New Buy:(THOR), Add-on Buy:(UTHR)

My goal when I started this blog was to always post a new buy or sell the day it occurred. I've done so until now, but was very busy this week and unfortunately fell behind. It's a shame, because once the moment has passed the perspective changes and it's impossible to recapture my state of mind at the time of the buy. (THOR) was on my radar for some time from my screens but from a CAN SLIM sense I didn't know what to do with it. It had broken out on a break-away gap on earnings news, a powerful move on 10 times it's normal volume traded. For some reason, it's hard to buy a stock in this situation, I guess human nature kicks in and it feels like once the stock has made a huge jump, it's too late to get on board. Of course there is no logic in this.

Then I was fortunate enough to come across a blog by a gentleman who calls himself the 'Solitary Trader.' This investor follows the CAN SLIM method, and by his account puts a massive amount of ours into his study of it. He has distilled the method into what works best for him, as I believe we should all be driven to do.

In short, he evaluated the best stocks of the last five or so years and found that one common thread was break-away gap ups to new highs on earnings. This is a mouthful, but as soon as I read what he had to say it rang true. It takes the CAN SLIM method to it's purest play - a stock that has just delivered news good enough to cause it to explode past all resistance to a new price high on huge volume. In the past year I've seen it occur enough to immediately see some sense in this method. I don't want to try to relate the person's ideas in my words - I highly suggest you visit his blog and read it from the beginning - good stuff.


When I read this blog a light went on and I decided to buy (THOR). The recent quarterly earnings increased 122%, the 3rd straight quarter of acceleration. The relative strength line is leading and the group is on an uptrend. The stock broke out on volume about 10 times average daily volume. Estimates for the next couple of years look good - 48% and 33% respectively. I entered a position at $23.42 and finished the day up several percent - just the way I like it.


As for (UTHR), I went out of my comfort zone and added on at $115.02. I regretted it almost immediately. This position closed down, and I felt then like I had too much money in the market. I think this buy showed a lack of patience. This market is just not solid enough to have much capital in - right now I'm about 50% invested. I have a tight stop around 4%.


-Geoff

Post Fed Thoughts

I've been taking this new rally very slowly, and so far it's keeping me out of trouble.

I have a mindset I use to try to keep myself on track. Before I make any new buy, I ask myself: 'If this trade loses money, will I be disappointed in myself?' Obviously any losing trade is disappointing - but they do occur. My goal is to avoid any mistake within my control that leads to a losing trade. Since I started this blog I've broken my own rules at times, and there's no excuses for that. As I stated recently, those times are over.

For instance, I considered today adding to my position in (UTHR). I'm not a big fan of the add-on buy, but the stock seemed to be gaining momentum and moved up in big volume. I could've added shares up to $115.58 within the CAN SLIM rules. However, I knew the FOMC was meeting today to discuss interest rates, and at those key points discretion is the better part of valor. It's too easy to lose money and too hard to make it, so I continue to temper my aggressive nature and work toward a more patient and disciplined approach.

In the past year the market has displayed a good deal of volatility around these Fed decisions. Today the market finished up nicely in a powerful move on great volume - but the wise play I think is to see what it does tomorrow. I expect it to fade some, and that may provide an opportunity for another buy or it may lead to the end of this young rally. As long as I remain patient and measured in my approach though, I will have no regrets however it ends up.

-Geoff

New Buy:(UTHR)

I stepped back into the market today with a purchase of (UTHR) on it's breakout with an earnings beat announced this morning.

This rally is new and could end tomorrow depending on the jobs number, so I've assumed some risk there, but the stock itself has a lot of the qualities I'm looking for: small float, relatively high short interest, triple digit earnings growth and large estimates for the future, leading relative strength and a strong group. Add to that a breakout on 3 times normal volume on a day when the market was down and the stock looks pretty strong.

I'm really not a big fan of biotechs, feels like roulette to me, one lawsuit or dirty look from the FDA and the stock can get creamed. Nonetheless, I couldn't ignore the strength of this group, and I like that UTHR is a first stage base (it formed it's cup pattern during the current bear market) and has made a new high with the breakout - no overhead resistance.

There were also a number of bullish characteristics in the chart formation, including several occurrences of tight closes over a number of weeks - I learned in 'The Successful Investor' that this is a positive feature.

Just the same, this is a new rally in a bear market so I've got a very tight stop, around 3% below my buy point. I don't see any reason to risk more capital than that now - if the market or the stock turn south I want to get out quickly with minimal loss of capital.

