Watching and Waiting

IBD viewed yesterday's action as a follow through day, and it did meet the technical definition as the S&P 500 was up nearly 2% on higher volume than the previous day.

Nonetheless, the stocks on my watchlist had a decidedly muted reaction - not the kind of explosive action I'd expect to accompany a follow through day.  In fact, the industry groups that moved the market yesterday have been among the weakest performers.

What does all this mean?  I will keep an open mind.  It is obvious to everyone that the financial system and US economy are in big trouble.  Whatever form the government bailout takes, it will most likely increase inflation and although it will help, we are still in for a protracted economic slowdown.  In spite of this, the market may rally and I'm ready.  I will take a conservative approach and view this as a bear market rally - I think we have some ways to go before the next bull market.

I will buy stocks only on convincing breakouts.  Many of the stocks I owned in the previous failed rally have held up very well during this correction and remain on my watchlist.  If the market wants to run a little I will join the ride, but I'm not going to take any undue risks.

-Geoff

Watchlist Time

What an exciting week in the market!

I'm greatly enjoyed the break from the daily concern over the market, but never let it completely out of my sight because I know the market often turns when the majority least expects it. We may have experienced the bottom of this bear market with the failure of Lehman Brothers over the weekend.

The market tends to repeat itself over time, and huge washout or 'capitulation' days with dramatic drops in the market accompanied by a significant news event and a spike in fear (measured by the VIX) can often signal a bottom. It's certainly been dramatic and volatile.

It's pretty contrarian to start looking for opportunities and building a watchlist just when the stock market and the economy appear as bad as they can get. I don't know why this paradox works, but it does. Perhaps it's just that things finally get so bad, they've no where to go but up.

I certainly won't rush in to bottom fishing or value investing here - but I'm tuning back in to the market and will keep watch for a follow through day. I'm building my watchlist again and though some of the stocks I liked have broken out early, like (BKE) and (THOR), there will be plenty more opportunities.

There are plenty of factors to set up for a rally at this time - the capitulation in the financial sector (AIG had to get bailed out today by the Fed on the heels of the Fannie and Freddie takeovers), getting close the October/November in an election year, housing market looks ready to put in a bottom, and this bear market has lasted a year and corrected well enough that we could rally from it.

Despite all of this, I'm not in the business of predicting the future. I'll be prepared but the market will let me know exactly when it's time to get back in. I'll be ready when it does.

-Geoff

Sell: (THOR)

DISCLAIMER - This post is being made several weeks after the actual date I sold the stock

Today I followed my new rules and sold out of (THOR) for just over a 2% gain. With the backdrop of the current market (in other words, lack of leadership and no lack of failed breakouts) I didn't need to see any more than five distribution days on the NYSE indices to get me out. This is a marathon, not a sprint, and there will be much better opportunities ahead.

I began my investing career in a very challenging environment, and the difficulty it's given my over the past year and a half should serve me well over time. I've seen the bad, so I expect I'll recognize the good. I haven't gotten away with any bad decisions - they've all burned me so I didn't make habits of them.

I actually consider this short rally my most successful stretch investing - and I lost money during it. What made it successful though was a few things:

• I entered the market slowly and deliberately
• I bought only a few high quality stocks from leading groups with great prospects
• I kept a tight stop on my positions, so my risk exposure was low, and so were my eventual losses
• I stuck to my rules and sold out when the distribution days mounted

Because I believe in the rules (they've worked for many investors) I know measure my success or failure based on how closely I've followed them - as well as the results they produced. In this case the system allowed me to dip my toe in the water, and then when I found it was still too cold to back out with little damage.

I'm also encouraged still by the new approach to the break-away gap up on earnings method. I've watched a number of stocks that fit this model and without question will look to buy this type of breakout in the next rally. There's always another.

One final point - other areas of my life, both professional and personal, had greatly increased my overall stress level. That is as good a reason as any to step away from the market, and it's why I haven't kept up with this blog nearly as frequently of late. It takes a clear, unemotional approach to do well in the market, and when I'm unable to attain for some reason that I believe it's better to just cash out and wait until my head is level again.

-Geoff

Sell Stop:(MPWR)

The bad news is that I stopped out on (MPWR) today, one day after I bought it.

The good news is that I correctly assessed the market, so my loss was minimal 3% on a small entry position.

There's not much more that needs to be said - the NYSE indices logged another distribution day today and leaders are breaking out and breaking down with regularity.

The market is doing it's best imitation of the Amityville Horror: 'Get out... get out...' I'm leaving (THOR) in place with a tight stop and will certainly not make any new buys.

-Geoff

New Buy:(MPWR)

(MPWR) came up on what has been my best screen last night, and it really has most of what I look for. Earnings and Sales growth decelerated in the recent quarter, but beat estimates and were good enough for the stock to breakout yesterday on volume almost four times average. The stock cleared a first stage cup base on base buy point of $27.60 to close yesterday at $29.91.

Estimates call for earnings to grow 44% this year and 30% next year - just the kind of growth I look for. All the other fundamentals are solid and the group strength is good.

What concerns me a bit more is the general market. The currently rally is not strong. I decided that I like (MPWR) enough to take a chance on it, but I wanted to see what the overall market looked like today - I'm skeptical and cautious.

Initially (MPWR) shot up but throughout the day it pulled back with the overall market. On a positive note it held the buy point most of the day and closed above it. My concern was that I didn't want to make a new buy into a distribution day, which would've been the third in three weeks for the NYSE indices. Midday the market was headed for just that - down on higher volume than the prior day.

(MPWR)'s pullback looked like a healthy break from the prior day's move on much lower volume, so I decided to pick some up at $27.64 with a tight stop of 3%, and just close out the position around 3:30pm if the market was on track for a distribution day. The afternoon came and as the market continued to drop volume dried up, so I held my position.

I still have the tight stop in place and I moved my stop up on (THOR). Many breakouts have been failing and I don't think this is a market to give stocks much room in. If they work, great - otherwise I get out.

-Geoff

Caution and Patience

I thought last Thursday that the market was ready to roll over. It looked like too much distribution too quickly into a new rally, plus the Dow and S&P 500 were turning tail at their 50 dma again. Friday didn't do much to change my mind, as the market moved significantly higher but on lower volume that Thursday - I thought this set up for a drop on Monday.

On the contrary, today the indices each cleared a moving average - the 200 day for the Nasdaq and the 50 day for the Dow and S&P 500 - and did so on higher volume. This is pretty bullish action. Add to this the negative news the market has absorbed recently and it makes a case that this rally has some legs.

Another concern though is the number of failed breakouts. I've seen more high quality stocks stage strong breakouts only to collapse a few days later. This is not the action I'd expect in a strong rally. It could be a rotation of leadership, or a sign that this market is living on borrowed time.

For now I'll continue to go slowly. I have my existing position in (THOR) and I've identified another stock I may buy tomorrow depending on the action of the market and the stock itself.

-Geoff

Sell Stop:(UTHR)

Once again an add-on buy only increases my losses. I stopped out of both my positions on (UTHR) today. I still think this stock will eventually do well, but I had decided that if it couldn't hold the $110.18 buy point I didn't want to own it. That's exactly what happened, and I took about a 4% loss on my positions.

The market looks very ugly today, with now two distribution days logged on the NYSE indices - the financials continue to weigh.

As of this moment (THOR) is looking good though, up around 5%. If I can just get to a point where I'm right half the time, my results will start to improve pretty dramatically. I just need to book a few 20% gains.

-Geoff

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