January 2nd, 2013

Shaking Off the Fear

If you’re an individual investor, one of the most important articles of last week besides the focus on the “Fiscal Cliff” debacle was an article in the December 29 Washington Post entitled “Bull market roars past many U.S. investors“.  The gist of the story was that “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis……Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.”

According to the Post, much of the damage to investors is “self-inflicted” because of fear and anxiety brought on by market volatility and memories of past “crashes”.  However, U.S. growth has improved and earnings tied to the economic are expanding.  Those improvements have been reflected in stock prices.  Of the 500 stocks comprising the S&P 500 Index, 481 are higher now than they were in March 2009 or when they entered the gauge.  Some of the statistics supporting these conclusions are:

  • Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
  • The proportion of stocks in the assets in 401(k) and IRA (excluding money market funds) fell to 72 percent from 72.5 percent in 2009.
  • The percentage of households owning stock mutual funds has dropped every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997. [Of course, this could also result from the wide choice, availability and acceptance of competitive ETFs]
  • New money has gone to the relative safety of fixed-income investments as corporate bonds and Treasuries have received nearly $1 trillion since March 2009.

Housing is making a comeback and housing stocks were among the leaders last year, banks are on the mend and financial stocks were also among the best performers and 2013 auto sales are projected to approach 1.5 million. Is it time then for individual investors to begin fearing declines in the value of their fixed income investments as interest rates reverse (regardless of Bernanke’s protestations to the contrary) and start moving money back into stocks?

Meanwhile, institutional investors (the group I call the “herd”) hasn’t fared that well in the market either.  According to in December 26 Wall Street Journal article entitled “2012 Was Good for Stocks, Bad for Stock Pundits“,

  • At the end of 2011, Mr. Cramer warned investors to avoid bank stocks. Oops. They were one of the best-performing sectors in 2012. He urged investors to avoid real estate, but housing prices are up more than 2% from a year ago…..and the stocks of home builders, as measured by the S&P Homebuilders exchange-traded fund, are up 53.6%.
  • Of the 65 market “gurus” tracked during the last few years by CXO Advisory Group, the median accuracy for market calls is 47%. If that sounds low, or you wonder about the quality of the pundit, consider that the list includes such well-known names as Bill Fleckenstein (37%), Jeremy Grantham (48%), Bill Gross (46%) and Louis Navellier (60%).

So how do I deal with the noise coming from the “talking heads” and the uncertain produced by the market?  I maintain my equanimity in the face of volatility by relying on how market participants have behaved during similar situations in the market’s history.  I rely on my Market Momentum Meter to give me some indication of what market participants believe will happen, on average, in the near-term as reflected in their collective buying and selling decisions.  It’s measure by whether they are pushing prices up or down and the momentum behind those decisions.

The Market Momentum Meter turned a bright Green on January 31, 2012 when the Index was 1312.41, or 10.25% under today’s close of 1462.42.  It wasn’t Green for only 10 trading days during the year (the longest period was 7 days around the November correction low:

Like a parent who never quite trusts riding in a car that his kid is driving, I didn’t fully trust my own creation.  It took me a few months after that Green signal at the end of January to increase the money I had in stocks.  As hard as I tried to totally drown out the noise (news) about Euro debt and currency problems and, more recently, the fiscal cliff debates, I never could bring myself to be fully invested and, like corporate America, always had a significant amount of cash on the sidelines.  And then in after the November elections, as the Market reacted to the realization of a second Obama term and continued Congressional stalemate, it looked for a couple of weeks like we might see a repeat of the 2011 market implosion.  Fortunately, I waited this one out and saw money begin flowing back into stocks as prices quickly recovered.

Like many other market participants, I need additional “guarantees”.  Even though the Meter says that these sorts of market conditions in the past have lead to higher prices and that it’s all clear to be fully invested with relatively low risk, I still want to see the Index continue its assault on the all-time highs by first crossing above where it stalled out last September.  When that happens (which could be next week), I’ll feel more comfortable putting rest of cash to work.