-Geoff

Much Needed Break

Hard to believe it's been two weeks since my last entry here. Well, maybe not - I really do tend to run hot and cold. After the roller coaster ride my last foray turned into, I've used this period of correction for a much needed mental and emotional break from the market.

I've probably devoted about 20% of my usual time my market homework over the last couple of weeks. There are certainly other valid ways to spend time during a correction - reviewing past trades, adjusting rules as needed, doing extra reading - but in my case I think the best thing for me was to take a step back.

My recent mistakes now seem relatively distant, which allows me to proceed with a clear head. In the past I've been overly anxious to put money in the market at every opportunity, and that's cost me. Today we had a follow through day, signaling the start of a new rally. Formerly I would dive in at the first stock that I saw in a new rally. I don't feel that sense of urgency now. My screens are showing some interesting stocks, but I'm suspicious - I'll look them over carefully and see if anything looks sound enough for purchase. I'm tired of losing money.

One other thing I want to spend some time on soon is an improved trade log. My coworker is a successful CAN SLIM investor, and he's made himself a trade log database to track his trades. This blog is less useful for that as it's anecdotal more than statistical. I need to have a firm grasp of exactly what a stock's numbers looked like when I bought it, what it's industry group was doing, what kind of chart formation it had; and I'd like this data to be sortable and filterable so that I can detect any trends. It will take me some time to put this together, but I think in the long run it will improve my results.

-Geoff

Sell Stop:(CLR)

I stopped out on my (CLR) position today at $75 for a 2% loss.

I could write a bunch of fancy sounding jargon about a capitulation day, about how the stock reversed and closed in the upper half of the range, how I was shaken out, etc...

It's all bull crap. I opened my last post with the only statement that matters "I broke the first rule of CAN SLIM investing today..."

Until I have the discipline to follow my own rules, I will never be a successful trader. It just isn't any more complicated than that.

That's not all that's required to be successful - but it's the first step. Nothing else will work without that foundation. No amount of effort or knowledge can save me from myself, until I decide to follow the rules of the system I claim to be using. Though I've said it before, I hope this is a turning point. I hope I've embarrassed myself enough to finally check the ego at the door and trade a machine - without hopes or fears and always putting the odds as much in my favor as possible.

That's all for now - I'm going to keep watching for a follow through day, and when it comes I'll be ready. I know WHEN to pick a winner - during a rally. I know HOW to pick a winner, I've owned a few. I know when to SELL a stock - and I put it in writing. Now it's time to start acting on what I know, not what I feel or think.

-Geoff

New Buy:(CLR)

I broke the first rule of CAN SLIM investing today, and bought a stock in the midst of a market correction.

This is not something I take lightly or would do in many situations. If my instincts are wrong and this trade doesn't work out, I may never do it again. Even if this trade does work out, I may never do it again. When the market is in a correction, the odds are not good on a long position.

Nonetheless, I took a position in (CLR) for about 30% of my portfolio. If we were in a confirmed rally, I might've put 100% in, perhaps even added some on margin.

This stock is CAN SLIM perfection. I mean that literally - it is the only stock to appear on my strict CAN SLIM screen. The last stock to do so was (RIMM) last fall.

The sales and eps growth are in the triple digits and have been accelerating for the last 3 quarters. ROE is 39%. The number of funds owning the stock has doubled since last September. The debt is high at 26%, however that is a very low number for this group - and this is arguably the number one stock in the number one group.

Oil is one of the few things that have been working this year - and it has been working big. (CLR) has been the leader in the US Oil and Gas Exploration group since shortly after it's breakout the week of March 28th. Since then it's demonstrated technical perfection, more then doubling over 11 weeks before pulling back to the 50 dma over the past 4 weeks. Early this week it broke the 50 dma in the morning, then retook it to close above it and at the high range of trading for the day - a very bullish sign.

When I saw the news last night that (CLR) was getting better than expected results from their second well in the Bakken shale, I thought there was a good chance it would move today - but I didn't expect it to explode like it did. However, I've been watching it long enough that I was ready and got my buy stop order in for $76.20 - it was filled at $76.29.

Because I'm playing around in a weak market I have the stop loss order in at 5% and will move it up as the stock advances (if it advances). I'll reduce my risk as early as possible. I think this stock is worth the chance though, it has the markings of a major winner. The last two times it cleared a short area of consolidation it never came back into it, so I'll watch for that same behavior now.

Of course there is always the chance that crude prices drop tomorrow and this thing comes right back on me. We'll see...

-Geoff

Sell Rules

Now that I've been in cash for a couple of days, it's so hard to believe I held on to (SOL) for so long. The market is clearly broken for a few weeks now, I clearly should've just taken what profits I had left when it began correcting. It's so nice to watch now with nothing on the table, no stress with the ups and downs of the market. Of course I'm still a bit bruised from my mistakes, but I'll have years to make up for them.

