to the upside or the downside, he said.
Stock Firm Chief Executive Timothy Thompson said the Port Washington, Wis., firm, which started its ad blitz in December, has “several thousand” customers, with 80% to 85% renewing their monthly or quarterly subscriptions. He said the retention rate indicates “people like the service.”
Fees are $15 a month, $40 a quarter or $120 a year. For the money, subscribers get information on 15 “channeling” candidate stocks each week--issues that have been trading in a range for some time.
Some analysts believe there is indeed plenty of money to be made trading stocks, rather than buying and holding, in the current choppy market environment.
“We’ve transitioned to a sideways market that could last for a long time, and that means you’re going to have to trade to make money,” said John Bollinger, head of Manhattan Beach investment firm Bollinger Capital Management. He started his career near the end of a 16-year span that saw the Dow Jones industrial average mostly stuck between 800 and 1,000, before it lifted off in 1982.
But some experts say the ChannelingStocks approach oversimplifies the challenges facing traders, which include not just getting the buy and sell points correct but absorbing commission costs, as well as paying taxes on any short-term capital gains.
Of course, trading strategies are always coming and going on Wall Street. In the dot-com heyday, thousands of investors were lured into “day trading”--rapid-fire buying and selling of hot stocks, with the goal of making small amounts on each trade, in hopes of accumulating big sums by day’s end.
More recently, “swing trading” has attracted investors. Swing traders look for suddenly hot stocks that they can ride for weeks or months, until the price momentum peters out.
Rather than just pick a stock that is at the low end of a recent trading range, Bollinger looks for upward momentum not only in an individual stock but also in its industry group and broad sector, as well as the overall market.
“With all four oars in the water, you get the biggest burst of speed,” he said. “Even if ‘XYZ’ stock is moving in a channel, if its industry group deteriorates around it, my best advice would be to respect that deterioration and move on to something else.”
By contrast, ChannelingStocks and other Web sites pitching channeling or “rolling” stock strategies generally focus on single issues and take a shorter-term approach.
“If a stock ‘channels’ only once every four months, we’d look for something more active,” Thompson said. Stocks often channel between their low and high price targets within days or weeks, the Web site notes.
Each Thursday night, ChannelingStocks releases a list of about a dozen stocks trading near the bottom of their recent channels. It also highlights three issues trading near the top of their channels, for aggressive investors who wish to “short” them, or bet on a decline.
Thompson said the company’s seven chart watchers handpick the stocks based on patterns over the last 12 months.
ChannelingStocks doesn’t suggest buy or sell target prices, but highlights the upper and lower ends of a stock’s recent channel. Users are expected to set their buy and sell targets based on how aggressive or conservative they are.
Thompson acknowledges that there are no guarantees any stock will stay in a channel, and he said the site advises traders to use plenty of caution.
ChannelingStocks suggests, for example, that traders wait until a stock is heading higher before buying, a concept Thompson calls “confirming direction.” If a stock has channeled between $10 and $15 and now is at $10.50, Thompson said, a trader might buy it only if it rises to $11. At the same time, the trader might put in a standing order to sell the stock if it rises to $13 or $14, depending on his or her aggressiveness, or if it falls to $9.50, which would limit any loss.
The company also suggests customers make practice trades--trading on paper, not with real money--for two months to learn confirming direction and other trading nuances.
“We’re not suggesting anybody cash out their 401(k) and do this,” Thompson said. But “it might be something for a portion of someone’s portfolio.”
Investors have had mixed reactions to ChannelingStocks.
Jerry Miller, a 51-year-old window company salesman in Smock, Pa., who signed up in December, said that after two months of practice trading he is close to “taking the plunge” with real money.
“I was impressed by the tone of the Web site. They tell you not to be greedy and just jump in,” Miller said. “They encourage you to practice, practice, practice, unlike the get-rich-quick sites out there on the Internet.”
Miller said he supplements the service by researching the business trends of any company he might invest in. “These are just charts,” he said of ChannelingStocks’ ideas. “If a company misses its earnings target, the pattern isn’t going to prevent the shares from falling.”
Stephan Lewis, a 44-year-old Hermosa Beach resident who stepped away from his job writing software books five months ago to become a full-time stock trader, said he wouldn’t touch ChannelingStocks.com “with a 10-foot pole.”
Like many others, Lewis believes investors now face a volatile market in which traders can thrive, but he said he prefers trading services he considers more sophisticated. He subscribes to TheStreet.com’s new “daily swing trade” feature written by Alan Farley, author of “The Master Swing Trader,” along with another site for active traders.
Noting that several of the stocks ChannelingStocks lists trade for less than $10, Lewis said “bid-ask spreads”--the difference between the price investors must pay when buying a stock and the price they could get by selling it immediately--could eat severely into trading profits.
Lewis said that during the bull market of the late 1990s, traders had success playing “breakouts,” or stocks starting to move higher after being stuck in a range. That was one form of classic “momentum” investing. But those are harder to find now.
“Everybody’s looking for some other concept,” he said.
Bollinger said it’s human nature for investors to seek out “a simplistic paradigm.” But he said investors should have learned by now that “there is no easy way to riches” in the market.
