Time to Reflect

When I start to feel down about my failures investing I usually like to take up to a week to just process my feelings. That happened to me recently, as I had a swirl of emotions over my results so far this year.

The way that (SOL) has come apart really shook my confidence, it is a disappointing situation. However, with no intent to excuse any mistakes I make, I felt it was important for me to review my successes as well:

• I'm positive on my trading activity this year. My portfolio is down due to cost of my IBD subscription and the chart and screen tools. Based on stock trading only I'm up. Compare that to an 18% drop last year, and with how much worse the market has been this year, and that shows I'm making progress.
• I haven't lost capital in (SOL). Yes, I gave back profits, but I haven't lost capital and I have my stop set where I won't. My ratio of winners to losers is much better this year - my mistakes have cost me profits rather than capital.
• I haven't compounded errors. In the past if I started feeling stress about a loss or a position that was turning on me, I would look to put more money in play to 'make up for it.' This year I've shown patience and discipline. I realize the main goal now is to avoid catastrophic mistakes - the profits will come soon enough and more than make up for these relatively small gaffs.

With a return to a positive outlook I sat down and thought about how I can avoid being in this position again in the future. I've arrived on two main action items.

One is I am going to type up some sell rules and keep them with me at all times. It's not enough for me to have them in my head, I must put them down on paper and keep them with me. They are not 'mine' - in fact they are the interpretation of Bill O'Neil's CAN SLIM sell rules by a poster on the IBD forums who goes by the handle 'williamsj55.' So I'm using one person's thoughts on another person's ideas - which really came from several other people... This is not about reinventing the wheel. On the contrary, I'm looking for the tried and true, time-tested methods.

I will take these sell rules and modify them slightly to fit my style and trading personality, and then I think I'll post them here. As I've said before, it's good for me to put all my rules in writing here, I'm far more likely to follow them that way.

The second decision I made is how to handle SOL from here. I still think the fundamentals are there, but I can't keep sitting on this thing just waiting to see what happens, so I came up with a stop loss plan. It's really not based on anything technical, it's psychological. Each time the stock closes above a new dollar milestone, I move the stop up to $2 below and leave it there - no matter what. So, with it closing above 18 on Friday I moved the stop to 16. If/when it closes above 19, I'll move the stop to 17, and so on. This does two things. One - it relieves me of a decision and the associated stress. That's what I needed to move on from this one. It's mechanical from here. Second, if it does shoot up to 23 again, I won't watch it go back to 16 again - I'll stop out at 21 with a decent profit. If it retakes the 21/50 dma's and holds them for some time, I may consider treating it like a winner again, but for now it's just another tough lesson.

-Geoff

Emotions in Motion

I find myself in exactly the situation that the books I've read describe.

I decided to hold (SOL) for the long term play, and since that decision the market, the solar group, and the stock itself have all changed significantly.

The Dow is testing it's March and January lows, and the third leg in this bear market could be over soon or might just be getting started now.

The Energy-Other industry group, which includes solar, is still ranked in the top five at IBD, but a lot of the leadership in the group is coal companies, and the solars are not flying like they were a couple months ago.

Then there is (SOL)... Man, a lot can change in a couple of months. This stock just can't get a bid. I've gone on about the situation ad nauseum, so instead of writing more about that, I'll talk about how I react to it.

It's not good. I've fallen prey to the trap that I've heard so much about. I had a stock that was up 90%, and it came back on me. I'm up 25% after today's close. Now I badly want for the stock to recover and succeed, both for the money and so that I was 'right' - of course being in this situation it would seem I'm wrong already, no matter what the stock does from here.

I don't want to sell and admit defeat, but each day I watch the stock weaken, in total disbelief. I stare at the live chart waiting for the institutions to pile back in. Honestly, I'm not kidding - I really curse the fund managers as I sit there. Sometimes it feels personal, like they hung me out to dry. How dumb is that???

I watch the news wires for any inkling of why the stock's in trouble, for any article that could spur a comeback - all the while knowing this is NOT how I've learned to invest.

Why, then, haven't I just sold? I can't tell you that my motivation is clear and right, but I hope the reason is that I don't want to make a bad situation worse. The stock still has some time to retake the 50 dma and get back on track, and yes - I'm concerned that it will do so the moment I pull out. There has not been any massive selling in the past couple of weeks, in fact the weekly chart is showing a contraction in volume this week. I'm probably kidding myself, but it might be wearing out of sellers.

