Stalemate

The Dow Jones Industrial Average continues to grudgingly head higher on very low end of year volume. This is occurring even as the leaders are beginning to break down. Many other leaders are still consolidating so we need to watch closely as they approach the 50 day moving average. A break on volume below this average will not be welcome. Before committing new money to new positions we must discover the direction of least resistance for the indexes. A move in either direction early in 2011 will give us our cue. Don’t guess just wait for the stock market to turn its next card. Profit comes from NOT forecasting the market (which is impossible) but reacting to the action as we see it each day.

The astute trader could play commodity stocks since they have been very powerful the last few months. I would not recommend commodity stocks in this blog because they are cyclical in nature and are hard to play. Growth stocks have a track record of increasing revenue and earnings. Commodity stocks are much harder to play being cyclical. These cyclical stocks can go from profit to heavy loss and back to profit in the blink of an eye. Cyclical stocks are tied very closely to the economy and currency swings and are not for the casual investor. Long term profits come from growth stocks which often trend longer term giving us greater chance of success in the stock market.

A number of my readers have been asking for more regular updates. To comment on the market on a daily basis is for day traders only, however I can understand the need for more information. For this reason I have started giving short concise comments on a more regular basis at http://twitter.com/rmhs my link is also on the left. Additionally I will continue to comment here as and when I consider necessary.

Dow at 2 Year High

The Dow Jones Industrial Average is teasing a 2 year high yet we see lots of sluggishness. A decisive breakout to the upside would certainly be welcome. Looking at the indexes reveal painful gains as we move higher. At the same time many of the leading stocks have retreated back to their 50 day moving averages. The answer to the next move as always will lie with what the leading stocks are going to do. Some of the leading stocks have broken down this last two weeks but others are going through a healthy consolidation.

Most of my followers should be close to be 100% invested by now and perhaps in the last two weeks may have fallen back a little as some stops got hit. At the same time if you have seen opportunities to add to positions then by all means do so. In a market such as this you have to trim the losers and add to the winners. As we continue to move sideways we will hopefully see new stocks setting up for potential breakouts later. Those stocks will be the ones that have refused to go down and are setting up for the next rise.

A number of my readers have been asking for more regular updates. To comment on the market on a daily basis is for day traders only however I can understand the need for more information. For this reason I will start giving short concise comments on a more regular basis at http://twitter.com/rmhs my link is also on the left. Additionally I will continue to comment here as and when I consider necessary.

Successful Retest - EPAY CNK DDIC MNRO

This week was packed with news as we had to consider budget deficit commission, fed speak on QE2 and the latest unemployment numbers that came out today as well as the ongoing problems in Europe. We could spend a few paragraphs talking about each of these and quite frankly it doesn’t help the investor since it is all just noise which can sway you either way regarding your stock holdings. As always let’s forget the noise and look at price and volume of the stock market which is all that matters.

Note the graph of Dow Jones Industrial as shown above courtesy of www.bigcharts.com indicating price, volume and the 50 day moving average over 6 months. As so often happens we have successfully retested the moving average by bouncing up off it. This is of course very good news for the bulls although it would have been more convincing to see volume increase on the rebound.

After recent hesitation in buying it would be acceptable to be on the look out for more investments. Hopefully over recent weeks during this small correction you have been carefully monitoring the stocks you own and maybe tightening up a little on the sell stops. I have found that most of my leaders have so far held up and are starting to move up again as I resume the buying. During any minor correction it is very healthy for the stocks you own to move in a sideways action for a few weeks consolidating recent gains. If and when the stock market resumes its climb these stocks will hopefully be first to move since they did not fall by much in the correction.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.



EPAY - $19.45

CNK - $18.60

DDIC - $10.98

MNRO - $51.42

Caution Required

This week was a week of distribution after the recent breakout failed. Notice how the down days are accompanied by hi volume spikes. These are clearly distribution days and can be expected after the run up we have seen since the follow through day on September 1st. Of course the question now becomes are we at a market top and is it time to take some big profits? As I always remind you nobody knows and don’t let people fool you into thinking they do. All we can do is apply money management and risk control as always and the rest will take care of itself. We don’t need to guess what the market will do next since that would be a fool’s game.

The Dow Jones Index shown in the graph below courtesy of http://www.bigcharts.com/ clearly shows that we have had quite a run up with very little in the way of pull backs. The index has moved well above its 50 day moving average indicating it is oversold and needed to pull back at some stage. In a market trending up it is not unusual to trace back to the 50 day moving average before moving higher again. A touch of the 50 day moving average by the index often indicates a break down or bounce back is likely. Bad news is when the index cuts down through the moving average on volume, which we haven’t seen yet. In fact it has bounced off the moving average back up so all is not yet lost, we need to watch the action around these levels.

At this point we need to see the index pick up in volume as it moves higher. If it moves higher on low volume that is not good news and we can expect another test of the moving average.

Coming back to the money management and risk control now is not the time to be buying new stock positions until the trend has reaffirmed itself if indeed it does. The plan should be to start tightening up on your sell stops to lock in some of those profits and as always follow the progress of the individual stocks you own. If you have a stock that has consolidated sideways and breaks out on high volume again then by all means buy more of that stock but do not initiate new positions at this point in time on new companies.

Breakout – LULU EXLS LFT AFSI

This week was quite interesting with lots of news such as elections, the Federal Reserve meeting and employment numbers. Clearly any one of these items can move the stock market in a big way. The most interesting news of the week was the Federal Reserve stated intention to buy back yet more bonds. The idea behind this is to “artificially” force down interest rates to lower the value of the dollar and so improve our export market. This in turn would spur investment as our factories increase manufacturing and so start hiring people. It is already very clear with the low interest rates that almost all commodities are increasing in price and have been for some time. Currently these increased commodity prices are not being seen at the retail level but it is only a matter of time before it affects you and I. This bond purchase program is a wonderful idea to stave off deflation but is also a very risky idea on a number of fronts. The inflationary nature of this tactic can sometimes be hard to control. We have to hope that as inflation starts picking up the Fed will be able to control it. The Fed by creating yet another bubble (housing and now bonds) does not inspire people with confidence down the road. The other issue is that as the dollar starts sinking due to lower interest rates the other world currencies all things being equal will go up in value on a relative basis. This will not be welcomed by the foreign powers and could start a currency war.

However this is all in the future and we can speculate forever. As investors all we care about is price and volume. After 2-3 weeks of market consolidation the stock indexes have broken out into new high ground on increased volume suggesting accumulation. This bodes well for the stock market but of course does not guarantee a continued bull market. Clearly odds favor more accumulation of stocks going forward and until we see a downturn on increased volume then the order of the day is still to accumulate stock.

The chart below of Dow Jones Industrial Average shows quite nicely the recent breakout and accompanied high volume, courtesy of http://www.bigcharts.com/

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

LULU - $48.15

EXLS - $20.29

LFT - $41.84

AFSI - $16.50

P/E Ratios – WYNN GOOG IDCC BMA

Many people purchase stocks that have low P/E ratios. The feeling is that the stock is under priced. A P/E ratio is price/earnings ratio and is calculated on a per share basis. For example a stock at $20 which has $1 in earnings would have a P/E ratio of 20/1 or 20. Depending on the industry class ratios lower than 15 are often considered inexpensive. My belief is that P/E ratios can be very misleading and my research suggests that if you try to buy low P/E ratio stocks then you miss most of the winners.

A P/E ratio can be low because of low stock price or high earnings. If the price is low then one should assume it is low for a reason since the stock market is forward looking. A stock may have a P/E ratio of 10 today but if the next earnings come out at only half of the last earnings that immediately adjusts the ratio up to 20 from 10. Suddenly the stock looks expensive and if the earnings get worse the P/E ratio would be much higher.

