The most powerful catalyst for stocks

I wrote about the TRAPP framework which helps us make sense of why and how the market differentiates between stocks or asset classes, even.

Today i want to talk about a technical aspect that leads to super-performance.

What do you think is the biggest contributor to a stock’s out-performance? Most would say earnings. Some sophisticated investors would say it’s the delta in the earnings. While both earnings power and the delta in earnings are very important, what really defines if you make a good investment or a superlative one?

The answer in my experience is, NEGLECT.

If a positive event in a stock meets with prior neglect - it automatically leads to super-performance.

Just look at the best performing stocks over any period and you will see the one thing common in most, if not all, is that the uptrend began from a period of neglect.

Those who follow price action often talk about breakouts. What is a breakout? It’s essentially a breakout from neglect. When a stock makes a large base it is essentially being neglected for that period i.e. neither bulls nor bears are interested. To be fair neglect often is not the catalyst itself its just the environment from the which a catalyst can give super normal returns.

Let’s look at the top performing stocks in the last one year:

Now go their monthly charts are look at the period for which they were trading in a range - essentially neglected.

Typically what you see is an atleast 3-4 year - in some cases upto 7-8 years or more - neglect followed by a rerating phase.

If there was no neglect, then these stocks would not be able to make it to the top of the list like they did.

Neglect ensures that there is no froth and that the buyers and sellers have exhausted themselves. This sets the stage for the run-up as and when an earnings catalyst appears.

This is also why once the stocks become popular they are unlikely to be super-performers.

So next time you consider a stock for investment or trade look at where the stock is on the neglect scale. If its too popular i.e. it’s far away from its base then it means the probability of super-performance is low. If however the stock has gone no-where for several years and a new catalyst has emerged then the probability of this becoming a multibagger is that much higher.

Remember this equation:

New 52 week or New ATH in a stock + prior NEGLECT = SUPER-PERFORMANCE.