May 1st, 2012

Don’t Let the Train Leave Without You

At the beginning of the year, I outlined my process for assembling an Watchlist of stocks that look like suitable candidates for purchase (see “The Challenge of Assembling a Watchlist” of January 18, 2012).  In short, the process involves running four scans that identify stocks meeting certain fundamental performance and technical momentum criteria and then manually looking at the stock’s charts to identify those that: 1) look as though they are about to cross above the apparent upper boundary of a congestion zone (either reversal bottom or consolidation chart patterns) or 2) haven’t moved too far above the previous congestion zone increasing the risk of the stock being susceptible to succumbing to a downdraft in the event of a market correction.

The market has been trapped in a very narrow trading range since mid-February and is again approaching the upper boundary in another attempt at breaking above and continuing to drive higher.  Therefore, it’s time to assemble another watchlist.

This time, using the process described above, I culled a list of 132 stocks that, in my judgement, meet the criteria.  The four scans delivered an additional 346 stocks  but most of those stocks have already had huge runs and are far above their most recent previous congestion zone.  Many of the names on the larger list of momentum stocks contains the names of stocks that are now familiar leaders; 71% have increased 10% or more since the beginning of the year while 35% are up 25% or more.  I was fortunate in having added 26 from the list to my Model Portfolio and show gains on them.

My most recent Watchlist consists of 26 healthcare, 24 tech and 30 resources and manufacturing stocks:

It’s from this list I suspect (it’s probably safer to say “hope”) that the momentum leaders in the market’s next up-leg will come.  That’s not to say that the movers since the beginning of the year won’t lead also in the next leg; I only say that if you are afraid of buying into such high fliers as AAPL and PCLN, then you can probably get some nice percentage moves in some of the new comers without at the same time suffering acrophobia.

Members have access the list and now you can also (click here).  Be prepared for the next leg higher.  Learn the price levels that signify a breakout and trigger a purchase.  Know when a stock may have run to far ahead to catch without risk.  Don’t let the market’s next move leave you standing on the sidelines watching as others make money.  Act now!

September 20th, 2009

New Place to Mine for Winners

It seems as if it were longer but only two months ago I described stock picking then being as easy as “shooting fish in a barrel” since many stocks had formed classic bottom reversal patterns. I even included a spreadsheet of 135 stocks, labeled “stocks on the move” because they met certain specific criteria (click on article above for the criteria); they looked like horses at the starting gate waiting for the bell.

Fortunately, this time I did take my own advice and did buy some for my portfolio because as a group, the stocks have increased 16.7% to their highs during the period and 13.2% to last Friday’s close. Of the 135, only 5 declined, 5o increased less than the S&P 500 but 85 went up more (click here for the updated recap). The biggest winners, if you were lucky enough to have picked them were:

What’s upsetting and distressing is that only 5 of the 135 are on the Stocks on the Move scan today. As a matter of fact, the scan produced only those 5 stocks. So even though the Index continues to move higher, it’s more and more difficult finding stocks that look attractive at this point.

So what is one supposed to do now? Should I swap out my big winners (if you were lucky enough to have bought WYNN, you’d over 60% to Friday) and put the money elsewhere? If I have some cash waiting on the sidelines, is this a good time to buy and, if so, where should I put it?

Good questions and, unfortunately, the answer isn’t so good. I’m having a hard time finding stocks where the future reward currently exceeds the attendant risk. But when I do find them, they seem to concentrate in the familiar commodity-based Industry Groups of Energy (see “Mysterious Happenings in the Oil Patch (Stocks)“), Metals, Steels, Coal and Precious Metals.

Does it have something to do with the continued weakness of the $US? Probably, since many were expecting the dollar to rebound when it touched a level that seems to have been support since the early ’90’s. It didn’t hold and the dollar continues sliding to the levels it hit in early-mid 2008:

There’s a lot of debate around which is best for the US today, a strong or a weak dollar. We’ll let other duck that out. What I’ve thought for quite some time is that about the only way out of our huge debt position in the hands of other countries is to devalue our way out. What that means is inflation, higher interest rates and higher commodity prices (when expressed in terms of $US). Having said that, some of the stocks (ETFs) where the expected rewards and risks might still be in balance include:

  • OIL
  • REA
  • XME
  • PTM
  • X
  • CENX (or AA)

Plus, of course, the precious metals complex including: SLV, GLD, UGL, DGL, GDX plus the wide range of miners.

May 22nd, 2009

Is it déjà vu or something new

If you’re anything like me, then your focus is beginning to turn from “what-should-I-buy” to “what-should-I-sell”. Although it was a phenomenal run since March 9, it was just too good to last. Sure, the Index crossed its 180-day moving average (I’ve added the more conventional 200-day moving average to the chart as a gray dotted line for the traditionalists) but it never was with convection. It did so for only a day or two and volume actually declined and continues to do so.