A stock with future earnings potential usually gets bid up in price even before the great earnings come through making the P/E ratio appear very high. A stock might appear expensive with a P/E ratio of 50 until the day it announces great earnings, then suddenly the P/E ratio drops to some low level because of the high denominator (high earnings). Of course the price then starts climbing in recognition of the great earnings and up goes the P/E ratio again.

My suggestion is ignore P/E ratios.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

WYNN - $107.00

GOOG – $612.00

IDCC – $33.57

BMA – $49.79

Darn That Market – BIDU ROVI KVHI HMIN

A friend said to me this week “Darn that market, too late to buy now”. My response was “I wish I knew”. The fact of the matter is people get scared to enter the market when stocks are low because of all the bad news around. Then of course they won’t buy the market after it has gone up because they say prices are too high and rightly or wrongly assume we have missed the rise. My response is as allows we don’t know when we are at bottom, middle or top. You have to look at it from a money management point of view.

The last few weeks I have been talking extensively about money management because when you are heavily invested as you should be by now then the order of the day should be money management and risk control. Even now it’s not too late to buy equities I don’t know where the top is. As I have said many times before risk management is key and I have outlined the techniques to protect your wealth and limit your risk. If you have ignored all my advice and not bought when we had the follow through day at the start of September it is still ok to invest. Find those companies breaking out on volume and start buying slowly. Build up your positions as they increase in value and sell out and step to the sidelines if indeed the market is at a top.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

BIDU - $107.77

ROVI – $50.47

KVHI – $15.97

HMIN - $51.27

Earnings Season – HLF TZOO MASI TEO

The stock market continues to do well. We have had some consolidation this last couple of weeks and stock prices have held firm. Looking at indexes like the NASDAQ a case can even be made that we are now climbing out of the recent consolidation. During this consolidation there has been some sector rotation in particular the cloud computing stocks got hit quite badly and continue to be weak, these stocks are no longer leaders. However other stocks have come to the front and are helping move the major stock market indexes higher. Indexes such as the DOW are lagging a little but this index is very focused and has been impacted by the turmoil in financial stocks. The recent news from the government about stalling housing foreclosures sounds good for housing short term. However in the long run this will prolong the housing crisis since we cannot get excess inventory onto the market and sold off. This has impacted the financial stocks recently which also impacted some of the financial heavily laden indexes.

All things considered we are not seeing a general sell off so the plan should be to remain invested and look for positions in new companies, add to existing positions and tighten up on sell stops where a company looks to be slipping. In particular be careful during this earnings season which is about to start. As companies announce better or worse numbers, this can very easily change the playing field for better or worse.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

HLF - $65.89

TZOO - $27.18

MASI - $28.94

TEO - $22.72

Risk Control Yet Again – LULU GEOY EXLS PANL

By now I think you are realizing that risk control by way of money management is absolute key to successful investing. I wish to talk about risk control yet again this week. Last time we spoke about how you can develop a broad base of stocks with very little money at risk. Each one of those purchases is like planting seeds in your garden. Some seeds will die (stopped out of stocks at a small loss) and a few will grow into big acorn trees (stock winners). We need to discuss how to take advantage of those companies with massive price appreciation. Since we only made a small pilot investment in each of those “seeds” (as discussed in the past) we will make very little money from them even with tremendous price growth so read on.

As well as broadening out our base of stocks we need to be adding to the companies that are going to start moving up. Companies move up in spurts then consolidate only to break out of new consolidation bases and move up again. A stock will move up 10, 20 or 30% perhaps then you will see some profit taking followed by some sideways movement called “basing” before it breaks out on volume and starts moving up again. Imagine a stock is owned at $20 and starts moving up to perhaps $21. Now is the time to move the sell stop up to break even on the $20 purchase and buy more stock at $21. As it moves through $22 you buy more raising the sell stop on the $21 to $21. Once the $22 purchase starts moving up you can raise that protective sell stop up to $22 as you prepare to buy more. You should have many purchases on the way up with many sell stops in place at your purchase price except for the last one you purchased which you can only lose a little money on if the stock starts falling back. One point I would like to add here is only buy more of a stock if you see the upward movements are happening on increased volume.

At some point the expected sell off will materialize and a few of your recent purchases will get sold at “BREAK EVEN”. It is important to note you are NOT losing money since you are selling at the price you paid for that stock (remember you raised the stop on all purchases to sell at break even). A good company will stop selling off at some point as the sellers dry up and the stock will start its basing or consolidation before starting another move up. Once it breaks out again on volume you can continue your purchase program.

As your holding in a company becomes much larger from continuously adding to the position you can consider raising the quantity of stock you buy. Imagine buying one units of stock 10 times so you then own 10 stocks. There is not much point in continuing to add one more unit each time, why not change it to 2, 3 or even 4 units. You can see that the more stock you own then the more stock you can buy and still not increase the risk since you are using “house” money from all the gains you have made previously.

Ultimately a great stock will start falling on heavy volume and it may be time to sell. If you see a high volume sell off then sell half your holding. If it continues sell the other half.

Finally if you have a portfolio of stocks that you are adding to (the garden) then consider the following. You have strong stocks and weak stocks so start selling a little of the not so strong stocks and add to the stocks that are doing very well. If those super stocks go into a consolidation phase then sell some of that stock and add it to the stocks that are still moving up.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

LULU - $47.42

GEOY - $42.14

EXLS - $19.98

PANL - $25.60

Risk Control Again – FNSR ACOM OCLR NXTM

The importance of risk control cannot be emphasized enough. Risk control is even more important when markets have been climbing as they are now. It is easy to get excited and take on too much risk. The market has been moving sideways this last week which is very good news, we need to consolidate recent gains. The interesting move comes next as we discover whether we get a healthy pull back on low volume or a big sell off on heavy volume spelling the end. Notice I don’t claim to know the future, forecasts are useless, go with the flow. If markets continue up then buy more and if they fall back tighten stops to lock in some profit. The graph below shows the recent consolidation courtesy of http://www.bigcharts.com/

Now lets talk some more about risk control by way of an example. I have spoken many times how you broaden your base by buying new stock positions in new companies and also adding to those bases by adding onto positions that are going up. I wish to focus this week on broadening the base in the following example on risk control. Starting fresh after a follow through day you may buy one new stock position with perhaps a 10% sell stop in case the follow through day fails. Let’s assume you are successful and that stock climbs 30%. You can afford the risk of taking THREE new positions each with a 10% sell stop. If every one of those positions are stopped out you sell the original purchase with the 30% gain and end up break even. In all likelihood those new positions will also go up since you have been buying break outs on high volume.

Now note the beauty of the process. If those three new positions have gone up just a little, enough to adjust the sell stops to break even then you have that original 30% gain to buy another three positions. Imagine those three new positions also going up. I know this is hypothetical but let’s say you have 30% profit in each of those new positions. Then you have four stocks each allowing three new purchases with a 10% stop, that’s TWELVE new positions !!!! Imagine how those twelve new positions can grow your base if they all go up. Yes of course this is purely hypothetical but I just wanted to show you what is possible with ZERO risk other than the initial 10% risk.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

FNSR - $19.06

ACOM – $22.99

OCLR – $16.60

NXTM - $19.72

Control Risk – RES, ANDE, JOSB, HLF

The stock market continues to perform well as accumulation days start piling up. Traditionally the run up to mid term elections are bullish but as I said many times before do not try and be smart by finding reasons, just buy the trend. I could just as easily counter the bullishness by saying September and October are traditionally bad months but it means nothing. I say again just follow the trend and pay attention to price and volume.

