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

Over Extended – TJX TSCO AGYS UVV

The stock market continues to show good strength with the S&P and Nasdaq appearing stronger than the Dow. This nothing to worry about since the Dow is a price weighted index and its value is controlled largely by a few of the high priced companies in that index. The way the index of 30 stocks is built is such that the very high priced stocks have a much bigger weighting and influence. The Nasdaq in particular has been roaring and can now be considered over extended. This means that the index has climbed too far above its 50 day moving average (see below courtesy of bigcharts.com).

The moving average will soon steepen to the upside and at some point the index needs to come back down to meet the moving average. A healthy market is when the index pulls back a little to approach the rising moving average then bounces back up again staying above that average. The best thing the market could do here is pull back a little on low volume or move sideways for a while so the moving average can catch up to the index. Of course I can’t do the bidding of the market and it could continue up and stay extended for a long while.

From an investors view point we remain in buy mode, manage each of your holdings individually. Add to them as they consolidate and jump up again but don’t be too aggressive while the index is extended. A pull back in your stocks as the index pulls back is normal and healthy. Try not to get stopped out by buying too much too fast which moves up your cost basis. Keep the cost basis (break even point) well below the current market price. If and when you see a consolidation in the index as long as it is on low volume add to your positions and initiate new positions in other companies. As long as the index (or your stocks) don’t pull back on high volume then try and stay invested.

Here are a few stocks that have recently jumped up on volume with good earnings and are now consolidating in their quiet area. Add them to your watch list but remember strike them off if they fall back on high volume and don’t buy just before earnings.

TJX - $42.13

TSCO - $58.30

AGYS - $11.50

UVV - $53.81

Build Positions – LXK, NDN, ODSY, TCO

The markets continue to show strength as the indexes move away from the 50 day moving average. The investor should now be accumulating very small positions. Consider it as planting seeds in a garden, a number may wither and die but a few will grow into big acorn trees. Your objective is to plant many seeds by taking those small positions and add to the ones that start moving up. Remember always recalculate when adding to positions to ensure that if stopped out it will be at a break even price or better. The following have already recently jumped on high volume showing interest and are now consolidating. These can be bought as the stock enters there quiet zone and the stock price tightens up. Those close to the market can buy as a stock starts moving up. Remember don’t buy if earnings are imminent. Don’t buy if any of your considered purchases have any heavy volume down days, these should be struck from your list.


LXK - $34.47

NDN - $16.91

ODSY - $17.69

TCO - $39.39

Break Above 50 MA – AIPC, GMCR, JDAS

My last two blogs have spoke about the indexes Dow, Nasdaq and S&P all flirting and indeed testing the 50 day moving average. The indexes now appear to be breaking through the 50 day MA to the upside. In particular the Nasdaq is breaking through to the upside on increasing volume. See the chart below courtesy of http://www.bicharts.com/

You can see the Nasdaq stalled at the moving average then tightened up only to break out again to the upside on increasing volume. This suggests that the bulls have beaten down the bears as they run into hiding (at least for the moment). Remember the stock market is an art not a science and there are no hard and fast rules on how to identify an up market, otherwise we would all be rich. However as I have mentioned before we do now have an ‘odds favor’ situation. This means the market is more likely to increase near term than decrease, I emphasis again no sure thing.

This is why we have to be great at money management. If you don’t know what I am talking about read my old blogs. The idea is we buy a little and wait for it to become profitable before buying additional equity in that stock as well as starting new positions. Doing it this way leaves very little money at risk if the market turns back down, then you add, add, and add again as long as the market keeps going up. If the market turns down after you own individual positions then you stop buying now positions and just add or deduct from the position you currently own as they move up or down.

Below I wish to mention a few stocks that have recently jumped up on very high volume and are now consolidating. A small pilot purchase can be made in these stocks as they become more quiet with your 10% (or better) stop in place or if you are close to the market you can buy as you see them move up from the quiet area. Make sure they are not about to release earnings otherwise wait until after.

AIPC - $39.33

GMCR - $87.90

JDAS - $28.86