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July 10th, 2012

Earnings Reports Season Is No Basis to Evaluate Prospects

As we’re constantly being reminded we’re going through earnings season.  Stocks announce results for the past quarter and outlook for the remainder of the year.  These announcements by company management are compared against the collective wisdom of the “brains” on Wall Street as measured by their average sales and earnings projections and based on whether these two numbers are close, the institutional holders of those stocks will either sell or rush to buy driving prices either higher or lower.

I usually find all these “Earnings Alerts” and the resulting reactions comical because I can never tell whether the “misses” resulted from the “brains” being overly optimistic or pessimistic.  Clearly, we can’t usually argue with the actual results,  so we have to assume that it was the Guru’s on Wall Street that were wrong.

But no one can argue with the very optimistic picture many longer-term stock charts are now presenting.  I have assembled a list of close to a hundred stocks where prices are close to or recently have crossed above resistance levels that extend back 5-10 years.  Every day, new names join the group of stocks that have succeeded in making the cross over into new high territory, some 4-5 year new highs and some all-time new highs.

Without revealing too much information that Members receive in their subscriptions, I offer the following post I shared with them on June 10:

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Last January, I posted a piece entitled “Is the Secular Bear Market Close to Ending?” in which I included 18-years charts for WMT, MSFT, AMGN, QCOM, DIS and IBM. These weren’t pretty pictures (click on the above link to see those charts). The price of each of these large cap stocks was constrained under a ceiling that went back to the 2000 Tech Bubble Crash. I concluded that

 

“What we’re all waiting for are stocks like IBM to breakout because when more do, we’ll be certain that the 12-year secular bear market will have ended.” Since then, DIS and QCOM have joined IBM at being able to penetrate, just barely, those ceiling prices levels.”

 

This past week, WMT crossed above that long-term ceiling (click on image to enlarge):

Biotech and other healthcare stocks are among those leading the market so I suspect that AMGN won’t be far behind in being able to cross above that long-term hurdle:

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If you’d like to learn more about these stocks and others, join the Membership site below.

May 3rd, 2012

Rohrbach on Market Timing

I shouldn’t but I will anyway.  I shouldn’t whine but you’re all friends or you wouldn’t be reading this so I’ll borrow your shoulder to cry on and your ear to hear my complaint.  OK, here it goes, “I don’t understand why more of you haven’t subscribed?”

I happened across a series of interviews on Forbes.com with Jim Rohrbach of Investment Models about using moving averages to spot trend changes.  The essence of Rohrbach’s message is that:

  • “[You] can’t look into the future. If you can just identify when the trend changes, that’s all you need.”
  • “[Most traders] don’t know how to identify a change in the trend in the market, and it’s not that difficult, if you spend the time to try to figure it out.”
  • [most investors] are being told constantly by brokers, etc., ‘Don’t try to time the market…it can’t be done.’
  • [Rohrbach] “spent seven years working on the mathematics of that thing. I kept stumbling, but I finally came up with a way where I can take certain ingredients, which I’m not going to tell you what they are, and if I applied them to the mathematics, I could tell on a daily basis what the trend of the market was for that day.”
  • “Convert the action of the market into a number. That number represents the trend for today. If the market is going up several days in a row, that number will go up, and vice versa.  But you’ve got to know the ingredients, and you’ve got to use mathematics. Don’t listen to those guys on the Street, or wherever, who tell you the reasons for the market going up or down, because they have nothing to do with reality.”
  • “And you’ve got to stay in [Apple] if you’re really going to capitalize on this thing. If you get out because Apple dropped ten points today, that might be a big mistake…… Stay in, stay in, stay in. Even if the market goes down 200 points.”
  • “You don’t have to be smart. You have to be intelligent. You have to have a strategy that tells you when to get in and out….if you have something that’s worked for 40 years, then once you know where the market’s going, the trend of the market, then you can start playing around with individual investments.”
  • “Just play it with the market. It’s telling you—and I know that’s kind of difficult for the average person to do, and it’s also very difficult for them to have the discipline to act on every signal. Your emotions get involved in this game, especially when your money’s involved.”

I tell you all this because I want to demonstrate what I’ve been writing here about since starting this blog over six years ago are the same things that others in the know have been doing also.  I also studied the market’s action since 1963, almost 50 years worth of history, and came up with my own mathematical indicator as to the strength of the market’s momentum and direction; I call my indicator the Market Momentum Meter.