After some consolidation on lower volume the Dow Jones Index again broke out on higher volume. This could end tomorrow, next week or next year. Don’t be smart and try to forecast just continue to buy the breakouts by adding to existing positions and adding new positions. The important thing to remember at this juncture is that you can run the risk of buying too many stocks and not waiting until you can move up your sell stops to break even before buying more. This can be dangerous because if the market suddenly turns down then each of those new companies could produce a loss, risk control is still very important.

Remember from all the stocks you buy (and by now you should have many winners) all it takes is ONE great company to make a lot of money even if all your other choices fail. I say this because that one winner you will be adding to in increasing size as it climbs and all those other potential losers you will be stopped out after the initial purchase.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

RES - $19.94

ANDE – $40.09

JOSB – $42.58

HLF – 59.77

Buy the Breakouts – NFLX, AAPL, PAAS, ACOM

We have another good week in spite of bad news everywhere. Continue to ignore the news and watch the trend since the stock market reflects not what is happening today but what will happen in the future. Some sideways action on low volume would not go amiss at this point to allow the stock market to consolidate recent gains. In fact a small pull back on low volume would be fine. Of course a pull back on volume could spell the end.

In the past I have likened the money management strategy I use to planting seeds in a garden and watching them grow into big trees. To have a good forest you need to plant lots of seeds. Every new company purchase is the planting of a seed and adding to existing positions is fertilizing those seeds and watching them grow. Remember the intention is to keep adding to seeds that grow (the stocks that rise) and allow the bad seeds to die away (let non performing stocks be stopped out). This strategy allows you to pour your money into the performing stocks. Of course you have to keep planting those seeds (buying new companies) to find the winners. Remember any new purchases you need to control your risk by waiting for them to rise and raising your stops to breakeven before you make new purchases.

Like you I continue to add as the stock market continues to climb. We cannot know where the top is but must continue to invest into the uptrend. If the market reverses on volume then we will get safely stopped out of our purchases with little or no loss.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks rather the idea is to teach stock selection with low risk advice.

NFLX - $140.50

AAPL - $274.90

PAAS - $28.41

ACOM - $21.00

Improvement Continues – GMCR, GEOY, AKAM, CMG

The stock market continues to show strength in the face of dismal economic news. As an investor we have to follow the stock market indices and follow the trends. The stock market is a forward looking indicator by as much as 6 months. The action we see today reflects what the economy may be doing 6 months from now. Today it is clear why the stock market topped out some months back since we see a struggling economy today with mediocre GDP numbers and high unemployment still. Those earlier gains up to May probably occurred as people and the stock market saw us leaving the risk of deep recession or even depression behind. Normally we get a strong recovery from such deep slow downs but this time we are seeing a very slow recovery most likely due to the high budget deficits our government are creating. Of course as I always say we can speculate all day long but the bottom line is to follow the stock market indices.


The graph below courtesy of http://www.bigcharts.com/ indicate the Dow Jones Index came off a bottom 8 days ago and as mentioned in my previous blog we even had a follow through day. Note the higher volume accumulation days since that time. The down days with red bars are on lower volume, this is good news, let’s hope it holds. The stock market indexes are now entering an important area of resistance as indicated by the solid horizontal line, this will be a test for markets.

Mid June and early August both sold off at these levels. People who bought stock at these levels got their fingers burnt and will now start selling as stocks get back to the prices they paid. The question we need answered is that will the market be strong enough to absorb those sales or will the market tank as a result. The best solution would be for the stock market to trade sideways for a while at these levels and digest the recent gains as we absorb the expected stock sales that will occur. From that sideways action it would be great to see the market move higher on increased volume. Of course what we want means nothing and the stock market will do its own bidding. All we can do is continue adding to our positions as they climb and open up new positions if this uptrend continues. In the meantime remember to protect your initial purchases to lock in break even points or gains that you may have.

Here are a few more stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks rather the idea is to teach stock selection with low risk advice.



GMCR - $34.36

GEOY – $37.96

AKAM – $49.80

CMG - $165.60

Follow Through Day – DAG, FFIV, INFA, AZO

Wednesday just gone was a “follow through day” on the Nasdaq index. The index was well up with volume higher than the previous day. Follow through days are expected on the 4th to 12th day from a low and Wednesday was the 6th day.

Remember what a follow through day is. It is simply a point in time that says “odds favor” a rise in the market and “may” be a good time to buy. Follow through days can fail but they usually indicate a gain of unknown price and duration. Not much help you might think but remember ALL bull markets begin with a follow through day but not all follow through days lead to a bull market. As I have said before the stock market is an art not a science. All we can hope to do is find “odds favor” conditions such as now.

Remember start buying small and wait to see if your picks are successful. If they are successful then add to them and buy more stocks, don’t forget your sell stops, money management is key. Here are some interesting looking stocks that may be ready to make a move. Don’t forget to make sure that earnings are not imminent on your picks. Remember this blog site is not a newsletter that promotes stock tips or penny stocks rather the idea is to teach stock selection with low risk advice.



DAG - $9.12

FFIV - $93.86

INFA - $34.64

AZO - $217.68

Too Much Bad News

The stock market is being hammered of late. Everywhere you look the news is bad. GDP stinks as numbers are being lowered. Authorities warn us that unemployment will remain high for some time to come. Companies are being cautious, case in point Intel warning of slower growth ahead. Even Ben Bernanke of the Fed is stating he will stand ready to support a slowing economy. The policies of our government are coming under closer scrutiny and criticism is coming from many quarters. This is certainly the recipe for what we might expect to be a terrible stock market going forward.

This is exactly the time we must make sure human emotion does not take over our decision making. We must be vigilant knowing that bull markets start when stock markets look their worst. I am not saying we are at a bottom but I am saying IGNORE THE NEWS and watch the technicals of the market. If we see up days on increasing volume in the near future then that is the time to start buying even if the news STINKS. Human nature makes us buy at the top and sell at the bottom. We do not want to follow human nature we want to follow the technicals of the market - remain ready to buy.

Human Nature

We have had another poor week with distribution days continuing to show up. The major indexes are now back below their 50 day moving averages as the stock market continues to act poorly. More bad news on the economy this week as the Philadelphia Report showed unexpected higher unemployment and poor economic numbers. Having said this we have to remain on watch for accumulation days since the stock market will turn around long before we see it in the economy.

I would like to discuss human nature today since it is the biggest enemy of successful investing. It is human nature to want to take profits yet when we own losing stocks we tend to stay with them sometimes for years if not forever. Let me walk you through a scenario you may see yourself as having done many times (I certainly have). I will explain it in three parts.

1. You find this great company (company A) that has a fantastic future, or so you believe. You buy the stock and it hesitates and maybe drops down a little. You stay with the company after all it has a great future. It recovers and now your back to break even, feeling great you know it will go up. The stock goes up 10% you knew all along this would be a winner. The stock rises more it’s now up 15%, gosh you’re a genius, you tell all your friends. You now feel a little nervous and want to lock in that profit. It now rises again to an 18% or 20% gain then hesitates a little perhaps falls back to a 15% gain. You sell out worried it will continue to fall and tell all your friends what a genius you are with this profit. You found a winner and made some nice cheese from it. Emboldened you look for another company.

2. You find another great company (company B) that also has a great future or so you believe. The company goes up a little, falls back a little. Couple of weeks later it is still around your purchase price. After a month you get bored and sell the stock. Oh well no big deal, you didn’t lose or gain so let’s find another.

