Frequently Asked Questions About Adam Khoo Monthly Market Analysis Framework
21 answers covering everything from basics to advanced usage.
// Basics
What is the path of least resistance in stock trading?
The path of least resistance is the most probable direction of price when the short-term, medium-term, and long-term trends all align. When the 20 EMA is above the 40 EMA, the 50 MA is above the 150 MA, and the 200 MA slopes up, the path of least resistance is up. You trade and invest with that dominant trend until it actually changes — not until you think it might.
What does FORO mean in investing?
FORO stands for Fear Of Running Out — the emotional urge to chase a rising market or stock because you fear missing further gains. It's one of the key rule violations the framework guards against. The antidote is a fixed process: dollar-cost average continuously and accumulate only on pullbacks to defined support levels, rather than buying into strength out of anxiety.
What is a wave pattern and why does it matter?
A wave pattern is the natural wave up, wave down, wave up, wave down rhythm that prices follow even within a confirmed uptrend. It matters because corrections are expected components of the pattern — part of the grand plan, not trend reversals. Accepting this prevents you from panicking during normal pullbacks that are simply the market breathing on its way higher.
What is an economic moat and why does the framework prioritise it?
An economic moat is a company's durable competitive advantage that protects its market position and profitability over time — wide moat means strongest protection, narrow means some, none means no durable edge. The framework prioritises moats because they underpin secular compounding: high margins, high ROE and ROIC over long cycles. Moat-strong businesses compound wealth reliably; commodity businesses without moats don't.
// How To
How do I map the four support levels each month?
Open the monthly candle chart with your S&P 500 proxy and read off four moving averages: 20 EMA on the daily (Support 1), then 20 EMA, 40 EMA, and 50 MA on the monthly (Supports 2, 3, 4). Record each price value. These answer 'if we pull back, how far?' as probabilistic landing zones. Update the values every month since moving averages shift.
How do I tell if a market rally is earnings-driven?
Compare forward P/E now versus the start of the year. If prices rose but forward P/E fell, the rally is earnings-driven — earnings grew faster than price, which is sustainable. Then confirm by checking the latest earnings season: how actual growth compared to analyst expectations and how many of the 11 sectors posted double-digit growth. A large positive surprise justifies the strength.
How do I apply the secular compounding filter to a sector?
For each sector, ask: does it have high margins, strong and durable economic moats, and high ROE and ROIC over long cycles? Tech and healthcare typically pass; commodity sectors like energy and basic materials fail due to cyclicality, low margins, and weak moats. Run the exception test — does any company behave like a non-commodity business (e.g., predictable, non-commodity-linked revenues)? If yes, it may pass.
How do I state a probabilistic outlook without predicting?
Synthesise your findings into one structured statement: trend direction, then valuation status, then earnings backdrop, then key risk, then the most probable support level if a pullback occurs. Frame it as 'Given the trend, earnings, and valuation, the probability is that...' and always acknowledge the alternative scenario. Never say what will happen — state what's probable and where you'd act if you're wrong.
// Troubleshooting
The 20 EMA just crossed below the 40 EMA — should I sell?
No — not on that signal alone. A 20-below-40 EMA cross means the short-term trend turned down, but check the 50 MA versus 150 MA and the slope of the 200 MA. If both medium and long-term trends are still up, this is a wave down within an uptrend, not a bear market. Continue dollar-cost averaging and look for a bounce near your support levels.
The market rallied on bad economic data — did I miss something?
No — you witnessed a classic counterintuitive macro reaction. Weak GDP or downward jobs revisions often trigger rallies because investors assume the Fed won't hike rates. The framework categorises this as entertainment: record it as 'macro bearish, market bullish — confirms macro timing is unreliable' and change nothing. Your trend stack, not the data, remains the primary decision input.
My favourite sector is underperforming — should I abandon it?
First determine whether the underperformance is short-term noise or a structural problem. A moat-strong secular compounder having a weak month is noise; a business whose competitive advantage is genuinely eroding is structural. Don't rotate out of a durable compounder just because a cyclical sector like energy outperformed this month on a geopolitical catalyst — that's chasing, which the framework forbids.
