A Couple of Good Trades

Even before the market followed-through on March 20th to begin the most recent rally, my screens began returning a half-dozen or more oil stocks every night. The screens worked well, they spotted the strongest group and I didn't act on it.

As I've mentioned, I listened to all of Bill O'Neil's radio interviews on TFNN. One thing he stressed over and over was that the biggest winners tended to be companies which have IPO'd within the last eight years. Most of the oil companies coming up on my screen were 'stodgy' older companies that had been plodding along for years.

However, like the recent fertilizer boom, I could have recognized that the 'N' in CAN SLIM - the 'New' - was the incredible market forces moving oil prices higher. This was great for the group but another reason I avoided it - I don't understand commodities and try to leave alone stocks that trade off the dollar, inflation, or other similar factors.

I'm not sure I was wrong in this. There are a reasonable number of good opportunities in the market. If I really don't have a 'feel' for a particular sector of the market, I don't see much harm in avoiding it. I've been communicating via email with a reader of my blog who's been very successful using the CAN SLIM system, and he filters out all commodity stocks so they don't even show up in his screens. If he doesn't feel he can understand the business to some extent, he doesn't want to own it. I don't think anyone can argue with this approach - perhaps feeling some level of confidence in a stock is part of the intangibles that go into making one a successful trader.

I'll add that I also thought the oil sector looked extended, and many of the stocks that were breaking out of this group were doing so on poor volume. In a new rally after a large correction, I was looking for new leadership. To see the same old energy group moving up further in low volume looked like a red flag to me.

I did see (CLR) take off and in early April I bought a bit of (SD) as it looked similar. It didn't do much for me and I stopped out even before it took off recently. My experience trying to find the second best stock in a group has not done well recently - I've stopped out on: (PWRD) - the leader is (SOHU); (GU) - the leader is (SOL); and the above-mentioned (SD).

Then on April 16th my Pitbull screen showed a stock that had exploded from a v-shaped cup base on massive volume - (SOL). Technically the cup was flawed - you want to see a rounder cup pattern, not a 'v' shape. However the fundamentals were tremendous as was the volume pouring into the stock on it's move up. It had IPO'd just six months ago, and the growth estimates were good. It was trading around $15 and I calculated a two year price target of $84. As far as the base was concerned, I'd read a number of times in IBD that IPO's don't always form perfect bases. I decided to buy it.

I had missed this stock's breakout and bought a bit higher than the rules call for. The buy point was $14.29 and I bought at $15.25 - almost 7% above the buy point (the limit is 5%). I liked how the stock was acting post-breakout so I took a chance. (SOL) increased over 30% in the next three days, which qualified it as a potential 'big winner' according to 'How to Make Money in Stocks.' This means I should try to hold the stock for at least eight weeks from the breakout.

I had never had a stock act this well. It went on to advance as high as $29 - 92% above my buy point. As I've discussed in prior posts the book is not written on this trade yet - but even if I botch it now I still have the experience of finding this kind of big winner stock. That should benefit me greatly in future trades.

By the time I purchased (SOHU) in late April I had already started this blog and I wrote about it then, so I won't rehash the specifics of that trade now. Suffice it to say that for the first time I owned two winning stocks. I wiffed on (PWRD) and (GU), then decided I didn't want to risk any more losses eating into the gains of my winners. I had learned my lesson on that last year. If I hadn't made another trade after buying (RIMM), I could have finished the year up 10%, instead of down 20%.

I guess that completes my synopsis of what brought me to this point - if you're looking for a sleep aid you'll have to go elsewhere now! This has been a very valuable exercise for me, and at the risk of sounding like I'm bragging it's helped me see the progress I've made over the past year. This is not to say that I'm doing great now, but rather that I think I'm reasonably less moronic.

In the future I'll spend my time here devoted to my thoughts on the market, my portfolio, failed trades (I still need to review (PWRD) and (GU) in depth), and whatever else comes to mind related to trading stocks.

-Geoff

Signs of Progress

My previous discussion of my investing history dealt with the time leading up to and including the November '07 through March '08 correction. I had subscribed to the IBD premium services of Daily Graphs Online and the Custom Screen Wizard. By this time I had some growing confidence in my ability to read charts, and felt it was worth paying $91.50 a month for accurate information to work from. I believed then, and still do, that I will easily recoup this cost if it helps me to improve my investing as I expect it will.

The Custom Screen Wizard can by difficult to use at first. When I tried to put in all the criteria I've read about in 'How to Make Money in Stocks' and see discussed in IBD, it wouldn't return any stocks. This was an important lesson to learn - almost no stock is 'perfect.' If it were that easy, anyone could put this screen together and buy whatever stocks it returned. As I've said before, trading stocks is as much an art as a science.