3. Yet again you identify a third great company (company C) and buy the stock. It does nothing for a few days then falls 5%. Oh well no big deal it will recover it’s a great company with great prospects. Next week it’s down a total of 10% but you know it will recover. The next week the Dow has a few bad days pulling all stocks down, your stock is now down 20%. The stock recovers a little over the next few days so now it’s down only 10%, you knew it was a good company. Oh dear suddenly it’s down 20% again and you say I have had enough of this, as soon as it get back to break even I am going to sell. Suddenly the stock is down 30% and you think to yourself no way am I taking a 30% loss I am going to wait for it to recover then consider selling. Oh my goodness just before vacation you notice it’s down 40%. I don’t care any more so I leave for a good vacation. Well the story goes on and the stock keeps falling. Your ego refuses to take a loss then one day perhaps a year down the road you still own it and its down 80%. Most people I know at this point will either hold stock C forever or sell it to take a “tax loss”. Your pride now justifies the sale after all it’s a tax write off.

Now let’s look at this statistically we buy all three stocks with returns of 20%, 0% and -80%. Of course I don’t know what will happen to those three stocks but we do know that statistically those three things could happen (up, down and sideways). In practice because of human nature we cut our gains short yet we let our losses ride. I can assure you that’s what most people will do.

DO NOT do that you must work against your human nature and do exactly the OPPOSITE. Cut your losses quickly at 10% or even better and let your winners continue to win. You are in a much better position if you take the 10% losses and collect the 100% gains. If you let human nature control you then you are destined to large losses but only small gains since you always sell your winners. I have already given you the tools on how to know when to sell your winners, remember the high volume falls as an indicator and/or the crossing of the 50 day moving average. Remember winners tend to continue to go up and losers tend to continue to go down.

Human nature is so hard to overcome but when investing you must do the opposite of human nature.

Back on Watch

We are in a very tough market to say the least. News of the economy has not been good affecting the major stock market indexes. Of course there is always lots of good news and lots of bad news so our primary indicator has to be stock market prices. News can be interpreted a number of ways but our over riding factor has to be how it affects equities. Unfortunately on that front the data is not good as the graph below suggests courtesy of http://www.bigcharts.com/.

Notice how the recent move down has been on higher volume, definitely not a good sign with lots of distribution days. Also the horizontal line shows how recent support (last trough) is about to be broken to the downside. The story goes that the economic recovery we are in is starting to slow. That may or may not be true there are many people smarter than us that don’t know the answer to that question. However as I said the stock market from an investment point of view is the final arbitrator. The stock market is the collective thoughts of every investor in the world and I am sure would include some very smart people. By the way this is the reason you don’t look at a companies earnings results so much as the market reaction to those earnings.

For the above reasons we have to be more cautious moving forward until the market tells us otherwise. The current situation is NOT a message to sell all your holdings. As I have said in the past, once you are in a stock you have to ignore what the major indexes are doing and just manage those positions. If the position is holding up then you have no reason to sell and if that position is moving up you may even add to it.

Recent picks like AZO, PANL, CRUS, CRM to name a few are still holding up pretty well. Remember we look for stocks that are holding up in a down market, these have good relative strength. Do not buy these stocks now since the major indexes are suspect however if you are holding these positions you can note they are holding up very well. You may choose to tighten your sell stops and if they move up you may also consider adding to them. Go back and read my notes on to add to stocks and still maintain your zero loss risk management. In the meantime maintain a list of the strongest relative strength stocks with great earnings and revenues and be ready to buy as they break out (once the stock market is on a stronger footing).

What, When and How - ILMN, CTSH, RVBD, FFIV

The up trend we are seeing continues giving us opportunities to buy. It could end tomorrow, it could end next month, we don’t know and neither does anybody else. All you can do is buy the up trends of a stock market and protect against loss. I think it’s a good idea to do a quick review of what to buy, when to buy and how to buy.

What to buy :- Maintain a list of stocks currently under consolidation (sideways action), close to new highs with great earnings and revenues. Such stocks being close to new highs have resisted any downward pressure and are now consolidating recent gains before their next move up.

When to buy :- As these stocks start moving out of their consolidation phase preferably on large volume it is time to consider buying such stocks. This means the recent gains have been fully consolidated and digested and the market is now ready to move these stocks higher again.

How to buy :- Start with a very small purchase that won’t keep you awake it night just in case the breakout fails. As these stocks move up you can continue adding to them. Also remember that previous purchases from earlier breakouts you are already adding to on a regular basis.

The following companies have all broke out on good volume and should be considered after you do your homework on potential purchases. Remember to use your sell stops and check that earnings are not imminent.

ILMN – $42.71

CTSH – $60.93

RVBD – $36.05

FFIV – $88.48

Market Holding Steady

The stock market continues to hold up after some good recent gains. The best we should hope for here is that the stock market consolidates those gains before another push up. The Dow, NASDAQ and S&P are all holding above their 50 day moving averages.

The temptation at this stage is to buy more positions, however I hesitate here until we see the markets next move. My suggestion would be to stay with the new positions recently purchased and hopefully in the near future the stops can be raised such that less money is at risk or maybe even break even. The key point is always to protect the capital we have to invest and it would premature to take on more positions if capital is still at risk on existing positions. We are in earnings season where lots of companies are issuing their results, lets see how things develop since there will be big moves up and down in individual companies as these earnings are announced.

If we can get through this with the indexes still intact then the opportunity will come to start adding to existing positions as well as take on new positions. Be patient and lets see how thing play out at this critical juncture.

Market Held Lows – ALTR, CRUS, CRM

The stock market was very close to failing its recent breakout last week and I commented the next few days will tell all. Well since then the indexes have been building constructively and the low was not broken, trading has been looking more positive. The indexes are back above the 50 day moving average, see graph below courtesy of http://www.bigcharts.com/.

 

The market is constructive in the sense that the lows held and we are now making ‘higher lows’ or better said ‘higher troughs’. The only thing missing from the current situation is that we still have a lack of volume. We need to see a good sized up day on very heavy volume to show conviction.

Having said all this I think it reasonable to do some more buying. Those who bought two weeks ago risked 1% of their cash if they used a 10% sell stop on 10% of their available cash and as I mentioned last week have tightened up on that sell stop. These stocks haven’t gone high enough yet to start adding to those positions but since losses are now minimal if stopped out (or perhaps even zero) then we should consider trading and buy more stocks. Remember you have to follow this approach since capital preservation is always paramount. You are in a very good position when you consider how much money people have lost this last 2-3 months while you have been sitting with cash.

The following companies have all broke out on good volume and should be considered after you do your homework on potential purchases. Remember to use your sell stops and check that earnings are not imminent.

ALTR – $29.90

CRUS – $19.82

CRM – $99.77

Market Suspect Again

We are in a very tough market climate with lots of volatility. Even though we have a follow through day the market is not behaving well. Look at the plot below of the Dow Jones over one year. Graph is courtesy of www.bigcharts.com

You can see the 50 day moving average (MA) moving up until recently with the index following nicely and staying above. Notice how the MA acts as support each time the index falls to the line before it moves up again. Now the MA is moving down as of May and it’s starting to act as resistance to any attempt for the index to move up. You can see how each time it meets the MA then fails which is typical of a down market. We are at that point again and unfortunately volume has picked up as it moves below the MA again. Early next week we will know if this is a failure.

In the meantime you have to stall the buying and tighten up on the stops you have in place. The stocks I last mentioned have done relatively well under the circumstances and you should now tighten up those stops. Remember if you spent 10% of your investable cash to probe the market and had 10% stops then you can potentially lose a maximum of 1%. Now if you tighten up your stops it will be even less. By the way one stock I mentioned MEND got taken over just after I mentioned it at a premium. I would suggest you take the profit on that one and sell.

Second Recent Follow Through Day AZO, PANL, MEND

Again we have a follow through day. Last Wednesday we saw increasing volume with a big jump in points on at least one of the indexes four days after a recent low was made. This wasn’t an outstanding follow day but meets the criteria so again we have to be in buy mode. Remember a follow through day leads to an uptrend about 75% of the time but can fail. The objective here is to statistically put odds in your favor.