If market conditions remain relatively unchanged over the next several weeks, the Market Momentum Meter will approach a critical level early in June.  Members to Instant Alerts see what the Meter’s reading is each time I make a trade; each day’s reading is recapped in the Weekly Report.

Rohrbach charges $395/yr for his market timing service or, as he says, “about a dollar a day”.  My service is less expensive plus you can see how I translate my Market Momentum Meter into actual trades shortly after their execution.  I also keep track of the the performance of those trades in a Model Portfolio because market timing needs to be followed with a high success factor in stock selections (even the best in baseball strike  out once in a while).

The market is at a critical point.  Is it correcting or reversing?  Should you sell in May and go away or buy in anticipation of a market resurgence?  Become a member to see what I’ve done.  Don’t put it off, act now!

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!

April 18th, 2012

Hold on to your winners and quickly sell your losers

The previous post explored challenges posed by a stock that disappoints, in this case, the disappointing reaction to news that HALO was requested to provide additional information to the FDA on a new drug they had submitted for approval.  According to my “selling rules” discipline,

In short, decisions to sell stocks should be the exception rather than the rule and those exceptions fall into the following categories:

  • individual stocks where risks associated with that stock appear to have increased:
    • Sell a stock that you may have bought incorrectly (i.e., too early, too late after a breakout buy point, a stock pattern fails or you erred in reading a chart incorrectly) and performance disappoints shortly after the purchase.
    • Sell any stock that has a surprise including such events as reporting an accounting error, a badly missed earnings announcement, a significant top management change or terminated merger and acquisition discussions. [example, HALO's announcement of more delays in FDA approval of a new drug].
    • Sell a portion of a stock position that, because of a large run, ends up comprising too large a percentage of your total portfolio and thereby increase its risk (a large position in NFLX or PCLN are examples).
    • Reduce exposure to an industry group if it falls out of favor (for-profit education stocks come to mind).
    • Sell a stock that has underperformed the market and you expect to continue doing so over the near term future as measured by its relative performance during the time you’ve held it (of course there are many of these I could name).
  • Sell a stock opportunistically to generate funds to take advantage of a stock you believe has relatively greater potential than the successful stock position you’re selling. I discourage this because it often results in nothing more than account churning and ultimately worse performance for the total portfolio over the long run.

But stocks follow chart pattern rules more often than they disappoint, especially when they have the wind of a favorable market behind their back.  The following three stocks have moved extremely well after crossing above significant resistance levels (stocks that I had add to my portfolio over the past couple of months).  According to the Sell Rule Discipline, there’s no apparent need to sell these stocks even if the market enters into a “Sell in May ….” sort of consolidation over the summer (click on images to enlarge).

  • INTU
  • IACI
  • CLB

While astute chart reading is important to being successful in the stock market (the number one requirement being that purchases need to be timed with market health and momentum), an even more critical factor to successful performance is to “hold on to your winners and quickly sell your losers“.  Just because these stocks show double digit appreciation since purchase, there’s nothing to indicate that the market won’t resume advancing after it consolidates.

These stocks and others that have crossed above significant resistance levels may retreat along with the market but there’s nothing to indicate that they need to be sold …. unless they fall below those resistance level breakouts and market momentum moves from consolidation to clear reversal.

March 19th, 2012

Would I buy the stock today if I didn’t own it?

I can’t believe it’s been two weeks since my last post.  Please accept my apologies.  I’ve been doing exactly what I said I would do in that March 2nd post, I’ve been “shooting fish in a barrel”.  And for the time being, I believe my fishing respite is coming to a close.

The market crossed above April’s high and is slowly climbing to what might be the next resistance at approximately 1435-1440, or a mere 2.5% above Friday’s close.  Last week, the market ended 2.43% higher for the week so the next resistance may be reached by the end of this coming week.

Why could 1435-1440 be the next resistance area?  Not because so many others are talking about it (and they may because they look at the same charts) but because that’s approximately the level of the higher of two alternative necklines of the 2007-2008 reversal top of the 2007-2009 Financial Crisis Crash.  The lower is where last year’s correction began and the extension of the upper neckline is where the market is heading next.

