From the April 4, 2004 Break Out Report

Tornadoes and Hurricanes
by Ken Ballard 

In this article from 2004, my partner Ken Ballard introduces two concepts he coined to help analyze investment and sector cycles.

First let’s explore Tornados. This is a new market term created by yours truly. Tornados happen when a cycle or sector buying shift dries up and market pressures are just right. Thus all your profits get sucked up in no time at all. Just like a real tornado it arrives with little notice (sometimes triggered by an after hours news release), destroys everything in its path and leaves an aftermath of almost nothing in no time at all. Market tornadoes are also caused by incredibly weak earnings, SEC investigations and extreme terrorist attacks. So how do you prevent a tornado from hitting your portfolio or at least touching down on a stock or two of yours? What do you do when it hits? 

Well, puts are always good insurance against a big investment loss. I have preached this one often enough but what else might you do?

Another solution is some more diversification.  Many times I have been tempted to put larger sums than normal in one stock or option. The bottom line is that would be a mistake. Of course, it could pay off huge but making money in the market is as much about keeping it (losses at a minimum) as it is growing it. To avoid a tornado wipe out, never put more than 10% of your money in one play and never invest with money you can not lose. Some people play options with their lunch money and then whine when they can’t eat because they got wiped out.

No one wins at poker every night and even the best in the world know when to walk away from the table. You have to know that it is a bit of a poker game. You can stack the odds in your favor with knowledge and information and experience. 

Now a hurricane is usually thought of as destructive but a market one means buying comes in waves thus driving things up and the waves just get bigger. This is good and it happens as money floods into a particular sector and/or stock you have invested in.

Think of it this way - get out of the path of tornadoes and ride the wave of the hurricanes. Let’s go storm watching and see what is out there in today’s current market. I am going to find you some tornado and hurricane stocks and sectors.

Note: Ken then had a few paragraphs analyzing then current sector trends. These are now dated and not included here.

Here is the final lesson that comes from all this searching and that is Step Out of Your Normal Industry watch. I tend to be a trend and technology watcher but I just learned too much of a few sectors are not a good thing.

Disclaimer