Since nobody can guarantee a new uptrend has begun we must once again probe. I would suggest you take small positions in just one or two stocks that are breaking out to new highs on volume. If these stocks fall back you protect yourself with a 10% sell stop and wait for a stronger market. Remember if you take 10% of your investable cash and use a 10% sell stop then if you are sold out early you lose only 1% overall. If the stock starts moving up after purchase you would reduce that 10% sell stop to be even less. Once the probing investments become profitable you can take other new positions and start adding to existing positions.

Here are a few companies for you to consider and remember not to buy just before an earnings release in case of bad news.

AZO – $200.12

PANL – $19.80

MEND - $22.19

Many Stocks with Massive Drops

Since mid April I have only mentioned companies to buy once and that was on the recent follow through day that failed. It is not prudent to buy stocks when the stock market is in a down trend since 90% of all stocks will fall during this period. I see great companies with fantastic earnings start falling in a down market so do not try and swim against the tide, be patient and wait for the market to turn. You want the wind at your back and not at your face.

It is very hard not to buy a company that you think is a great investment, even in a down market. Do not be tempted to buy, it is much better to hold off and keep maintaining your list of companies that are fighting against the downtrend and holding close to their recent highs. These are the companies that will take off first when the market turns back up.

If you still have a temptation to buy a great company in a down market, then just look at what happened to these great companies in the down market we are in right now which is not yet over. Companies such as HAWK, FORM, COCO, CAGC, AKS, APC, CF, PCF, MON, NVDA and PWRD to name just a very small sample have all been decimated.

If the market turns back up do not buy any of these companies since they all fell big time. Like I said we want to buy the stronger companies that resisted the fall.

Follow Through Day Failed

I think at this point I am stating the obvious that the follow through day has failed. As much as stocks are looking cheap it would be suicide to buy while we remain in a downtrend with all indexes under their 50 day moving averages which are falling as well. The tendency is to want those stocks that appear as real bargains but you have to remember they have taken big falls for a reason.

When this market does eventually bottom we won’t be buying the stocks that look cheap, we want the stocks that have held up and remain near their highs. The best thing about a bear market is that it is very easy to identify strength. Look for the stocks that have fallen the least and add them to your future buy list. I have such a list and every so often a few fall off from that list. When the market does indicate a turn I will be ready to buy from that list and will continue buying all the way up.

Be thankful if you bought after the follow through day that you only spent a very small amount of money on a probing position and even then you only had a 10% loss maximum. If the follow through day had been successful you would now be pouring money into those early positions as they continue to rise. At this stage keep your money safe and wait for another follow through day. We are seeing lots of distribution days currently so be thankful you are in cash as you listen to your buddies saying they picked up real bargains only to see them go lower.

Follow Through Day at Risk

The follow through day we saw in my last blog is now under pressure. If the market doesn’t turn up quickly then the follow through day will have failed. Distribution days have occurred since that follow through day which is not a good sign. Readers may have taken a small probing position (important part of money management as discussed in previous blogs) and have been unable to add to their positions to date. You may even have been stopped out. I would suggest not talking new positions at this point unless the follow through day shows it is going to succeed. Remember the mantra every bull market starts with a follow through day but not every follow through day leads to a bull market. In fact only 75% of follow through days are successful (still very good odds).

Today I thought it appropriate to have some fun. I hesitated to use this example since people will say it’s easy in hindsight. Please please be aware I am not or have not recommended the following stock I just wish to use it as an example of money management and yes it is in hindsight. It is VERY important to start with small positions then build them up (probing positions). If the stock market turns down at the start you then lose very little. If it turns down later when you are accumulating much larger positions you have choices on how to proceed but with good money management cannot lose. Please read on.

Suppose you bought LCUT one year ago at point 1 with one unit of money. Remember a unit is a very small amount that leaves you comfortable if you lose 10% of it. Now after that initial purchase at point 1 you place a 10% stop loss in case it fails. Note as it rises you buy more stock at point 2, a second unit. By the way these numbers are not sequential I am using them to show how many units you own. So at point 2 you own two units. After the second purchase you raise your stop to the average buying price to break even if you are stopped out, now you cannot lose. At point 3 you make another single unit purchase so now you own 3 units. This time the break even point (average buy price) will not have moved up as much. Its like if you own 100 units and you buy 1 then your average price isn’t affected much. However the stock price is now moving further up away from your average price so you are less likely to be stopped out.

Notice after every consolidation as the stock breaks out to the upside I buy another unit and another and another. At point 6 we own 6 units and the stock consolidates then at point 8 it breaks out and jumps up again. Notice I bought 2 units since we already own 6 units I buy 2 and call it point 8 since I own 8 units. If I own 6 and start buying 2 units at a time I am not affecting my average buying price by much so it still doesn’t move up close to being stopped out.

I now keep buying 2 units at a time until I own 20 units. During this fast ramp up I could easily have increased my buy size to 3 or 4 units at a time and still not have brought up my average buy price by much. Now not long after point 20 where I own 20 units with an average buy price much lower things are starting to look not so good. The stock gets hit with some high volume selling so I sell half my holding and at point 10 I now only own 10 units. I have just locked in a very nice profit, my average cost and stop sell point is till very much lower. Now if the main indexes are doing badly and you have a strong stock you will generally find strong companies start moving sideways, they resist any sell off. In fact at point 12 you have bought another 2 units and the upside climb has resumed after a long sideways consolidation. The stock did not break any lower or go up for a while so you sit tight. When it broke out to the upside on volume you started adding to those 10 units again. You now own 12 units and look like your about to go to 14 or 15 units. This is how you stay with the leaders even in down markets.

Imagine if you owned a few companies this way. The stocks that move sideways you can start selling off a little and moving that cash into the companies that are climbing.

Follow Through Day Today - EDU CRUS SNDK CMG

Today was a “follow through day” on the Nasdaq index. The index was well up with volume higher than yesterday, not great volume but good enough to qualify. Follow through days are expected on the 4th to 12th day from a low and today was the 6th day. You can see on the chart courtesy of www.bigcharts.com how the volume is higher than yesterday with a big point gain. Also the index is making a break through of the resistance level discussed in my last blog. A follow through day indicates an “odds favor” point in time to buy.

Now remember what a follow through day is. It is a simply a point in time that says “odds favor” a rise in the market and “may” be a good time to buy. Follow through days can fail but they usually indicate a gain of unknown price and duration. Not much help you might think but remember ALL bull markets begin with a follow through day but not all follow through days lead to a bull market. As I have said before the stock market is an art not a science. All we can hope to do is find “odds favor” conditions such as now.

Remember start buying small and wait to see if your picks are successful. If they are then add to them and buy more stocks (don’t forget your sell stops). Here are some interesting looking stocks that may be ready to make a move. Don’t forget to make sure that earnings are not imminent.

EDU - $99.23

CRUS - $15.15

SNDK - $48.58

CMG - $152.90

Mixed Signals

Looks like the stock market is giving us mixed signals at this point. On a positive note the recent low is holding (see the lower horizontal line) and is acting as support. The upper line shows an area of resistance. Previous blogs talk about support and resistance so read back. If support is broken then look out below and if resistance is broken then maybe we will see an upside move. It is likely that a move through either of these lines would be accompanied by volume showing the conviction in one direction or the other. Again in the past I mentioned we get our best up days in a down trending stock market. Recently we have had some wonderful up days only to be end up as traps for the impatient investor. The problem with these up days is that there is no volume. We want to see high volume up days after which we can consider buying. For the moment wait and be patient until the stock market shows its hand.


Graph courtesy of http://www.bigcharts.com/

I have added a page “rules for trading” (see the tab) so my readers can quickly look back at some of the important rules I talk about.