So, with little experience under my belt, I had to try to weight criteria and decide which to jettison and which to loosen up a bit. I made a strict CAN SLIM screen just in case it returned any hits (so far the only stock it's returned is CLR - well after it made it's big run). I made a few more relaxed screens as well, one that focused on accelerating earnings, one that focused on big earnings growth in the most recent quarter, and one that focused on just the top twenty industry groups.

I also built one screen looser than all the rest, based on the Pitbull system that had introduced me to IBD and CAN SLIM so many years ago (I still have the original Pitbull document I ordered for $50 back then). This screen was targeted mainly at stocks nearing a 52 week high on volume at least 50% higher than average, along with a few basic criteria to return only fundamentally sound companies.

One of the first stocks that came up on several of my screens was (BRKR). This stock had outstanding fundamentals and was a member of the same industry group as (ISRG), a huge winner last year. The group was in the top 40 and I had wanted to stay in the top 20 industry groups, but the fundamentals on (BRKR) and big volume breakout lured me in. I traded the stock several times to a net of zero - I risked a great deal of capital for no return. Looking back on it, the industry group was not necessarily too low, but it was trending downward. (BRKR) ended up lowering guidance due to currency exchange rates and falling apart shortly after I stopped out of it in early April. I had sold half of my position just prior to this, a good move that preserved some gains. I want to remember in the future that it never hurts to take some profits off the table. I'm often hesitant to sell. It's also an excellent reminder that the sell stop is my friend - I stopped out even the remainder of my position, the stock proceeded to quickly drop another 20% or so.

After (BRKR) I resolved myself again to stick with the top groups, and next (MOS) caught my eye. I knew the fertilizer play was extended, but I'd had success with solar and steel last year when they were extended too, and I thought the fertilizer group had at least one more run in it. I thought (MOS) looked the best in the group based on past performance and future earnings estimates. What I was just beginning to play around with was forward PE, and I didn't really apply it when I looked for a fertilizer stock to go with - otherwise I might have chosen to buy (CF) instead of (MOS).

I believe what 'How to Make Money in Stocks' teaches, that I don't want to avoid a stock due to a high PE ratio. However, I think the book understates (or ignores) the value that a forward PE can offer when trying to compare group mates to see which has the best growth prospects. I won't base a buy decision entirely on forward PE, but I do include it in my evaluation.

I had as much as an 18% gain on (MOS) and let it come back, selling for just a 2% gain. Honestly, I just wasn't paying attention to it well enough. It got up and I felt pretty good about it, when it came back I remained a bit too calm on it, until finally it stopped out just above my buy point. This was another good lesson for me. Since I believed this group was extended, I should have placed a stop loss to lock in a 15% gain once I had it. This was not the kind of trade to relax and let ride for the long run.

It was an expensive lesson, but I had reason to be optimistic. Throughout the previous year, my mistakes cost me capital. In 2008, my mistakes were costing me unrealized gains. I felt this was a big step, and my confidence began to grow.

Boy, did I miss the oil trade though.

-Geoff

Happy Memorial Day

I hope everyone is enjoying a safe and happy Memorial Day weekend.

My gratitude goes out to all the men and women - and their families - who've served our country. Today especially we honor those who made the ultimate sacrifice to protect our freedom.

Thank you.

-Geoff

Sell Stop:(GU)

I stopped out of (GU) today for a 5.4% loss. This stock was up as much as 11% intraday from the buy point (16.16) in the time I owned it, but never closed above 17 and never got much traction. It usually takes me some time away from a trade before I get an idea where I might've gone wrong. Looking at it, the company is a bio-diesel play in a top five industry group while the biggest story going is oil prices and energy. Looks like a no-brainer, and it's a good lesson in why it's a good idea to cut your losses - no matter how good the story is, if a the market or a stock rolls over you can get creamed.

I think this might be a case of right stock, wrong time. I've followed a lot of good looking stocks that broke out the past week or two only to collapse soon after. That should've been my sign not to put any more money at risk. Next time when I'm so apprehensive to make another buy, I will take the more conservative approach.

I'm also pretty sick of the add-on buy within 5% of the original purchase. I don't think I'm going to do it anymore. I think I'm going to manage my money like this:

1) With my current portfolio size, I'll own a maximum of three stocks
2) My initial purchase into a stock will be for 20% of my overall capital, as close to the buy point as possible
3) If the stock works, and offers an additional buy point, I'll purchase another 10% of my overall capital - that will complete my position with one third of my capital in the stock
4) If a stock is really working well, I may divert another 10% of my capital to it at the next buy point, and so on

This suits me better, I think. It has me going in slightly stronger that recommended in the beginning, but since I don't follow up the initial purchase until I'm well ahead, I should quickly be either out of the stock or reasonably allocated.