It's easy to be disciplined and make the right decisions when everything is going well. Or, maybe it's not - because when everything is going well is the time to sell, and I have a lot of trouble doing that. It will take weeks or months to pass before I can review this saga and make some definitive rules for myself from it, but it's clear I'll have to do that. I can't build a career out of investing if I end up in these points of indecision - right or wrong I must determine what I will do in any given situation.

I know enough successful investors that go 100% during any correction that it seems that might be the right course of action. I could even trail a stop behind my winners once we enter a correction, so if they continue up I'll get the move but if they drop I'm out.

Right now I can tell you that anything looks preferable to being in this position again.

-Geoff

Sell Stop:(SOL)

Well, I got my answer today, as (SOL) seemed to fall completely apart minutes after the open. It fought it's way back to $21 briefly intraday, only to drop into the close again and finish up at $19.65. It is now once again below every moving average.

While there really is no bright side to a day like this, the volume was only 30% higher than average, which indicates that not everyone was heading for the exits. Small consolation.

I stopped out of both my positions at $20.20 - I was net ($8) on the whole deal. I maintain my original position in the stock at $15.25 - for now. I never wanted to assume any risk on these new buys though, given the change in the complexion of the market and the stock.

From this point I'll need to see the stock retake the 50 dma in fairly short order. I don't know why the buying hasn't come back in as I expected, and it doesn't matter. I must admit though my curiosity is overwhelming. How could this stock be a rocket six weeks ago, only to now find next to no support? Someone bought the 10 million shares in the secondary offering, and paid $20.50 a share for them. Why aren't they supporting the stock now to keep it at that level, at least?

Again - I must remind myself it doesn't matter. The only thing that's important is the price and volume action of the stock - and those have gone from fantastic a month ago to abysmal now.

-Geoff

Waiting Game

Today's action on (SOL) was a bit of a mixed message. It was up a little over a percent on poor volume, but it continued to hold the 10 wma which is positive. On the other hand, for the second time in a few days it seemed to find resistance at the 21 dma. Furthermore, the solar group in general had a big day with many of the stronger members posting gains of 5% or more, and in that regard (SOL) lagged.

The general market was quiet today and should remain that way in advance of the Fed's decision on short term interest rates, which will come Wednesday around 2pm EST.

I still think I'll have a fairly clear signal which way (SOL) wants to go this week. The 10 wma is rising to meet the 21 dma, which is falling. The stock is trading between the two, so something has to give. If (SOL) can catch a bid, break through $22 and hold it, I'll be confident it's back on track. I've moved my stops for my last two buys up to $20.20 - if the stock get's much below the $20.50 price that the secondary offer went at I think it's broken, for the time being at least.

-Geoff

Never Boring

Another week has passed and I hardly know what to make of it.

I'm still positive on my two add-on buys of (SOL), barely on the most recent. The stock came back nicely this week and ran up over $23 intraday Thursday, then fell from there to close at $22.15. Energy stocks were hit hard Thursday afternoon when China announced it was reducing it's gasoline and diesel subsidies, effectively raising prices at the pump. The market's immediate reaction was that higher prices will reduce demand, so crude sold off.

I still don't understand why solar stocks trade in parallel with crude prices, but they do. I've found no evidence that solar energy, which produces electricity, is any kind of viable alternative to gasoline - which is the primary use of crude oil. Crude oil is used to produce electricity, but in such small amounts it is insignificant. IF there are someday a large number of electric vehicles available, then solar energy could replace gasoline by producing the electricity that charges these cars; it would also reduce coal consumption (coal accounts for 50% of our electricity).

For the time being, I just have to accept that solar stocks tend to trade with crude prices, whether there is a good reason for it or not.

After giving back some gains on Thursday (SOL) opened lower on Friday and stayed down all day, along with the overall market. Encouraging signs were that the stock traded on below average volume and closed above the 10 week moving average - both indications that the stock is now finding the institutional support that was lacking when it dropped ahead of the secondary offering. In the past week all the evidence I've seen has indicated to me that (SOL) is right back on track with the strong support it had before.