Lottery Syndrome

Wow what can I say except be glad that you own no stocks. We continue to wait for an indication that the bottom may be sight. Let’s have a little fun and include a lesson on how to buy stocks when things improve.

It would be nice if I could find the winning stocks just like finding the winning numbers in the lottery. Well I hate to burst your bubble but I cannot and neither can anyone else. If you think this blog site will find the stocks that will make you rich overnight then stop reading right now.

The secret to making money in stocks is not what you buy but how you manage those purchases, in other words money management. We have already discussed how you must cut your losses short so that they are very small losses. The reason for this is that even if you find a great company it can still go down in a poor market or may even be considered short term over valued. A bear market will pull down even the best of companies. Once you have that purchase made and you have applied the 10% sell stop your next aim is to reduce that 10% loss, eventually to your break even point. In other words as the stock starts rising you slowly move up your stop to your purchase price so if you are stopped out you can sell at break even. Once you get to this point you can do two things. Firstly you can start adding to the stock position if it continues to rise but you must recalculate your break even point so you never end up with a loss if it goes against you. Secondly you can buy an additional stock and start again with another company.

The objective is to build a portfolio of lets say 10+ stocks. Of course you don’t know which of those 10 will be a real winner because nobody can know. If someone did know then that stock would have been bid up a long time ago even before you bought it. You should keep watch on your 10+ stocks and add to the ones that are rising. The stocks that do nothing you don’t buy or sell. You keep adding to the winner or winners building bigger positions. The not so good stocks you will be adding less to. Maybe that great stock you recently bought went up 100% and you added to it 10 times. However it has now leveled out so you stop adding to it. Maybe some other stock in your portfolio of 10+ stocks will start rising so instead you start adding to that position.

Maybe that great winner you added to starts falling a little. Careful here because all winners will fall a little on low volume as each consolidation occurs. However if you see a serious fall on volume then start selling some of that position off, maybe 25% at first followed by another 25% if it continues. If the stock turns back around to continue up you can always start buying again. Let’s assume you sold off 25% which will free up some money, you can use that money on some other stock that starts rising in your portfolio.

This has the effect of moving your money into the winners and slowly taking it out of your losers or even those stocks that are flat. You don’t have to know which stock will be a winner, just keep adding to the ones that are climbing and selling the ones that are falling.

I liken this to planting seeds in a garden, some will die away (your 10% losses) and some will grow into big oak trees. All you need is a couple of great winners to do really well and they will swamp those very small losses you take on the initial investments that die (some of the seeds).

In conclusion I have no idea which stocks will do well but I take very small positions in likely candidates taking small losses along the way. The money management will move your funds into the stocks that do well and take it away from the stocks that don’t do so well. One last point, you have to realize that even those great companies will take a set back from time to time as they get ahead of themselves. That’s when you start selling off a little and if they level out you still have a position for when they start rising again.

Battle Lines are Drawn

The stock market is putting up a valiant attempt to find a bottom and indeed there are some promising signs. However we cannot jump the gun and should wait for a follow through day. A follow through day typically occurs four to ten days from a recent low. Today is day four from the last low. To see a follow through day we must see higher volume than the day before with a 1-2% increase in a major index. Yesterday we had such an increase but the volume was actually lower than the day before. The fact that the bottom four days ago appeared as a key reversal during the day is promising indeed and then we saw a big up day like yesterday, but it just isn’t enough.

My readers are now mainly in cash avoiding this 10-13% correction. We do not know at this stage if it will get worse. As I have said before the best up days come in down market to draw people in. As hard as it is stay patient and wait for better prospects. We want to invest in an “odds favor” environment, we may be close or could just continue on down again. The best position to take is one of caution until we see a little more positive action. Those that try to get in at the bottom run a tremendous risk of going lower. It is better to be as sure as you can that the bottom is in then invest (no guarantees unfortunately).

Winning in a Down Market

The stock market has had another dismal week with all major indexes falling badly on volume as more distribution days pile up. It is hard for investors to stay out of the market during a down trend since stocks begin to look cheap but as I have said before you just have to stay out and wait for that follow through day as the signal to start buying. Do not think you are missing opportunities in fact you are doing very well by being in cash. You are not treading water you are increasing your buying power. As stocks fall your cash remains flat and so later you have greater buying power. Professionals measure themselves against the market indexes. They live and die on how much they beat the market by. Since the market has now fallen approx 10% from its peak you can consider yourself as beating the market by 10% if you are in cash and be proud of that fact.

The question is what to do in a down market. I am very busy in a down market and so should you. The best time to identify strength is when the market is weak. The powerful stocks that will take off first in the next up market are the ones that resist falling in down markets. So as the market falls you need to be identifying which stocks are not falling and which stocks may have recently jumped up on volume and are now holding steady. The stocks that are holding steady in this terrible market are the ones you need to be ready to buy when the follow through day occurs.

I am consistently updating my watch list on a daily basis looking for those strong companies. I will prune the list by pulling out stocks as they succumb to the selling and add to that list when I identify new companies that appear to be holding up well. I will not mention these companies now because even these strong stocks you should not be buying in a down market. You must wait until odds favor buying which is after the follow through day. When I see such a day I will start publishing my favorite stocks from the list I maintain daily. You should also be building your own buy list to be ready.

Market Looks Ugly

The stock market is showing so many negative signals now. It is below the 50 day moving average, down days are on heavier volume and the recent bounce up met resistance at the 50 day moving average as the market turned down again on increased volume. Just look at the chart below of the Dow, a picture tells a thousand words.

Graph courtesy of www.bigcharts.com

Notice the heavy volume down days then the rebound on lower volume. As the market moved back up the volume became less and less until it approached the 50 day moving average and got hit to the downside again. Only last week I mentioned to my readers beware of the up days in a down trend. Very often we will see many triple digit up days on lower volume to suck people back in before it tumbles again. Wait for the follow through day before buying stock.

The Sideways Action is Resolved

The sideways action of the last 3-4 weeks has now resolved itself to the downside. You may recall I said don’t buy until the market breaks out to the upside on volume which clearly hasn’t happened. We have now had some wild triple digit up and down days in quick succession. Big swings up then down then up again have been common which is very typical of a market that is in a topping process. This occurs because we have the buyers that we had on the way up but we also have the sellers who are getting nervous driving it down. Some days the buyers win giving a big up day other days the sellers win giving a big down day. As long as we have heavy buying and heavy selling we get the volatility and the sideways action as we have seen. It could have gone in either direction as the bulls or the bears give up first on their campaign. In this particular case we lost the buyers leaving only the sellers to drive the market down. The 50 day moving average has been broken on heavy volume so clearly the market is now in a down trend and my readers should be mostly in cash as their tightened stops have been hit. The graph below of the Dow indicates quite nicely what has been going on, see all the distribution days (red volume bars).

Graph is courtesy of http://www.bigcharts.com/

The downturn could end tomorrow, next week or next month I have absolutely no idea. Beware of the pundits claiming now is the time to buy but also beware of the pundits that say stay out of the market….nobody can know, let price and volume decide.

We have just one thing to do now which is stay on the sidelines and wait for a follow through day to indicate a turn. A follow through day is a big up day on volume followed by sideways movement with no real selling then another big up day to confirm (this is the follow through day). You absolutely must wait for the follow through day because any down trending market is volatile and you will see lots of triple point up days which are fakes just to get you in before the next plunge. We need to see the follow through day as a confirmation. However I must stress that even follow through days are not fool proof. No bull run will start without a follow through day but not every follow through day will lead to a bull run. All the follow through day can do for you is put you in an odds favor position.