We’re now stuck with the toughest question in stock market investing/trading – when should you sell? Accepting the proposition of a 10% market correct to around 800-810, what should we do with stocks we now own? I wish I could give you an answer but no one answer or rule of thumb covers every situation.

More importantly, the question you should ask yourself is whether there are strong, compelling reasons to not sell a stock. As a general rule, I would say that market direction and momentum rules; if the market is starting to trend down, you should sell nearly everything (especially since the Index is still below the 180-day moving average). Because you think it’s a good company, pays a good dividend, you already own it and believe it will come back or because Cramer just mentioned it on his show are not good enought reasons to continue holding a stock.

Other factors you should consider:

  • Did you buy the stock close to the March 9 bottom and now have a large profit [at least sell half]? Or did you just recently buy the stock and it now has a small loss [no loss in selling and starting again later].
  • Is the stock volatile [will drop 20%, for example, if market drops 10%] or relatively stable [perhaps weather the storm with some]?
  • Contrary to everything a regular reader of this blog believes, are you a buy-and-holder who’s owned the stock since before the crash and are hoping it will return to pre-Crash levels when the market and economy finally recover [you’re a lost soul – Sell]?
  • Do you actively monitor and manage your portfolio [conserve your capital to gain relative to the market when it’s time to jump back in]?
  • Do you have a way of knowing [like, for example, through reading this blog] when it’s time to get back in and what stocks might be the right ones to buy then?

Here’s a strategy I’ll be following myself:

  • I plan to be no more than 30-40% in stocks. If the market declines more than 10% (or, coincidentally, below the now converged 60- and 90-day moving averages), I plan moving again to nearly 100% cash.
  • Holdings will be limited to stocks related to:
    • weak dollar (forex ETFs),
    • commodities (steel, coal, ag products),
    • precious metals (gold, silver and miners),
    • higher interest rates (Treasury bond short ETFs),
    • foreign stocks (Australia, Chinese, Brazil, India, Asian)
  • As a further hedge, I have a small percentage in the S&P double short ETF, SDS.

I know this sounds extremely conservative, some might even call it pessimistic. But I’m actually quite optimistic. I, like many others, have been waiting on the sidelines and are anxious to jump in with both feet. There are reports of huge amounts in money market accounts waiting for just that opportunity. I’ve been anticipating this pullback and have written often about it as you know.

It’s not going to be much longer but the doubts, fears and anxieties will turn the next several weeks into a déjà vu kind of experience.

March 23rd, 2009

Metal Ores Industrial Group: RIO, BHP, RTP, PCU, SLT, CCJ, ZINC

Regular readers here are familiar with the various ways I’m capturing stocks I believe will be leaders as the market continues to build a base and transitions from distribution to accumulation phases in its life cycle. Another tool for helping find future leading stocks is the rankings of IBD’s Industry Groups.

One of the critical components IBD uses in calculating Group rankings is the performance of stocks comprising the Group relative to the overall market. Industry Group stocks that outperform the market (as measured by the S&P 500 Index, for example) move up in rank; Industry Groups that have poorer performing stocks drop in ranking.

This is unabashedly a momentum strategy. In short, it assumes that not only does current ranking indicate the best performing Industry Groups but it also assumes that there’s a high probability that Industry Groups that begin to outperform the market (move up in rank)) will continue to outperform the market for some time – perhaps a quarter, 6 months even perhaps a year – until they are near the top ranking where the only direction, some time in the future, will be a lower ranking and worse performance than the market average.

Again, a critical element of Industry Group rankings is relative performance. In a Bear Market Crash, a high ranking doesn’t mean stocks in the Group are increasing; it only means that the average stock in the Group may not be declining as badly as the total market.

This past Friday, the Industry Group with the second greatest increase in ranking was the Metal Ores Industry Group. This week, the Group was ranked 46 or 138 positions higher than the 192 of 4 months ago, 5 positions from the bottom. The following graph summarizes the history of the Groups ranking for the past several years:

What are some of the stocks in this group and do their charts have any of the patterns indicating potential reversal patterns described over the past several weeks? They clearly do. Some of the largest by capitalization (except for ZINC) are:

  • RIO (Companhia Vale Do Rio Doce)
  • BHP (BHP Billiton)
  • RTP (Rio Tinto)
  • PCU (Southern Copper)
  • SLT (Sterlite)
  • CCJ (Cameco)
  • ZINC (Horsehead Holdings)

Remember:

  • for less risk, stocks should cross above the resistance trendline with above average volume;
  • there will usually be other opportunities to buy the stocks after a breakout when they retreat to test the trendlines;
  • a favorable market adds tailwind to insure a low risk investment;
  • these are very volatile stocks that have fallen to fractions of their pre-Crash highs. If they do start moving up there will be many opportunities over the next several months and years;
  • rather than buying individual stocks, the XME (Metals and Mining SPDR etf) has many of these stocks and has a similar chart pattern.