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.
Sunday, August 29, 2010
Saturday, August 21, 2010
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.
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.
Saturday, August 14, 2010
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).
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).
Sunday, August 8, 2010
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
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
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