What I'm Working On

In addition to my daily homework on the market and my positions and watchlist I try to make some time to continue reading books that may help me improved. I've been a bit 'stuck' on Trade Your Way to Financial Freedom for some time. It's academic and a bit dry - though I think it's a worthwhile read.

To greatly oversimplify the content, the book is aimed at helping investors develop as mechanical a system for trading as possible. In fact, many of the topics are directed at program trading (automatic computer trading), though the principles of disciplined trading apply just the same to an individual trading manually.

While I do not necessarily intend to program trade, I would like to take what I can from this book and apply it to my trading with the goal of becoming more disciplined. Additionally, I may have found a nice convergence between a skill I need to develop for my career (I'm a developer for an Identity Management application) and my trading career. I need to learn a software language to further my career. I'm going to be learning JAVA as this is the language most commonly used in my area.

I can put this to use as well in my trading, as I recently had an idea spring out of a frustration I have with IBD's Custom Screen Wizard. What is lacking from this application is any method to gather or store (in a time efficient manner) the information from the screens. As important to me as the current data is, I find historical data equally important. I would like to graph and trend the information on stocks like the price when the enter my screen, how long they stay on it, and the price when they drop off of it. I could do this by exporting the data into spreadsheets every day, but that would take too much time.

What I plan to do is write an application that will automatically execute my screens each weeknight and load the data into a database. I'll then come up with ways to manage and display this data so that over time I should be able to draw some mathematical conclusions about the potential for a stock when it makes one of my screens. Eventually I would hope that I can translate this into a mechanical trading system. For now though I've got a lot of work to do learning a new programming language.

I also ordered another book I want to read - Jack Schwager's Market Wizards. I need some inspiration. I think I'm doing well now but I want to read about some people who've made it - sometimes it's hard not to get discouraged after a string of failures, and I find these stories help get my positive outlook back.

So Where to Go From Here?

Over the past month I bought two solid stocks, (SNDA) and (TNDM), and stopped out on them after making a conservative decision to trail my stops due to a quick distribution day in this new rally.

Then I reminded myself that I still lack patience and discipline by throwing some money away on (SDS), an ETF that works like a short position in the S&P 500.

So what now? Well, the shorting debacle reinforces my need to formulate as strict a system as possible for myself, with all 'rules' clear and well documented. Before my recent vacation I began some work on my trading system using 'Trade Your Way to Financial Freedom,' and I feel it's critical for me to renew those efforts. I intend to begin posting my work here shortly.

The market may even be seeing the beginning of a new bull market as I type this, or we may be in a bear market rally. It doesn't really matter - at some point there will be a new bull market and the more prepared I am, the more I stand to profit. I've dug myself into a considerable hole in my first two years trading, and I owe it to myself to put the effort in required to dig back out - and then start producing the gains I'm working for.

My goal remains to trade successfully enough to retire from corporate America. I've got a long, long way to go, but I view this like quitting smoking. The only way to get 10 years smoke free is to pick a day and get started. What happened in the past is only valuable as it helps me to improve today.

-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

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