One and Done?

Today the FOMC lowered short term interest rates 50 basis points to 1%.  The market stayed true to form and was very volatile following the news, concluding with a massive drop in the final 10 minutes or trading that landed the Dow and S&P 500 negative on the day.  Both indices also logged a distribution day.

Traditionally, a distribution day within the first three days of a new rally signals the rally will fail (about  90% of the time).  Since there are nearly no high quality stocks breaking out of sound bases it's really moot point anyway.

Patience is still key, there is no need to swim against the tide.

-Geoff

Another Follow Through Day

Just as I thought the market was setting up to take another dive, it once again did what I least expected and logged a follow through day with massive gains on equally massive volume.

In spite of this, there is still plenty of reason for caution.  The market's unprecedented volatility over the past month renders any move to the upside or downside questionable - the old rules about what a big volume move means don't necessarily apply here.  This may have been an unwinding of short positions ahead of the Fed's announcement on interest rate policy tomorrow (a 50 or 75 basis point cut is likely).  In my experience, any market movement the week of the FOMC meeting is suspect - it's prudent to wait until a couple of days after the rate announcement to see how the market reacts.

Furthermore, there is just no leadership visible.  IBD shows no stocks making a new high today on the NYSE or Nasdaq, while almost 1,000 made a new low.  Few stocks trade above even their 200 day moving average, as I've discussed before this is woeful.

Nonetheless, I will not dismiss this new rally outright.  Despite all the bad news (or because of it), we may see a powerful snap-back rally.  I have one stock on my watchlist, and will keep an open mind if other stocks make my screen.  In the meantime, I'm in no rush and will 'let the market come to me,' so to speak.

-Geoff

Rude Awakening

It's a pretty overwhelming task to comment on the market these days. What we're seeing is certainly historic, perhaps a once-in-a-century event. Though we don't have the kind of sell-off that occurred after the tech bubble burst (yet), we're looking at a global recession that is possibly beyond anything we've seen before. The 'VIX' - or volatility index - which measures fear in the market is DOUBLE the previous high level it had reached in almost 20 years it's been measured. Despite this, each time the market looks like it will capitulate, it instead reverses and closes up or down more moderately. Some of this is due to constant governmental interference (necessary or not depending on one's personal views), and some of it has no real explanation. This market seems to befuddle even the most experienced traders.

I still expect to see the S&P 500 in the 700's, and possibly below. I think the PE ratio for the S&P 500 is still too high for the current earnings expectations, which will continue to be revised downward. Of course I don't buy or sell stocks based on what I think, but I do still follow the behaviour of the market and look for 'setups' to the upside or downside. I don't think there is too much harm in forming expectations of what the market or an individual stock will do, as long as I base my decisions on what is happening, not what I think will happen.

As bad as things are the CAN SLIM method has kept me in cash most of the past year. The few times I've invested in rally's I'm made small gains or stopped out for small losses. I'm happy with my risk management and capital preservation this year. Outside of the cost of trading materials, I'm down only a few percent on my trading portfolio.

Friday I used all of the money in my Traditional IRA (about 1/3rd of my trading portfolio) to purchase a fixed income bond fund (LSBRX). I use this same fund for my son's educational IRA, and I've watched it drop from $15 to $10 a share this year. I would never trade a stock this way, but at a yield of close to 9% now and an all time low on the share price I find this an excellent opportunity for that portion of my portfolio. I believe it will provide solid return by the time I want to put that money back to work in stocks. Meanwhile, the remainder of my portfolio is cash.

Over the past year I've given a lot of thought to the concept of risk management and capital preservation as the most important factor in trading. Since I began investing, I was always aware of the potential for a catastrophic loss on an individual stock, but felt I had this risk managed well with my stop loss orders (never more than 8% below my purchase price). I knew this system does not remove all chance for a catastrophic loss, but felt that it mitigates the risk sufficiently.

Then last night a friend emailed me about a stock that I've owned a couple of times in the past few months - (THOR). This stock has held up better than anything I've seen through this bear market, and was on the top of my watchlist. That is, it was on the top of my watchlist. My friend brought to my attention a news release after the market closed on Friday, where in short (THOR) stated that:

...wear and fatigue related to its implanted heart pump may require surgical replacement that could potentially be fatal...

...In five of these cases, patients expired as a pump replacement was not feasible...

Shares dove to $12 in after hours trading.

IF I'd still held (THOR), there isn't a thing I could've done to foresee this event or protect myself from the price move after-hours (same might even be true if the news came out while the market was open). This stock looked great and showed all the signs of institutional support, then without warning lost half of it's value. That is a very sobering realization for me.

I really still haven't come to terms with this. I plan on doing some research to see if there are further steps I can take to protect myself. I'd like to think the method I use had me out of the stock before the news came out, but couldn't this just as easily have happened if I owned the stock during a rally? I owned (THOR) a week ago - couldn't they have released this news then? Certainly the answer is yes.

