September 10th, 2009

A Strategy That’s Worked and Its Results

The reason I haven’t been writing as much recently is because I’ve been busy tending to my portfolio and watching the total balance at the bottom of the screen continually clicking higher. What a wonderful feeling seeing a sea of green and watching its percentage change during the day by usually 40-50% more than the change of the S&P 500.

It’s what I’ve been waiting for and writing about since May, to the dismay of the skeptics whose comments claim that the market will soon be headed south again. Since Friday’s close at 1016, the market is up 2% – far from the total 10-15% I’m looking for by year-end but not bad for 3 trading days.

And if you were in some of the more volatile stocks I’ve written about then you could have seen your portfolio (depending on how many stocks you own and the percentage of the total you put into these volatile vehicles) increase by 3-4%.

Here’s a snapshot of most of the stocks I currently own that have performed exceedingly well …. so far:

Some of you are asking “Why so many stocks in an industry group?” or “Isn’t it hard to research and then stay on top of so many stocks?” My answer is that actually it isn’t. I take a very top-down approach (market and sectors) rather than bottom-up approach (individual stocks). It’s also a money management approach of deciding how much to have invested and then making sure that the pool of money that is invested, regardless of the number of individual stocks or industries, continually deliver the sort of return needed to meet the objective (i.e., return 50% more than the S&P 500 and avoid suffering a loss). Here’s the process I follow:

  • First, you begin by “timing the market”. Determine what the future direction of the market will be over the next several months and, based on that market timing guesstimate, decide what percentage of your portfolio should be invested now, how much cash should remain and how long before you think you hit the next market target.

    Readers here know that my on the bottom was March 19. Each step of the way from that day till now, I’ve incremental reduced my cash position and increased my stock exposure. There were hurdles and at each step the market has proven itself, my commitment increased. Today I’m essentially fully invested.

  • Second, identify what you think might be the hottest Industry Groups and commit in a basket of stocks of that Group. The groups change every so often so some rotation is necessary. It looks like the some of the Oil & Gas – Exploration and Development stocks are starting to move.

  • Finally, assemble a basket of stocks in the industry with: 1) charts where it looks like the stock is going to break out of a base or consolidation, 2) look for some of the more volatile stocks, 3) if possible, select stocks with a high yield. A number of these stocks were found through different scans such as “Bull” and “Golden” Crosses, new high lists, “momentum” and “stocks on the move” scans.

I expect to be able to hold many of these stocks until the market begins to tire at which time a decision will have to be made as to which to stocks to sell, whether to increase the cash position or pick up stocks at that time with excellent chart patterns in anticipation for the market’s next move out of its consolidation. As I described in “Comparing Labor Days in 2003 and 2009” a couple of weeks ago, the market’s Tech Bubble Crash recovery continued straight through Labor Day until the begining of 2004; most of 2004 was eaten up by a 9 month consolidation. There’s no telling whether that will happen again in 2010 but we have time to develop a strategy if it does.

While they haven’t performed as well, I continue to own some foreign currency and stock exchange ETFs, along with precious metals, as a hedge against inflation starting to rear its head.

This strategy has driven my portfolio to a 33% increase vs. a 22% increase in the S&P 500 since March 12. Not bad for a day’s work. Let’s see if we can get another 7-10% market move to the end of the year without losing any of the gains earned so far.

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  • Minnesotalee

    The wedge is broken. Your H&S pattern is the one or should I say WON.

  • Anonymous

    guru, congratulations!! that is a lot of stocks to track..I only own EEM, GS & trade EDC, FAS, BGu & TNA…

    oildigger

  • Guru

    Yes, Minnesotalee, it is the H+S. Always thought it would be but had to temper my enthusiastic anticipation just to be on the safe side. Patience is a difficult discipline to master.

  • G

    I am starting to understand the rationale of when to "buy" but haven't seen any discussion on what to look for as a signal that it is time to "sell"

  • Guru

    Good point, G. Let me try to address that in a future post when it gets closer to the time to consider making selling. Briefly, though, I believe you hold as long as you can because its usually better sticking with a known commodity than try luck with an unknown. Having said that though, sell if:

    1) stock selection was bad timing or didn't meet your expectations within 4 weeks or 5-10% loss
    2) you have a clearly better stock with greater upside potential
    3) a significant gap down due to surprise negative announcements like accounting irregularities
    4) general rotation out of the stock's industry group
    5) start of a market consolidation or bear market.

    The nice thing about selling is that if it was a mistake and stock continues to move up all you suffer is an opportunity cost and you can always buy it back. If you made a mistake buying a stock and suffer a loss that's not easy to recoup.

  • Charts and Coffee

    Guru, I've been lurking and just wanted to say thank you for the posts. I've been following you since the beginning of the year and I have grown to have a certain appreciation for your skill and experience.

    CC