I also think I will move my stop loss orders a little tighter. When I pick the right stocks, they seem to take off and not look back. I think past the first day or two after my purchase, if a stock is still flirting around below the buy point I just want to cut it loose and move on. I'm still thinking about this one, and tend to place my stops situationally rather than by a hard and fast rule - of course never more than 8% below my purchase price.

I took a beating on (SOL) today to. It's one thing to talk about how I'm going to hold on to a big winner for a long stretch, it's another altogether to watch my gain evaporate from 92% to 50% in just three days. Ouch. I think I need to turn off the ticker and just check the chart in the evenings or I will have a bleeding ulcer by the Fall. If I'm right, it will find support at the 50 dma. If I'm wrong it will hurt, I'll recover and learn from it and move on. I must view this process as a marathon rather than a sprint.

I'm never as smart as I think I am on the good days, nor am I as dumb as I feel today.

I'm not looking for anything new now, the market's in a correction and it's just a waiting game at this point. I have never held a stock more than a couple of months, so it's almost relaxing to resign myself that I'm in for the long haul on (SOL) and (SOHU). Of course the market will dictate how long I hold them, but I think I'll last longer in this business if I find a winner or two and ride them for awhile then keep searching constantly for the next fast buck. You can make money either way, it's just a matter of finding the style that suits you.

-Geoff

Thanks for the Feedback

Just wanted to leave a quick note of thanks to all the folks out there who've given my feedback on the blog. I hope you're getting something useful out of it - I sure am.

A week or two ago I added a link to the feed to 'email the author.' I didn't test it. It turns out that some of you actually attempted to email me, but I didn't receive your notes. I'm very sorry for this.

It turns out that blogger doesn't actually pass along the necessary data so feedburner doesn't know where to send the email. I don't want to post a link to my email because the spam-bots will get me.

I welcome all feedback. If you would like to send me your thoughts you can either:

1) Leave a comment - this is public
2) Subscribe to the feed. When you receive the next post it will arrive from my email address, which you can then reply to - this is private

I've gotten the 'email the author' link working now for new posts - just make sure it doesn't say 'noreply@blogger.com' and then it will come to me.

Sorry again to anyone who previously took the time to email me.

Thanks again for spending a little time here!

-Geoff

One Year in the Books

One year ago today I began a concentrated effort to become a successful stock trader. The market didn't throw me much of a celebration for my first anniversary.


The overall market extended it's decline today, crashing into the close following the 2pm release of the minutes from the last FOMC meeting. If I invest for 50 more years, maybe I'll understand why the market would sell off on the 'news' that inflation is a problem and growth is slowing. Who on planet earth hasn't heard these topics for the past year? That's why it's a fool's errand to try to figure out why the market moves - I spend my time on how it moves and what that means for me.


That brings me to my second frustration. I'm a big fan of Investor's Business Daily and the associated premium services. I read the paper every night. One section I never miss is the 'Big Picture,' which provides a synopsis of the market's action along with a statement of the market's outlook - whether it's in a rally, rally under pressure, or correction. I make my own decisions about the health of the market, but I also rely on the paper as a resource.


In the year I've been investing, I don't ever remember the market outlook going straight from Rally to Correction, but that's exactly what happened today. The column went from an almost too bullish stance straight to an end of the rally. They might be right, but to skip the 'rally under pressure' step almost implies that they were behind the curve on this one. I'm still not sure I agree we're in a correction, the S&P 500 and Nasdaq are still above their 50 dma's and have not even tested them yet. The Dow fell below it's 50 dma, but this index does not represent the health of the overall market well anymore.


Nonetheless, I will go ahead with the defensive playbook. Here's how I plan to handle my portfolio:


(SOL) is off it's highs but still up about 70%. I should be able to ride out a correction if it finds support at the 50 dma. It should, but obviously I don't know if it will. I may sell half of my position to lock in the gains and leave the other half for now.

(SOHU) is up about 14%. This one is trickier. Even if it does find support at the 50 dma, I don't know if it will hit it below my buy point - the 50 dma is still only around $60 and my cost basis is around $69. I may trail a stop up behind this one and just get out. I can always buy back in if it does bounce off the 50 dma.

(GU) is even. I will see how it opens and either lose a couple percent if it opens down or trail a stop up behind it if it opens up. I like the stock but I have no cushion to play with so it's best if I just try to get out of it.