This is a further reminder to me what a serious thing stock investing is. It's not nearly as 'fun' as it was when I began - and I think that's good. It's a business, a second job, and a risky one. I need to approach it without emotion, follow my rules, and be aware constantly that the market is still very random and can humble me at any time. It certainly got my attention yesterday.

-Geoff

New Buy: (LSBRX) and Portfolio Management

I didn't think to post about a new buy I made last week, because it wasn't really a stock trade. Today I got to thinking since I consider it part of my trading portfolio, I should treat it like any other stock trade with this capital.

I consider myself to have three different sections to my portfolio: my 401k through work, my Roth IRA, and my Trading capital.

I contribute 7% of my income to my 401k - that's the maximum amount that my company matches with a 25% contribution. Nothing like getting an immediate 25% return the first year you add to your capital! These funds are split just about evenly among three mutual funds: an S&P 500 Index Fund, an International Fund, and a Small Cap Value Fund.

I also contribute the maximum I'm allowed to my Roth IRA on a monthly basis. Like my 401k, these funds are split pretty evenly into mutuals: an Energy Fund, a Mid Cap Growth Fund, and an International Fund. I'm probably too heavily weighted in International funds and will look to shift some of that weighting to the Small Cap Value and Mid Cap Growth Funds.

Finally I have my trading capital, which includes a cash account and a Traditional IRA account. The Traditional IRA is a small amount that I had saved before the Roth existed. Because I'm optimistic that I'll be better off in retirement than I am today, I contribute to the Roth IRA now and the Trad IRA I just trade with the amount it has.

If CAN SLIM is so great, why not trade with all of my capital? Originally this is the question I asked myself. Fortunately my coworker and fellow CanSlimmer (see his investing blog here)is less aggressive and probably more prudent than I am, and he gave me the following advice: 'Don't nuke yourself!' Ok, there was more to it than that, but the basic premise is pretty simple. If I'm successful investing, I won't need my 401k and IRA to generate wealth. If I'm unsuccessful, I'll be glad I left them alone and should still be able to retire comfortably on their proceeds.

That brings me to this week. I've been buying a Loomis Sayles bond fund, (LSBRX), for a couple of years for my son's education IRA. This is a well respected, well managed, well performing fund historically. Not surprisingly, it's been beaten down this year, particularly in the past few weeks. It trades around $10 NAV now, when I began buying it it was at $15 NAV. This doesn't concern me for my son's education because I believe my time horizon is long enough (at least 10 more years) that I'll have a good exit point and because I contribute monthly so I'll dollar cost average down during these low points. Furthermore, the fund is now yielding close to 9% so each month I reinvest that at this all time low price.

With my outlook on the stock market and belief that we have another year left in this bear market, I decided to take my entire Traditional IRA, which is about 33% of my total trading portfolio, and put it in (LSBRX). While I don't subscribe to bottom fishing in individual equities, I think it can be done in funds, particularly those with a strong track record and a high yield. When the fear leaves the market (and it will) there should be plenty of buyers lining up for bonds with that kind of yield. In the meantime, I'll earn the 9% and if the price goes down further I don't mind leaving this money invested in LSBRX for a longer time period.

We should get a bear market rally soon and I've left myself plenty of working capital to take advantage of it.

-Geoff

Sell Stop: (THOR)

I stopped out on (THOR) today for a 4% loss, about a 1% loss for my total portfolio.

This stock is still on my watchlist, so the only real self review I have is that I could've played it more conservatively and purchased as the stock was making a new high at $29.82 (I still have this option).

Nonetheless, this is a volatile market without any clear leadership, so any buy is riskier. I chose to take a chance and protect my capital with a tight stop, and that's what happened.

-Geoff

New Buy: (THOR)

I watched what I consider the best stock on my watchlist - (THOR) - throughout the day yesterday, and took a position after 3pm at $29.10.

I'm going to start including charts from the day I buy a stock, so here is how (THOR)'s chart looks currently:

I spend most of my time on weekly charts as I think they provide a more accurate picture of the price and volume action than a daily chart.

I owned (THOR) after it's big breakout in early August, and though I followed my rules and sold it when we went into a correction I've never stopped watching it. I believe it's held up through this correction as well as any stock in the market, and that's very positive. The fundamentals have not changed, it's still showing accelerating and triple digit earnings growth. Q3 earnings are due out on Nov. 1st, which means I'll have to build a cushion fairly quickly or get out of the position. In this market an earnings miss could be devastating.

Over the last month the stock has corrected it found support at the 200 dma and then the 50 dma, both positive signs. It came off the 50 dma Friday on 180% normal volume, another requirement for a purchase. I could've waited for this stock to make a new high to purchase it, but it's acted well enough I got in on the early side. If it continues to move higher I will add to my position.

I have a 5% stop on my position now, which I may adjust to avoid a shakeout Monday morning. I often take my stops off for the first 15 minutes the market is open to avoid a shakeout, and this practice has worked in my favor a large majority of the time.

-Geoff

Technical Follow Through Day

In technical terms, the market followed through today, signaling a confirmed rally.