What if my support levels don't hold during a pullback?
Support levels are probabilistic landing zones, not guarantees. If price breaks through Support 1 (20 EMA daily), look to the deeper monthly supports — 20 EMA, 40 EMA, then 50 MA. A break through all four combined with a 50-below-150 MA cross and downward-sloping 200 MA signals a possible bear market. Until that full confirmation, deeper pullbacks are still accumulation opportunities within the uptrend.
// Comparisons
How does this framework compare to technical day trading?
Day trading uses short-timeframe indicators to time entries and exits for quick profits; this framework uses multi-timeframe moving averages to identify the dominant long-term trend and accumulate through it. Day trading reacts constantly; this framework runs once monthly. Day trading chases momentum; this framework forbids FORO chasing and enforces dollar-cost averaging into secular compounders. One is speculation, the other is disciplined long-term allocation.
How does forward P/E analysis compare to a full valuation model?
Forward P/E versus historical averages is a quick sanity check, not the primary valuation method. It classifies the market as cheap, fair, or overvalued at a glance but doesn't account for growth quality. A full valuation model or tool assesses individual stocks for moat width and intrinsic value. The framework uses P/E for market-level context and a valuation tool for stock-level watchlist building.
How does this compare to using seasonality to time the market?
Pure seasonality trading sells in historically weak months like September to dodge drawdowns — that's market timing, and it doesn't work. This framework uses seasonality only as mental preparation for volatility, never as a sell signal. September averages negative but has also returned +8% some years. The framework says: if the market drops this month, it's part of the wave pattern, not a reason to exit.
// Advanced
Why avoid energy and basic materials even when they're winning?
Because their outperformance is usually cyclical and catalyst-driven, not durable. Commodity companies have low margins, weak economic moats, low ROE and ROIC, and unpredictable revenues tied to volatile commodity prices. A geopolitical spike can make energy the top sector one year and the worst the next. Secular compounders in tech and healthcare deliver more reliable long-run returns, which is where the framework directs capital.
Can I use this framework for individual stocks or only the index?
The trend stack, support levels, and wave-pattern logic apply to individual stocks too, but the framework is built primarily around an S&P 500 proxy (SPY, CSPX, or VOO) for market-level context. For individual names, layer in the secular compounding filter and a valuation tool to assess moat width and intrinsic value before adding them to your watchlist as undervalued or fairly priced.
What's the exception test for commodity companies?
The exception test asks whether a commodity-sector company actually behaves like a non-commodity business. For example, an industrial gas manufacturer with predictable, contracted, non-commodity-linked revenues and pricing power may have a real moat despite sitting in a cyclical GICS sector. If it passes — durable margins, high ROE/ROIC, defensible position — it can qualify for secular compounding capital even though most of its sector doesn't.
How do I combine time-weighted and money-weighted returns in my review?
Track both when comparing your portfolio to the index. Time-weighted return measures your strategy's performance independent of cash-flow timing — best for judging your allocation decisions against the benchmark. Money-weighted return reflects the impact of when you added or withdrew capital — best for judging your actual dollar outcome. Reviewing both monthly reveals whether your process or your timing of contributions is driving results.
What does a steepening yield curve tell me in this framework?
A steepening yield curve — long-term rates rising faster than short-term rates — is beneficial for bank stocks and floating-rate private credit. But in this framework you record it as entertainment and general knowledge only. It informs your understanding of the macro backdrop and any counterintuitive market reactions, but it carries zero weight in your actual buy or sell decisions.
How long does a full monthly analysis take once I'm practised?
Once you've plotted your moving averages and know where to pull forward P/E, earnings, sector, and macro data, a full pass through all ten steps typically takes under an hour. The trend stack and support mapping are the fastest once your charts are set up. The discipline isn't speed — it's running the identical process every month regardless of how noisy or scary the headlines are.