Savvy investors know that its not always the stocks that you own that make you a good investor but many times it's the stocks that you successfully avoid. Enabling your capital to stay productive (and compounding) is one of the keys to long-term wealth generation and stocks with large drawdowns are poison for long-term compounding With this in mind, we utilize point and figure charts to help us avoid the type of stocks that can blow up your portfolio (
click here for more information on how our proprietary point and figure charts). Point and figure charts do a great job in helping investors identify stocks that are either in a long-term down trend (aka value traps or falling knives) or on the precipice of a large decline after putting in a top. Currently, the MSCI US Apparel, Accessories and Luxury Goods sub-industry looks particularly weak. Five of the nine companies in this sub-industry are either in a clear downtrend or in the midst of a topping formation.
As the charts below show, Coach may be the bellwether for this group as it has fallen completely from support but has consolidated somewhat in recent months. However, Coach may be a good example of a value trap as there is absolutely no sign that the underperformance of Coach has abated (Coach has underperformed the MSCI World Index by 45% over the past year, this includes a 12% outperformance over the past three months).
PVH looks to be a great example of stock that has put in a topping formation and may enter a period of massive underperformance. PVH's relative performance uptrend ended in 2014. PVH is down 6.9% over the past year and has underperformed the MSCI World Index by 13% during this time. However, as the chart below shows, the period of underperformance for PVH looks to be just in the opening innings as there are no clear signs of support until possibly another 50% relative underperformance has taken place (line H).