Remember when we resume buying we start small in case the market fails again and build on the successes. Now is the time to go fishing or do the gardening and keep your powder dry ready for the next great run.

Focus on your Holdings During Tough Times

The distribution days are beginning to increase. The DJI (DOW) below shows three distribution days recently while other indexes are showing a lot more than three. Also the indexes have been moving sideways for 2-3 weeks now. Although odds favor a correction after a fantastic run up we just don’t know (nobody knows). We have to keep our gun powder dry and ease off on the buying until the market shows its hand. At this juncture it could quite easily move into a corrective down phase or conversely after some sideways movement break out to the upside again from its recent consolidation. As I said nobody can possibly know for sure but I would like to assume a downside move just so I can talk about how to handle the stocks you own in a down turn.


Graphs courtesy of www.bigcharts.com a great site for all your charting needs.

Compare the charts of DOW and CMG during the period when the DOW corrected approximately 8-9% (mid Jan to mid Feb). As I have said in the past when the main indexes start correcting down it is time to stop buying and concentrate on each of your individual holdings.

As you examine CMG which can be considered a leading stock with great earnings notice how it resists the corrective action of the DOW index. In fact each time it fell which was approximately 5% from its peak, then it quickly recovered its posture. In fact a number of times it fell only to recover quickly while the DJI continued falling. Another point worth noting was that even during the DOW’s correction CMG did not exhibit any high volume sell offs. The down days were in fact on much lower volume, certainly no panic. Now look at when the DOW stopped falling and in fact showed a little strength, CMG blasted to the upside on much increased volume. Clearly this stock was exhibiting no real sell off and was quick to show continued accumulation as the high volume up days kicked in. While the Dow was trading below its 50 day moving average CMG hadn’t even crossed the 50 day moving average. Once the Dow correction had ended CMG was quick to resume its uptrend and quickly gained about 40% from that point.

Now of course when your stock is in the thick of a down turn and you are a holding a lot of stock in a company the temptation is to take your profits and run. However the big profits are made by those that can hang in there. If the stock holding is keeping you awake at night then by all means lock in some of those profits, why not sell 50% of your holding. By locking in that profit you are essentially lowering your cost basis. If the stock starts moving up again you can always restart the buying of CMG.

Of course this is an example of what to do with a winner during a down phase of the stock market. Remember the Dow could have continued on down and CMG could also have plummeted. In this situation as the stock falls through the 50 day moving average and the sell volume picks up then most definitely you should sell. Even great stocks can simply become not worth their price if they are bought up to the skies. If in doubt sell some now and the rest as you become sure.

Ignore the News – MDRX OCR PRGO PRX

Last weeks sharp sell off did not have any follow through to the downside and already we are making new highs again. All you can do at this stage is continue your investing (or holding if fully invested) and hold your breadth. Hopefully last weeks big down day or tightening of your sell stops have not caused you to close out of too many positions.

Now for some fun.

Here are a number of reasons NOT TO BUY stocks …..

1. We could enter a double dip recession.

2. This recovery is considered a no jobs recovery.

3. We have massive deficits.

4. Taxes are climbing and will kill growth.

5. The economy is improving on borrowed money which is artificial.

6. Still lots of people out of work.



Here are a number of reasons to BUY stocks …..



1. The recovery is strengthening.

2. Interest rates are low and may remain low.

3. From such a deep recession things can only improve.

4. GDP is positive and growing again.

5. Employment is improving even if slow.

6. Corporate profits are improving.



OK so if that doesn’t make your head spin then nothing will. There will ALWAYS be the optimists and there will ALWAYS be the “doom and gloomers”. Since there are thousands of variables to assessing the economy and since there will always be the optimists and pessimists then I say ignore it all for your own good health. As I have said many times just look at price and volume. If stocks are climbing on high volume then somebody with influence and buying power knows something. All we can do is follow their coat tails. If we see selling on heavy volume then stay away – it’s that simple. Listen to the news or both sides of the debate and you will forever be stock trading. You don’t want to trade you want to invest. News creates unnecessary volume for the stock market and commissions for the stock brokers. Follow your stock charts with price and volume not the noise.



By the way those “doom and gloomers” have just lost one year of good market gains. Yes one day they will be right and of course they will say “told you so”. I say take advantage of any stock market rises and be sure to have your money management and risk protection in place, as we have discussed in the past. I don’t know what the future holds and neither do the optimists or the “doom and gloomers”. Do not listen to the news, or the optimists or the “doom and gloomers”, bottom line is nobody knows!!

Here are a few companies that have recently broke out on high volume. They are NOT “hot stocks”, they are just stocks for your review. Add them to your watch list and study their reaction to the recent jump up on volume. If they fall back on high volume then remove them from your watch list. I consider watching price and volume as probably the only real technical analysis you need. As an investment strategy this will beat most. If the stocks stabilize in a quiet zone with very little selling then it’s time to buy using sell stops of 10% on just an initial small purchase of that company. Remember don’t buy if earnings are imminent (be careful we are in earnings season now, check your stocks).

MDRX - $21.61

OCR – $29.99

PRGO – $60.58

PRX - $27.86

A Distribution Day

Friday the stock market sent us a reminder that it doesn’t just go up. The Dow lost 125 points just over 1% on heavy volume and the other major indexes lost similar amounts, this can definitely be called a distribution day as trading was heavy. The sell off was triggered by the news that the SEC is accusing Goldman Sachs of fraud which caused the stock to fall over 23 points or 12%. From a monetary point of view Goldman can afford this and it would not have too big an impact on results going forward however the bigger issue would be their tarnished reputation.

The stock market sold off quite broadly with the financial sector being the focus. Of course the stock market has been looking for an excuse to trade down since it has gone up so much and so fast, the stock quotes looked quite scary during the day. As the indexes climb that wall of worry stock holders become more and more nervous. We know a correction is due but we never know when as the indexes become stretched way above their moving averages. See the graph below of the Dow courtesy of http://www.bigcharts.com/.

What we don’t know and what nobody knows is whether we at the start of a big sell off or is this going to be just a small correction in a very good market. This may continue a few days or it may bounce straight back. The investor must watch the nature of the bounce back to determine if the uptrend will continue. If the Dow moves back up on very light volume and then takes another big tumble on heavy volume then it is time to step aside for a while not initiating any new company positions since the trend may be changing. However if we see no more distribution days and the market resumes its march up then we can continue taking new stock positions. Don’t let the “doom and gloomers” tell you this is the end and don’t let the optimists tell you it’s a buying opportunity, nobody can know.

For the time being do not buy a position in any new companies and manage the companies you own until the picture clears. If the stocks you own continue up then by all means continue to add to those positions. Look at your holdings and decide if it is time to tighten up on your stop losses. Tightening up on your stop losses will allow you to lock in some profits however be aware that if you tighten up too much then you run the risk of being stopped out of your position in what could easily be a minor correction. One strategy is to use two split stop losses on one company at different points to sell some at one point and more later. I would suggest you watch your positions closely and if they break the first level of support then sell a portion of the holding. If they break a second level of support on volume then sell even more. If your stock breaks a couple of levels of support on volume and falls below the 50 day moving average then sell out of that position completely. (I talk about support in my early blogs).

Remember at this stage watch your individual positions for possible sales. You do not need to take your cue from the major indexes to sell, you should treat each of your stock holdings individually. Trading is not what you wish to do the preference is to hold your positions but only if they behave well. On line traders had a field day today as they played this stock market in both directions, we do not do that.

No new companies are mentioned today until we get more visibility. By the way it has been suggested that the stocks I mention are stock tips, stock picks or hot stocks. This is definitely not the case since they are simply stocks that break out on volume. Using a well defined money management strategy you can make a lot of money even if half the stocks mentioned go down. In fact you only need a couple of good winners as you invest more and more into those few stocks and take very small losses on the ones that fall. When I mention a stock it is to go on your watch list for possible consideration and review by you. Personally I may never buy that stock myself.