Tonight I want to publish the sell rules I'll use. I'm going to list the defensive sell rules and the offensive sell rules. They are, like everything else in this venture, a work in progress - but I will follow them to the letter until I have a good reason to make a change. I'm going to also attempt to post them in short form on the sidebar of the blog website, for quick reference.

As I've stated, many of these rules are copied verbatim from a post made by williamsj55 on the investors.com forums. They are his interpretation of the CAN SLIM sell rules, and I could certainly rewrite them in my own words but I see no need. He got them from Bill O'Neil, who got them from many other traders and his own experience through the years. I've adjusted them as fits my style, but made no fundamental changes.

Defensive Sell Rules

• Sell anytime a stock falls 7% below my purchase price. This is described in 'The Successful Investor' (also by Bill O'Neil) as the "3-to-1 profit and loss percentage plan." In short, it means that if I lose 7% on two trades for every one that I make 20% on, I can stay in the game with relatively small loss of capital until my pick percentage increases.
• When one of the major indexes (Nasdaq, S&P 500, or the Dow) flashes 5 distribution days in 4 weeks, I will immediately sell any stocks up less than 20%. If I am holding any 'big winner' stocks (up more than 20%) I will put a 5% trailing stop order in for them.
• The defensive sell rules trump all offensive sell rules.

Offensive Sell Rules

• Take profits on a stock that increases 20-25% in more than three weeks. I will use a 5% trailing stop loss once a stock reaches a 20% increase from the proper buy point, in hopes this will minimize my downside and allow the upside if it wants to run. If the trailing stop is hurting more than helping I'll adjust my approach.
• If the stock shoots up 20% from a proper buy point within 3 weeks, I will try to hold that stock for 8 weeks. I will place a stop at break-even to ensure I don't lose money, but unless the market enters a correction I will leave the stop there and evaluate the stock after three weeks.
• I will sell if a stock makes a climax top. Warning signs for a climax top are: greatest weekly price spread, exhaustion gap, and break of the upper channel line. I'm not going to go into detail about these here.
• I will sell if a stock slashes it's 50 dma on heavy volume and fails to rebound above it within a day or two. In most cases, my other sell rules would have me out of a stock before this could happen.

That's it for now. Pretty simple really, but should keep me out of trouble if I follow them. A cursory look at my past trades indicates strictly following these rules would have me in better shape than I am today.

-Geoff

Sell:(SOL)

Today I completed the round-trip journey I began with (SOL) in April. I bought it for $15.25 then, watched it rise to $29.48, and then watched it right back down to $16 where I sold today for about a 5% gain. I can assure you the ride up was more fun than the ride down.

The only review I think that's necessary for this trade, and for (SOHU) which I never posted a review for, is on the sell side. They were both great buys and bad sells.

There is one sell rule I'll incorporate that would've preserved much of my gains in both of these stocks, and that is once the market enters a correction, I will put a 5% trailing stop on any big winners I hold. This will allow them to run if they want to, but protect my profits.

This would've had me out of (SOL) around $22 for about a 45% gain and out of (SOHU) around $75 for about a 15% gain. This compared to 5% and 9% gains respectively is reason enough to employ the strategy. Add on the reduction of risk being in cash and it's clearly a sound rule.

Yes, there will be times when I stop out and the stock powers higher after that. My goal is to book profits on trades, not to ride every stock to it's ultimate peak and sell there. Learned that the hard way recently.

The most important rule is still to invest with the market, and this sell rule incorporates that into my strategy. I'll post my full rule set here in the next day or two.

On a personal note, I'm pretty embarrassed and demoralized by this trade. There's an analogy that I thought of tonight and will use to work past this:

There's a quarterback who's led his team down the field in short time, doing everything right, and positioned them inside the red zone ready to score. Instead he makes a rookie mistake, forces a pass into double coverage, and throws an interception which the other team returns for a touchdown. Instead of bringing his team 7 points (assuming the PAT) closer to victory, he's put them down 7 points (you know).

It's still early in the game, and the team can't afford to have their quarterback lose confidence. He has the ability, he just made a mistake. If he focuses on the mistake, he will inevitably make more. If he learns from the mistake, focuses on his training, and remains patient, he can surely bring his team back and win the game.

This is how I see myself. I pressed, and I got burned. It doesn't mean I can't do this. It means I still have a lot to learn about patience, ego, and trading stocks.

It's a helluva ride...

-Geoff