It would be nice to think that once the market recovers a trend will continue unabated for an extended time.  Unfortunately and disappointingly, that’s not the way market’s work.  The market has risen 16.49% since December 16 and needs to digest this extended move.

I’m guessing that the market was recovering from the 2007-2009 Financial Crisis Crash until the European Debt crisis and the Congressional Federal budget stalemate last year stopped it in its tracks.  Even though we will soon enter a consolidation there should be plenty of further room on the upside before a major correction along the lines of last year’s.  Too many stocks haven’t yet fully participated in the unbelievably beautiful, stealth bull market that’s occurred since the beginning of the year.  For example, even though many of the banks and other financial stocks have led the market higher so far this year, most are still just now crossing the necklines in their chart patterns indicating that there should be another an equal amount of appreciate left in their move.

The challenge up to now has been to put money back to work without severely increasing risk.  The next several weeks will present a different sort of challenge: determining which stocks you own are 1) consolidating previous gains, 2) late bloomers and will begin their move after the market correction or 3) will be forever doomed and should be sold.  Here are examples of some that I’m evaluating:

  • BR: I recently added this stock on the expectation that a strong market will help it cross above its long-term resistance into all-time new high territory.  Was I premature by not waiting for that cross?  I didn’t follow a discipline of buying only after a breakout and now wonder whether I will soon pay the price of that violation.
  • EMN: Purchased the stock in the hope that the “buyers’ remorse” correction had ended and it was able to realize the potential of its ability to cross into all-time new high territory.  Should I patiently wait for that realization or should the stock be abandoned while I can exit with a small profit.
  • EXPE: Another stock I purchased on the expectation that a strong market will help it cross above a long-term resistance level.  But now a market consolidates will probably hinder the stock’s ability to cross above the upper boundary of the ascending channel and the long-term resistance level.  Wait it out or sell?  That is the question.

I’ve always found that the simplest way of deciding whether to hold on to a stock is thinking the mirror image of the question: “Would I buy the stock today if I didn’t own it?

February 23rd, 2012

How Reliable is the “Stocks on the Move” Scan?

If you’ve explored this site you’ve learned that one of the benefits of a membership is access to Watchlists, lists of stocks culled from the 7000 or so publicly-traded stocks by way of scans whereby all stocks are filtered against combinations of different financial and technical parameters and by my visually scanning hundreds of stock charts for potential breakout potential.

One of my favorite scans is called “Stocks on the Move”, a filter that focuses on parameters defining outstanding fundamental operating plus strong technical performance.  I developed this scan a number of years ago while attempting to replicate similar lists published in Investors’ Business Daily.  My scan was modeled after IBD’s and frequently delivers many of the same names.

A subscriber wrote the other day asking whether I’d “performed any regression analysis to ascertain the relative predictability of these parameters?”  I had to confess I hadn’t performed any rigorous analysis and realized that I should …. for the benefit of both my subscribers and myself.

I had twice posted the results of “Stocks on the Move” scans (July 22, 2009 and March 2, 2010 ) and I made the most recent list available exclusive to subscribers on January 6, 2012.  But the question remains: on a back-tested basis how reliable were these scans?  If you had selected stocks from any of these three lists, what’s the probability that they would shown a gain? outperformed the S&P 500? would the performance be any different 100 days, 200 days, 300 days or 500 days in the future?

Some might argue that this is a limited sample but I believe it’s indicative of the potency of “Stocks on the Move” as a reliable source of investment ideas with a low risk and high probability of outperforming the benchmark.  Of the 7000+ stocks the scan picked up the following stocks more than once and all together 358 different stocks:

But the question asked whether it was possible to “back-test” the scan to determine how well the stocks captured in the Stocks on the Move scan performed over various time horizons:

The back testing was performed at intervals of approximately 100 trading days after when the scans were run against 2 measures: absolute performance and performance vs. the benchmark S&P 500 Index over the same periods.  Interestingly:

  • Stocks filtered out in the scans run on both days, more than 50% of the stocks filtered out by the scan appreciated above the price on the day of the scan for 300 or more trading days into the future (of the S&P 500 Index, half perform better than the Index itself by definition).
  • More than 60% of those stocks also outperformed the S&P 500 far after the Scan was run however that better than average performance occurred primarily shortly after the scan run date; by approximately after the end of the first year, those stocks  no longer showed superior relative performance.

