April 28th, 2006

Bottom of the List: Big Stock Declines

For you CNBC Fantasy Portfolio junkies, stats in the next post.

============================================================

I believe my portfolio management process is pretty effective.

  • Look at the charts of stocks with the largest daily percentage gains to see whether there are any with clear-cut resistance trendlines and break out potential.
  • Add those stocks with clear potential of breaking through resistance trendlines to a price trigger watchlist at my broker and then
  • Buy only those stocks that have actually broken out (after freeing some capital by pruning out stocks that either aren’t meeting expectations of those that have delivered extended profit moves).

My “price trigger” list now includes about 250 potential “buys” if and when they successfully complete a breakout. Some stocks have been on the list since November and December; had I bought any of them when they first looked promising, my money would have been tied up for months waiting for a move.

But “owning” them only in a watchlist of sorts (almost like a “fantasy portfolio”), I don’t have to track and monitor them and my capital isn’t tied up. I let stock prices, through tripped price triggers, tell me which to buy and when. In the meanwhile, I’m freed to focus on stocks I
already own, continually deciding whether they continue to merit being held (especially those that may have disappointed and in a loss position). A good case in point is ASV Inc (ASVI):

The stock was purchased in November, 2005 on its breakthrough of a long-term resistance trendline that began at the end of 2005. It gained over 30% in two months and established a new resistance trendline. The stock was sold after it showed renewed weakness after a third failed attempt to breach this trendline; the stock has been in freefall this month and is approaching the old long-term trendline which, if held, may present another buying opportunity in the stock.

Most of us only search for stocks that have moved or, we hope, will move up. But it’s good
discipline to frequently balance our usual bias towards a bullish view by applying the tactic to the bottom of the list. I flipped the stock list of the nearly 3000 stocks with capitalization of more than $500 million (stocks qualifying for the CNBC Fantasy Portfolio Challenge) upside down and looked at the 100 that had the largest percentage declines each day. I was surprised by what I found.

Avg
% Change 100 Largest Moves
Up Down
4/5/2006 6.040% -3.893%
4/6/2006 5.790% -4.058%
4/7/2006 3.215% -4.904%
4/10/2006 4.057% -5.065%
4/11/2006 2.784% -5.358%
4/12/2006 5.208% -3.373%
4/13/2006 4.955% -3.249%
4/17/2006 5.373% -4.550%
4/18/2006 7.660% -2.576%
4/19/2006 7.291% -3.677%
4/20/2006td>

5.724% -6.873%
4/21/2006 5.087% -5.796%
4/24/2006 4.378% -4.325%
4/25/2006 6.599% -5.782%
4/26/2006 7.218% -6.002%
4/27/2006 7.045% -9.206%

The 100 stocks with the largest percentage declines yesterday dropped by an average of 9.206%. The declines were the largest since the challenge began on 4/5 (interestingly enough, the average increase of the top 100 gainers has remained around 4.5-7.0%). The individual stocks making up the list was quite impressive and presents a disquieting picture. Many of them are old darlings that surprised with disappointing earnings or finally merely tired of
fighting against a downdraft.

I’m just about ready to put the little reputation I’ve created writing this blog on the line by sticking my neck out, getting off the fence and falling on the side of those saying that we’re closing on an intermediate top. Being a raging bull since starting this blog, I’m beginning to see too many stocks that are just not being able to penetrate resistance levels, others not
being able to stay above support levels. Even though the averages are closing in on new high territory, there are many fundamental forces weighing on the market including energy costs, the 4-year age of the market, the upcoming mid-term elections and seasonality (“sell in May and go away”).

The thing that most people are hanging their hopes on is the end of Fed rate hikes. However, I just heard that, contrary to the popular belief, the market has fallen after 7 out of the last 9 rate hike ends!.

The market will be signally us its course for the next few months over the next few weeks.

Subscribe below or click here to learn more about help for navigating turbulent markets.