As for the results of my first year trading, I lost about 8% of my capital. Considering that 2 weeks ago I was down 20%, I'll take it.

-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

A New Beginning

When I last left off the story of our intrepid investor, I was flailing about like a drowning man looking for a life preserver. I was down almost 19% in just six months, and desperate for a winning stock that would get me even. I was using a service designed to provide buy and sell signals based technicals, and if the fundamentals met CAN SLIM criteria I would consider buying.

It wasn't working for me.

Looking back on my trading those first six months, it's embarrassing. I read my trade logs and I want to go back in time and tell myself to calm down. I had no patience, and little discipline. Fortunately, I never violated the 8% stop loss rule, and that prevented me from really ruining myself.

I can clearly remember the sick feeling I had with each new loss. I'd dug the hole a little deeper, and would now need an even bigger winner to climb back out. That was my mindset. I think I probably was trading like a gambler who gets behind - and we all know how that story ends.

However, at some point just before the brief rally of November last year, a small bit of sanity began to emerge. As emotional as I was about my situation, I forced myself to evaluate my trades and think about what I was doing wrong. I tried to recall what I'd read from the book's by Livermore and Darvas, as they were a bit more simplistic than How to Make Money in Stocks. In particular I looked at Livermore's 'top down' approach. I thought maybe I was making things too complicated, and I decided to start reviewing the best industry groups and looking for the best stocks in these groups that were near a buy point.

I believe this was a key step in my investing career. I previously made a habit of 'making excuses' for stocks - I would forgive their flaws and try to find a reason I should by them. However, I had now suffered enough losses that all stocks began to look bad to me. Instead of opportunities for gains, every stock looked like an opportunity for a loss. I was skeptical of them all. If I was going to put my money on the line with a stock now, it had to have a pedigree. I wanted it to prove to me why I should risk my hard earned capital on it. I think this is the way it should be.

My perusal of the top industry groups led me to two stocks: (STP) and (MTL). The former was a solar power company that had made a nice run, the latter a vertically integrated Russian steel company that had also been on a tear. Both were near a buy point, both were top ranked in their groups, and both industry groups were in the top five out of 197.

As simple as this was, it worked fairly well. Despite the fact that both stocks had already had large advances and the rally was a difficult one, I made a small profit. For me at that time a small profit was a big deal. It confirmed for me that no matter what, I should look for and buy only the very best stocks - no matter how long it took them to come along.

The November rally failed fairly quickly, and I tried some shorting a few times as the market corrected. If I ever short again, it won't be for a very long time. It is much more difficult that being long a rally, and with my lack of experience not worth the risk.

We were in this correction as the New Year came, and this yielded the next step in my progress. I keep very detailed records of my trading activity and my returns. I use Google Docs and would recommend it for anyone. I have access to my records from any Internet connected PC, and it's free. For tax reasons and clarity I decided to 'retire' my 2007 trading activity, so I copied the spreadsheet to a new tab for that year, then took the original tab and made it my overall return. Finally, I created another new tab for 2008, and put in the starting capital numbers as the ending capital from 2007. Obviously, this meant my returns were zero.

That zero looked great. No negative, just a zero. If I didn't do anything, didn't buy or sell, I would not be negative. I didn't have to catch up. I wasn't behind. I was even - zero. My mind shift was tangible. I was going to preserve this capital - 2008 would not be a repeat of 2007. Patience and discipline.

As the correction continued, I spent more time evaluating my past trading behavior and began reading 'The Battle for Investment Survival' by Gerald Loeb. I find this book slow going, and I still haven't finished it. I cancelled my subscription to the Market Edge service, and got a subscription to Daily Graphs Online and Custom Screen Wizard - both premium services from O'Neil + Company. They are expensive - I pay $91.50 a month for them - but I could not find consistent and accurate financial information for free on the Internet, and I believed if they improved my investing the tools would easily pay for themselves. I felt more confident reading charts by now, and I believed in my ability to learn and grow more than any recommendation service.

I began building different screens and tweaking them. I didn't know when a new rally would come along, but I wanted to be ready. I had a nervous anticipation - now that the fog had cleared I wondered if I would see the new industry groups moving in strength, or if I would miss them. I wondered if my screens were too tight, or too loose. I listened to a series of interviews William O'Neil did on the Tiger Financial News Network, took notes, and tweaked my screens based on what he said. Just nine days after his last interview on the show, when no one was expecting it, Bear Stearns nearly collapsed and the market found it's bottom.

It was time to see if I'd really learned anything.

-Geoff