The major indices were all up more than 2% on significantly higher volume today, the fourth day of an attempted rally.

With record high volatility position sizing and risk management will be more important that ever.  Patience is the order of the day.  I did not make any purchases today, I do have one stock I'm watching closely and others on my watchlist - however I am in no rush and the market will need to get through the next few days without a distribution day for this rally to have a chance.

-Geoff

40 Week Moving Average Tells the Tale

I started keeping a more detailed watchlist spreadsheet in late July.  It's been very helpful and I'd recommend it to anyone.  It's simple now; I track the date I became aware of the stock, what screen produced it, what kind of pattern the stock is in, what I think the buy point is, information about the stock's relative strength and the same measure of the stock's industry group.  I hope to write my own web application eventually that will track this data and give me more advanced sorting and reporting features on it, but for now a spreadsheet does the trick.

With the tremendous volatility of the past weeks persisting in a huge downward move in the market today, I wanted to take a moment to review my list and see how the stocks look.  To no great surprise, of the 25 stocks on the list, only four are above their 40 week moving average.  It's almost more shocking that nearly 20% of the list has managed to hold that level.  I expect the numbers are worse than that across the broad market.

With an assumed four out of five stocks this heavily beaten down, record volatility, massive credit freeze and a slowing global economy does this market have any chance to rally?

I have no idea, but I want to be ready if it does.

Of my four watchlist stocks that have managed to hold their 40 dma, all are related to the medical field (another bearish indicator, as this tends to be a so-called 'defensive play') and all belong to an industry group in the top 10% of the market in relative strength (no surprise here, either).  Two of the stocks actually belong to the same industry group, and I owned one of them previously and have never taken my eye off of it.  It's shown tremendous resilience in this bear market, and is in the best shape of any stock on my watchlist now - trading just below it's 50 day moving average.  This stock would be my first (and perhaps only) buy if the market followed through tomorrow.

It's difficult to make any sense of the current market, so I won't try.  I'll continue to track whatever solidly fundamental and technical stocks appear on my screens and watch the market for the signal indicating a rally.

-Geoff

Playing by the Rules

Thank goodness I have a system with 'rules' to trade by.

Hard as I try, I tend to get caught up in the latest action of the market.  I'm an emotional person, and most likely always will be.  So when the market advances 12% in one day, I tend to start feeling 'bullish' and could get carried away.

That's why it's so important for me to trade within the context of clearly defined rules or guidelines.  Without them I would most likely get caught up with the lastest movements of the market and get whipsawed into a zero balance.

Instead, I know that I don't buy stocks until we get a follow through day signalling a new rally (not all succeed, but this is the time to test the waters).  Meanwhile I have a small watchlist of stocks that have held up well within the context of the current market volatility.

I'm using this time to continue my studies and have begun the Van Tharp book 'Trade your way to Financial Freedom' - this may be why I'm focused on the idea of a system right now.  Though I haven't read much yet, the book is intriguing in it's study of psychology and the development of a trading system like a business.

I look forward using what I learn in this book to refine and document my trading system; for although I follow the CAN SLIM methodology, each of us has our own unique way of interpreting and implementing the same information.  It's important that I 'mold' this method to fit my style, personality, and goals.  Through this process I will make someone else's method into my system.

-Geoff

Capital Preservation

I'm feeling quite pleased with the progress I've made in my short investing career.

As I'm able to look back on it now, I began investing a year and a half ago, about six months before the start of one of the worst bear markets in history.  Despite that I've only lost 26% of my capital, just under 20% annualized.

Yes, I said 'only 26%.'  I lost the majority of this money my first six to nine months trading, and by the time I started to figure things out a bit the market had really gone bad.  In spite of this I'm still positive on my trading activity this year, the loss in my account is due to the cost of materials for the IBD services I subscribe to.  They are expensive, and it hurts to shell out the money when we're in a prolonged bear market, but I believe in the long run, they will be well worth the price.

Additionally, my trading account has outperformed my IRA mutual fund account as of this week.  Now, that's a rather ignanimous accomplishment on the one hand - it came about as the stock market has swooned to five year lows.  However, this does not change the fact that I've been in cash in my trading account, which preserved capital and has as of this moment led me to out-perform my mutual funds - even including my cost of research materials.  I've reached my goal of outperforming the professionals, now I need to do so to the plus side in the next bull run!

As far as the market is concerned, my watchlist has been whittled down each day this week and the last of the stocks on it were damaged today.  I will, as always, continue to watch the market for a turn but for now it looks like there's more to work through before we put in a solid bottom.  This is a good time to catch up on some reading.  I've almost completed 'The Successful Investor' and then I want to begin 'Trade Your Way to Financial Freedom.'

As time allows, I'd also like to make use of another interest I have and try to develop a program to track information on the stocks I purchase.  I'm not exactly sure what I want it to look like yet - which makes it difficult to get started - but I'd like to have something that will allow me to store data and get percentages on what characteristics my best trades share.

-Geoff