However, the problem now may be the overall market. This week was just ugly. The Dow is very close to undercutting it's January lows, from there you'd have to go back to September '06 to find the last time the Dow traded below 11,600. The S&P 500 doesn't look much better, and the Nasdaq has finally lost it's 50 dma. If the massive drop wasn't enough bad news, it came on huge volume as Friday was options expiration day.

Things certainly look bad. From what I know about bear markets, we should have a third and probably even a fourth leg down. The market is set up for the third leg down to happen soon, if it isn't happening already.

On the other hand - maybe we're near the end of the third leg down?

Take a look at this chart of the Dow:

I've used red arrows to mark the January lows, the March lows (which led to the recent rally) and the current lows. I notice that the March lows stopped short of the January lows - could this be a level where the market sees 'value?'

Yes, there's a lot of bad news out there, but is any of it new? The sentiment is extremely negative, but that could be a contrarian indicator that the market is ready to turn.

The difficulty of the last rally was that it was led by crude prices - a catch 22. Only the energy stocks had momentum. If crude prices stabilize or fall, could that open up buying into the rest of the market?

Honestly, I don't see the stage set for any major rally, and certainly not for a bull market anytime soon. On the other hand, I don't see signs of the apocalypse, either. I think there's reason to believe this market can survive the summer and set up for a fall rally, especially it being an election year.

What does all this mean for my holdings? I'll continue to keep a tight leash on my recent buys, there is no reason to risk capital in this market. I have about 1% at risk on my last two buys. I'll let me original purchase ride unless I see the stock break down and roll over.

I can't help but think about the Saturday several weeks ago, when I was on a tremendous run and thinking of cashing out. I'd hate to think that it's proper to invest on instinct, but I would be looking good right now if I'd followed my gut and gone to cash then.

-Geoff

Post Script on (SOHU) - the stock lowered revenue guidance for 2009 and rolled over on Friday, crashing through the 50 dma on huge volume. As it turns out, my stop loss from last week worked out better than if I'd continued to hold. I was right for the wrong reasons. I'll take it.

Add-on Buy:(SOL)

I took another position in (SOL) today at $20.73. As is my practice when I'm able to, I waited for the first 15 minutes of the market to pass, during which time the stock shot up past $21. As usual, I thought maybe I'd outsmarted myself, but also as usual the stock pulled back again. When it did I entered my order, which was triggered before 10 am.

I chose a trigger price of $20.73 which was 10 cents above the 10 wma. I wanted to see the stock clear this level, and then hold it. (SOL) traded in huge volume today - almost 7mil shares, double the average. It ran as high as 21.89 and then weakened to close at $20.77 - but it held the 10 wma several times during the day, which is the action I was looking for.

The stock has advanced enough that I've moved up my stop loss on yesterday's buy to a break-even level. My stop loss for today's purchase is about 7% below my cost basis. (SOL) has advanced about 30% in three days, so I think I need to leave it a little wiggle room. It will probably trade below the 10 wma tomorrow, but I think it will be important for it to hold the 50 dma around $19.75.

It's my understanding that the secondary offer priced today, but I've seen no additional information on this, or what the final price was. I'll comment on it when I know something more.

-Geoff

Add-on Buy:(SOL)

(SOL) continued to show strength again today, retaking the 50 dma while gaining over 10% - albeit on less explosive volume than I would've liked to see (it increased about 30% over average). While it's not good to be in the habit of making excuses for a stock, I'm not surprised that the volume was lacking a bit. If indeed the institutions can pick up shares tomorrow for what I calculate to be around $18.70 a share, I'm honestly surprised it moved as well as it did today. For now, the action of the last couple days seems to confirm that the downward pressure on the stock has been 'artificial,' and once the secondary offering is complete (SOL) is ready to resume it's uptrend.

I took a second position as the stock crossed the 50 dma at $19.43. I could've had it for less numerous times over the last few days, but I wanted to see the stock clear this key level to show some strength in the bounce. It's now 22% above the recent lows and in position to recover the 10 wma next.

I did break one key rule in buying (SOL) today, as the market is not in a confirmed uptrend. I've mentioned time and again that the direction of the overall market trumps all other factors, so anything I say here may just be an excuse. The truth is, from everything I've seen with (SOL), and with the explanation that I believe for the drop in share price, I think the stock has a run in it up to the low to mid-20's. The $23 level looks like it might offer some resistance in the short term.