Fully Invested? – NTAP NKE PTI AMZN

The stock market continues to be strong and in a stock market such as this when the investor is buying positions in new companies every week there comes a time when the investor will say enough or even be fully invested. Basically using my analogy you may consider you have planted plenty of seeds in the garden and many of them are now growing quite nicely.

Let’s assume through your trading you consider yourself to have enough stock positions and many of the companies have grown quite nicely, the task is now to manage the companies you own. In fact you no longer need to watch the stock indices but just watch the companies you own very carefully. The task now is to trade your funds from the weaker companies into the stronger companies.

If you have companies that are moving up on a weekly basis there is nothing wrong with selling off or reducing the holding in your weakest companies that may not be moving much and using those funds to add to your stronger positions. Even in the stronger companies a time will come when they also stop rising and maybe even start falling. In this case it will be time to trade off parts of that position and move those funds into a new rising star.

Basically you will manage your collection of companies by always moving funds from the companies that are stagnant or falling and moving the funds into companies that are rising, trading this way is quite acceptable you simply trade part of one company for part of another. Using this methodology you will always be putting your money where it will work hardest. It would not be unusual to find yourself investing more money into one of your stronger stocks only to see you taking money back out of it later as it weakens. Who knows, if the company regains its growth you simply start putting funds back into it again.

I have just described a constant flow of money from your weaker holdings to your stronger holdings. This is a continuous process as companies come in and out of favor. Stock market timing is a fallacy you cannot know when to buy and sell. You cannot buy at the troughs and sell at the peaks. All you can do is follow the uptrend by adding and sell off as the trend turns down. Today with on line stock trading this is so easy and inexpensive to do.

Here are a few companies that have recently broke out on high volume. Add them to your watch list and study the reaction to the recent jump up. If they fall back on high volume then remove them from your watch list. I consider watching price and volume as probably the only real technical analysis you need. As an investment strategy this will beat most. If they stabilize in a quiet zone with very little selling then it’s time to buy using sell stops of 10% on just an initial small purchase of that company. Remember don’t buy if earnings are imminent.

NTAP - $34.84

NKE - $73.99

PTI - $25.02

AMZN - $140.96

Keep Adding – AIPC BGS CATM PCLN

A rising market is an opportunity to accumulate lots of companies at very low risk. As long as the companies you buy keep moving up (and provide a profit cushion) you can add more and more companies. As each company moves up and allows you to lock in that break even sell stop then you can keep buying other opportunities as well as adding to companies you already own. It is very important to diversify and buy lots of companies. We cannot know which will be the real winners so if you buy a number of companies on the way up you will surely hit one or two real winners.

The real winners will stand firm when the market pulls back allowing you to stay with those companies. When the market starts moving up again you are still in those stronger companies and can continue adding to them. Of course the hope is that your strong companies become long term investments, we can only hope. When doubt creeps in as these companies pull back a little be sure to start selling off portions to lock a profit. If they stabilize and move back up again you can resume buying.

Here are a few companies that have recently broke out on high volume. Add them to your watch list and study the reaction to the recent jump up. If they fall back on high volume then remove them from your watch list. If they stabilize in a quiet zone with very little selling then it’s time to buy using sell stops of 10% on just an initial small purchase of that company. Remember don’t buy if earnings are imminent.

AIPC - $39.09

BGS - $10.35

CATM - $12.53

PCLN - $257.00

Control of Risk - CLNE HMSY NUS

I was asked this week if I thought the market was going to go up, I said I have no idea. My belief is that nobody knows and those pundits who say big gains by a certain date or big falls by a certain date are all blowing smoke. All I know is how the market is performing today and beyond the headlights I have no idea. The markets are rising and all the major indexes are above their 50 day moving average, that’s all we need to know. This suggests we continue buying until we see otherwise.

I have spoken about risk control by buying a stock with a 10% sell stop to control the risk. My unit size for the sake of explanation is $100 so the investor has $10 of risk. I have also said how subsequent purchases will take away any risk because the second purchase in this initial company will raise your stop to break even. Future purchases at higher prices must have the break even stop recalculated to a higher level. Please read back if you are confused by this quick explanation.

As well as building up bigger positions in a company the investor should also broaden his or her holdings out to other companies. Analogies I have used in the past are that we are planting seeds which grow into big oak trees but now we also need to plant a lot more of those seeds to broaden out…. so here we go.

Buy one company ($100 purchase) with $10 of risk since if we are stopped out we lose $10. When that company rises (say 10%) we move our stop up to break even, so no risk. Buy a second company and do the same again. If the market is strong hopefully both companies will move up 10%. So now you can afford to risk buying two new companies with a 10% stop and still have minimal risk if stopped about. Let’s assume you have four companies now and they all move up 10% in a strong market. That would be a $40 gain so now we can go out and place another four $100 investments with a 10% stop loss and not risk any money. No money is at risk because we have the $40 profit as a cushion and if all four new investments get stopped out then you have only lost the profit.

You can see how exponentially you are rapidly buying lots of stocks in the market (planting lots of seeds in your garden). You go from one company to two, then four, then eight, then sixteen etc and all you are risking is the profit. Of course you don’t want to stay at break even if the market turns down since at some point you will lose those profits built. Take a portion of your profits to make new investments.

Let’s review, in a rising market we can build our one position into a bigger position as discussed in previous blogs (please read back). However we can also broaden out our investments by taking positions in new companies. A third option when you are in profit is to increase the unit size, after all you are not risking your initial capital since you are only using your profits. I like analogies, so we can plant a seed in our garden and grow it to an oak tree. We can plant more seeds in our garden to broaden out. A third option when we make a bigger units size purchase so instead of planting more seeds we are planting saplings or small plants.

The market is an uptrend and any pullbacks create buying opportunities. For a long time earlier this year I was unable to mention company names since the market was not in an uptrend. The stocks below have all jumped up on volume recently and have good earnings. These companies can be considered in their quiet periods as they pull back on low volume. Remember don’t buy before earnings are announced and don’t buy if these companies have high volume down days.

CLNE - $21.26

HMSY - $52.04

NUS - $28.66

Pause for Thought – CISG AMLN PEGA HELE

The market has indeed performed well in the face of a poor economy and high unemployment. Last March things looked bleak yet the market bottomed and has moved up ever since. This is why the reader needs to follow price and volume and not look at the news. All news is already built into the price of stocks. In any case the market is a forecasting tool of things to come so arguably it could be said that the recent 12 month climb was a forecast of an improving economy. Clearly the economy is weak and it could still stall however things have improved in the last 12 months.


My last update spoke about the market being extended and the fact that indexes can stay extended. Currently the indexes are hesitating so we need to carefully consider new purchases. Friday most indexes were down on quite heavy volume. See the graph below courtesy of http://www.bigcharts.com/

Notice the circled high volume spike which is apparent on most indexes. This suggests you should treat the market with some caution and watch for more high volume selling spikes which may or may not occur going forward. I have to stress however that any pullbacks are healthy at this juncture since the indexes are too far above their 50 day moving average. The reader should still be in buying mode as long as the indexes stay above the 50 day moving average. When indexes fall below the average on volume is the time to think differently.

I remain in buy mode and any pull backs should be viewed as another buying opportunity unless things change. The following stocks are all pulling back into their quiet zone as volume diminishes. As the indexes pull back the following stocks can be considered with a very small pilot purchase. Any falls on high volume in these stocks and they should be removed from your watch list. Be sure not to buy just before earnings are announced.

CISG - $25.28

AMLN - $22.49

PEGA - $37.77

HELE - $26.02