Become a member now and you’ll have access to the archive of all the Watchlists, the Weekly Reports, the Model Portfolios and all the Instant Alerts since November to help you navigate this market as it moves higher.

 

 

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January 18th, 2012

The Challenge of Assembling a Watchlist

Since the market looks like it’s firming (my opinion and, yes, I’m aware that many believe the market is actually topping out and will soon be making its final leg down to new lows), now’s a good time to begin assembling your watchlist of stocks that may be ripe for the picking as soon as a bull market begins unequivocally.  I’ve assembled four such Watchlists for members of Instant Alerts, each based on one of the following four scans:

  • 5-yr Highs(scan run on December 23): a truly momentum-based scan that produced a list of 51 stocks that crossed into all-time new-high territory .  The premise is that a stock that has made “all-time new highs” has a low risk of reversing course and is likely to continue making new highs.
  • Relative Strength (scan run on December 30): another momentum-based scan that produced 22 stocks that had a the top 10% relative strength vs. the S&P over the past year plus were in the top 10% in shares traded over the previous five days.
  • “Stocks on the Move (scan run on January 7): a scan that produced 53 stocks based on a combination of both fundamental and technical indicators as follows:
    • Price > $15
    • Price % change today > top 25%
    • Relative Strength Indicator (RSI) > top 50%
    • “Moneystream” Surge for past week > top 50%
    • EPS % change for past 4 qtrs > top 50%
    • Volume Surge today > top 50%
  • Momentum (scan run on January 13): another stab at a combined fundamental and technical scan that produced 128 stocks
    • Earnings Growth Rate over 5-years – top 25%
    • Sales Growth Rate over 5-years – top 50%
    • P/E Ratio – top 50%
    • Price > $10
    • Volume ($) for the day – top 50%
    • Relative Strength vs. S&P 500 past year – top 50%

You would expect that the same names would appear on multiple lists because the criteria overlapped to some extent. Interestingly, that didn’t happen.  While 254 stocks appeared on all these lists, there were 237 unique stocks …. only 17 names appeared multiple times.  In other words, each scan produced pretty much different names.

To see how this list compared to stocks that have performed well, I produced another scan: stocks whose four moving averages (50-, 100-, 200- and 300-dma’s) were in a perfectly bullish alignment from the fastest on top to the slowest at the bottom.  Out of 5100 stocks,  436 met this criteria.

You would expect that many if not all the stocks in the previous scans would be on this broader list of stocks with favorable price momentum but this wasn’t the case:

  • Only 89 of the 237 stocks in the previous scans, or 37% had bullish price trends as indicated by their moving averages.
  • Fully 80%, or 347, of the 436 stocks with bullish price trends weren’t caught in the previous technical/fundamental scans.

There actually was little correlation or overlap between the different scans.  It’s actually very difficult to narrow the field down:

The conclusions I draw from these statistics are that:

  • scans are a good place to begin but there’s no substitute for good judgmental chart reading and
  • good market timing always trumps stock selection.

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January 11th, 2012

The Breadline for Financial Bloggers

Time have been tough for hedge fund managers, big and small.  John Paulson, for example, needs to generate a 104 percent return to recoup a 51 percent drop in one of his largest funds after wagers on a U.S. recovery went awry.  Until he hits that mark, Paulson will have to forgo his 20 percent performance fee, and will collect only his 1.5 percent management fee.  According to the San Francisco Chronicle,

“Hedge funds are on track for their second-worst year in more than two decades. They’ve dropped 7.6 percent from their peak asset value in April, according to Hedge Fund Research. At the end of the third quarter, about 30 percent of the 2,000 funds that make up the firm’s benchmark index were below their so-called high watermark, or previous peak value.”