My thought is this - if the stock moves like I think it will, great. I'll trail my stop order up on the second position to minimize my risk - right now it's 5% below my purchase price. If I can get a 20% gain I'll move my stop there to lock that in, and let it run if it wants to. Meanwhile I'll still have to decide what to do with my original purchase - as crazy as it may sound I'm still inclined to let that ride.

If the market was really trending down, I probably wouldn't make this play. It isn't going in the tank though anymore than it's rallying. We seem to be seeing a classic summer sideways action for now.

Maybe I've just been following this stock so closely that I've fooled myself into thinking I know something about it. I'll find out soon enough.

-Geoff

Am I (SOL)?

I couldn't resist...

In my last entry, I said I was going to give more detail about my only remaining position, (SOL). I've covered my decision to hold, and why that might not have been the best way to handle the stock.

Still, if (SOL) was the institutionally sponsored winner that I suspected, I should've been able to count on it to find support around the 10 week or 50 day moving average line. Instead, last week it sliced through these levels on high volume, dropping as low as $16.33 a share - less than 10% above my buy point.

As a CAN SLIM investor, I remind myself that the reason for a stock's price and volume action is not important - reading the action correctly is. However, it's possible with (SOL) I've found a rare exception to this principle.

I have to admit I was baffled by the drop. How could institutions be piling into this stock four weeks ago only to rush for the exits last week? Yes, the solar group has cooled off and the Chinese market is struggling, but other solar stocks - even the real high fliers like (SOL) - were not taking this kind of damage.

Some speculated that it was the secondary stock offering the company had announced pressuring shares. That didn't make sense to me, as it had been announced a couple of weeks prior, and the stock had held up for about a week after the news.

Then I was pointed to a blog entry at Seeking Alpha that discussed the situation. I don't read many articles about stocks I own, and I don't usually put much credence in thost I do read. This article, however, was delivered calmly and made a great deal of sense.

If I understood it correctly, the story goes something like this. (SOL)'s prospectus came out and described the secondary offering, including that the shares would price based on the average closing price of the five days prior to the pricing day. Because the market in general and solar group in specific were week, the very institutions that had been buying (SOL) could now sell it and short it - taking profits and virtually guaranteeing themselves a low price on the secondary offering.

This might all sound too simple, but as further evidence, the moment the news came out about 11:30am that the stock would price on Tuesday it seemed to find a bottom and closed up for the first time in a week. Compare that to Thursday, when (SOL) announced yet another 6 year contract to supply silicon wafers to ARISE Technologies and the stock still closed down 10%.

The situation looks like a golden opportunity for the institutions, which has created a good opportunity for the individual investor. Based on trading the last four days, I think the secondary will price around $18 a share (if I'm understanding how this stuff works). After that, I think this stock can quite easily get back to the low to mid 20's in the mid term, and something around $80 a share in two years.

I will look to add to my position if the stock crosses the 50 dma - currently that's around $19.30 - on big volume. If I do this, I'll keep a tight stop - around 5% - just in case I'm wrong about the whole thing.

-Geoff

Time to Play Some Defense?

Today was the kind of day that really tests my fortitude investing. It highlights my lack of knowledge and experience and leaves me scratching my head what to do.

I don't worry too much about bad news - I try to stay focused on the price and volume action of the market. However, today some of the old stories popped up again: inflation and recession. To some degree the market appeared to have moved past these - or maybe gotten used to them is a better way to put it - but a surprise increase in core inflation sent the market tumbling today.

The NYSE, Dow, and S&P 500 each logged a distribution day; that's now five for the S&P 500 in the past four weeks - a real danger sign. However, the Nasdaq - which has been leading the charge - again avoided a distribution day (today's volume was lower than yesterday's) and still remains at just one. Both the Nasdaq and the S&P 500 remain above their 50 dma, the Nasdaq by 8% and the S&P 500 by 3%.

Even with the progress this rally has made, I still can't see much leadership outside of Energy, Agriculture, and Commodities. This is obviously a catch-22 - if the market's leadership is derived from inflation plays, the rally cannot last long. Somehow though it's managed to muscle ahead for some nice gains, in an orderly fashion even.

Once again I'm wondering what to do. It would be easy to sell everything and take my profits. It wouldn't be wrong, I'm up a good deal. However, when I hear about how O'Neil traded, I'm struck by how often he owned stocks for several years. I think it's possible, and maybe ideal, to find a few great growth stocks and hold them for longer periods. But would O'Neil do that in this market?

Another option is a compromise - I could take some profits to reduce my exposure and let the remainder ride. At this time I'm about 80% invested, and that might be too much. Of course I have my stops in place so I don't really have any capital at risk - but if I lose my gains that's not much better. This option is attractive to me.

I could also sell the positions that are up less and hold my big winner, (SOL). I'm up enough in (SOL) that I should be able to ride out another correction, but my other two stocks would lose their gains or could even become a loss.

My preference would be to wait until I'm more certain the uptrend is over. The problem is, if I hold until I'm sure it's time to sell, it's already too late.

I'm trying to find a balance between greed and patience. My preference is to hold on and see how far the stocks I own can go. I don't mind riding out a correction. I'd like to have some stability and not become 'panicked' into selling each time the market doesn't look great.

I'm not going to plan any new action at this time. Only the DJIA lost it's 10 dma, and the S&P 500 and Nasdaq have the 50 dma to catch them if they continue to fall. Though the market doesn't look as good today as it did last Friday, I don't think the sky is falling - yet. However I'm more skeptical now and I will continue to evaluate my defensive options. If the NYSE should log another distribution day this week I think I'll be forced to make a decision and move on it.

-Geoff

'Twas the Night Before Earnings...

(SOL) announces their First Quarter results tomorrow morning before the market's open. I think most investors would admit that the time leading up to their stock's earnings release is stressful.

I've seen stocks blow away numbers and drop on guidance. I've seen stocks meet analyst's estimates and sell off. I've seen companies miss and really get hammered. The night before earnings, it's hard not to imagine the worst.

A good rule of thumb I try to follow is not buying a stock within three weeks of earnings. This allows for a profit cushion to be built up prior to the announcement and allows more options. If the stock doesn't move as expected, I can sell it before the announcement. If it does increase in price, I now have some profit in case the stock gaps down on the earnings news. As I've discussed previously, I'm looking to never take more than an 8% loss in a stock, so a 15% gap down on earnings could be pretty devastating.

There are a couple of behaviors I've seen stocks exhibit commonly the week leading into earnings. One is that they'll catch some serious buying interest. I don't know if this is speculators or funds that don't want to risk paying more after an earnings beat. The other is the stock will sell off. I assume this is folks who, for whatever reason, don't want to take the earnings news risk. I have not noticed any correlation between the action of a stock right before earnings and the earnings themselves. Someone may have inside info, but the majority doesn't.

I guess that brings me back to (SOL). This one broke the mold. I had a nice profit cushion and expected a quiet few days leading into earnings. I even planned to buy more if the earnings were good and it passed $18.95 - ten cents above the previous high. Instead, in the past three days is exploded 24% from $17.43 to $21.67 on massive volume. Today's volume was the highest ever, and it was up 15%. What to make of that?

On the one hand, I'm afraid of a 'sell the news' scenario. Sometimes when the market expects some good news, the stock will move up in advance of it, and then the smart money will sell into the news and shortly after the stock will begin to drop.

I'm also concerned how much more this stock can run without taking a break. It's up 52% from the $14.29 buy point on April 15th. I wonder if it makes a big move on earnings tomorrow if it will soon after go parabolic (retrace right back to the buy point and even lower).

I don't think either of those will happen though. I think this is the right stock at the right time. They've raised guidance on favorable supply contracts. Almost every stock in the solar group is beating estimates and raising guidance. There is a very small amount of fund ownership in (SOL), when I bought it there were none reported and it just ticked up from four to five yesterday. That means these funds are probably still building their positions, and there is plenty of room for more to buy in. The move up in price was on huge volume, indicating something more than speculation. Even with the recent move in the price, the 2009 forward PE is still a ridiculously low 12.

No, I think there are more reasons to be optimistic than to worry. I'm going to hold on for now and see how far this ride goes.

-Geoff