That’s the herd but what’s happening to the individual investor?  According to the NY Times, in an article entitled “Small Investors Recalibrate After Market Gyrations”,

“small investors withdrew hundreds of billions of dollars from American stock funds, and they kept bolting as the market rebounded sharply for much of last year….The timing for those people was off, and now they are being buffeted by the steep drops on Wall Street or bailing altogether. Still others who have been holding on in recent years have had enough.”

Some investors fear that the markets have become dominated by high-frequency traders blitzing in and out of stocks, or by sophisticated hedge funds running mind-bending algorithmic trading programs that can outsmart the ordinary investor.  After years of underperformance or losses, some individual investors are questioning whether the long-term outlook that has been drilled into them by Wall Street financial advisers and professionals is really the best advice.

As reported on Yahoo! Finance, “The WSJ says all this volatility is detrimental to the markets … Plus, the swings scare off individual investors, leaving only the big players on the field.”

But the high volatility and lack of trend is a double-edged sword for us financial bloggers.  Not only do we struggling like other individual investors to make a reasonable return on our own investments but we also suffer because so many individual investors have thrown up their hands and resigned themselves to sitting on the sidelines or exiting the market all-together and are, therefore, in no mood to plunk down a membership fee.

But having abandoned the market, those individual investors aren’t aware that what we may be witnessing is the withering end of a secular bear market that’s held us hostage for the past 12 years.  By remaining uninterested, uninvolved and uninformed, those investors could run the risk of missing out on the quickest and most inclusive of all stock market moves … the exit from a long horizontal trading range.

Rather than turning away, investors should be now looking for the most reliable and objective source for market timing.  I believe with our proprietary Market Momentum Meter, the Stock Chartist blog is answer.

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December 5th, 2010

Hold or Sell: A Nice Problem to Have

A few weeks ago, in “My ‘Sell Rules’ Discipline“, I very confidently stated that

Stocks with momentum that have appreciated substantially will tend to continue moving up. Stock retreats brought on by market consolidations may actually be an excellent time to the position size of winning stocks. In short, decisions to sell stocks should be the exception rather than the rule…”

What I didn’t expect was that I’d be faced with the quandary of whether or not to sell a strong momentum stock so soon. But the strong market over the past several weeks have placed several recently purchased stocks in exactly that situation.

As subscribers to my Instant Alerts know, as of Friday, 85% of the 85 stocks of the stocks in my portfolio show gains since their purchase and 75% have appreciated more than the S&P 500 since their acquisition.

The reason I bought most of these stocks was: 1) the market was clearly approaching an “all-in” signal and 2) these stocks were trapped by “New All-Time High” or “Stocks on the Move” scans. They were breaking across long-term resistance trendlines with many moving into all-time new high territory. Several have had stellar moves in a short time:

Take CEVA as an example (click on image to enlarge):

CEVA has been like a rocket since crossing above its resistance trendline into all-time new high territory gaining 69% while the S&P 500 has risen 12%. According to my “Sell Rules”, its sale would be dictated by a market correction, abandonment of the industry group by the “herd” or some event endemic to CEVA itself …. something other than the fact of its astronomical rise.

Some could argue that I should have avoided being “piggy” and sold all or a portion of the stock on October 25 at a 25% or November 5 at a 50% gain; now at 69%, continuing to hold it would clearly be suicidal.

How about ICO? After purchasing it on August 5 at 5.04, a sale on October 12 would have netted nearly 20% or on November 19 a clean 40% gain. Continuing to hold it with a 59% gain would again be no less than marching off to the slaughter house.

One technical “rule of thumb” for identifying price objectives is to place the breakout level (neckline, resistance trendline, etc.) at roughly the midpoint between the trough and a peak. In CEVA’s case, with a trough at around 5.75 (measured from the March 2009 lows) and the breakout trendline at 12.75, the price objective could be around 28.25 (12.75/5.75 x 12.75 = 28.25); for ICO, the price objective would be around 12.5 (5/2 x 5). Of course, the tough part is picking the trough and breakout points that’s why I prefer broader “zones” instead.

Am I acting foolish? What would you do? If you had sold, what would you have done with the proceeds? If you sold Monday (all or a half), what would you do with the money? I think what I’m going to do is go back to the charts and come up with some price targets …. assuming the market continues advancing into 2011.