May 28th, 2008

JCG, NDSN and SWKS: Beautiful Charts. Timely Buys?

One day doesn’t a trend make but today’s action, beneath the surface, was more encouraging that it first appeared. The type of stocks making new highs is broadening out from strictly the energy sector. In addition, several recent IPO’s (within past 3 years) are striving hard to break into new new territory.

Take JCG (J Crew), for example. This stock appears like it’s about to break out of a symmetrical triangle just the way RL (Ralph Lauren) did today just as I had expected (note, I mentioned RL specifically and the Apparel Manufacturers and Retail-Apparel Industrial Group on May 17). Here’s the JCG chart:

I know what you’re saying. Just this morning, in answering a reader’s question about BAC, I wrote that symmetrical triangles aren’t reliable bases. But I also said that they were more reliable as consolidation patterns. This is exactly what the JCG symmetrical triangle above looks like to me. What’s most important is the direction both those stocks were trending before starting to form their triangles — BAC was trending down while JCG was trending up. If the market continues to improve and the Apparel Group continues ascending in ranking among the industry groups, JCG has a strong chance of matching the double it made before the triangle and move all the way to the 80-90 range.

As I was scanned the new highs list, a number of other stocks popped up as strong candidates for continuing to move higher:

  • NDSN (Nordson): Offers an interesting example of a 1) a breakthrough a long-term resistance trendline (1994-2003), 2) a herd’s remorse retest of the the breakout in the shape of a downward-sloping channel that lasted 18-months, 3) a perfectly formed long-term, upward-sloping channel and, finally, 4) a recent breakout from an upward-sloping triangle consolidation pattern. All of the above with continually favorable volume trends.
  • SWKS (Skyworks Solutions): Although having moved into 4-year new high territory (signaling that it’s probably cleared a significant amount of headwinds), SWKS is 20-24% below a major resistance trendline at 12.20 it has to breach before clear upside momentum can begin. You can either buy now and hope to collect that 20% gain (perhaps taking an initial position of 25% and scaling up to 100% if an when it successfully breaks 12.50) or put SWKS on your watchlist while you take advantage of other, more certain, situations elsewhere.

I haven’t reported on the MTI (Market Timing Indicator) since May 21 but, although improving, is still signaling “all cash”. Patience is difficult, especially on days like today. If you’re like me, you decide to assume the risks (even in the face of all the bad economic background news) with small, early positions in stocks that may be terrific movers when the market does get on more solid footing.

May 14th, 2008

WRES: Example of Symmetrical Triangle and New Highs

A reader asked for a reading on WRES (Warren Resources) and I thought, because stock chart interpretation is a visual sport, this was the best way to respond. Here’s the picture:

I have to admit, it’s as pretty a picture as you can get.

Having said that, I should also caution that I’ve found symmetrical triangles somewhat unreliable. They indicate that while buyers and sellers are coming closer together and starting to achieve equilibrium, it also means that neither group is able to achieve any sort of overwhelming momentum (either to move the stock up or to move it down). I’ve often found symmetrical triangles often morphing into a different, more extended pattern as buyers and sellers fight it out in establishing dominance.

I inserted a second, dashed line at around 15.12, a potential resistance trendline connecting 5-7 pivot points since 12/31/2005 (depending on whether you count the near hits in June 2006). Buyers were unable to generate sufficient momentum each of these times for either economic, industry or company reasons.

With some believing that the best moves for stocks in the Oil & Gas Industry Groups is temporarily behind us, it may be late for more big moves. The risk for any owner of WRES is that should it be able to break through the upper boundary of that symmetrical triangle, it would be tested and stalled at that dotted resistance trendline.

I think I’d give up the move from the current 13.77 to 15.12 (yes, that’s about 10%) as insurance and buy when and if it breaks through that resistance trendline. At least your money won’t take a loss if the stock sellers ultimately win and the stock breaks through the bottom boundary or the triangle or be sitting for weeks or months waiting for that break through the resistance at the 15.12 trendline.

Should that happen, the next objective would be the All-Time High at 18.35 only 15 months after the IPO. It’ll be a struggle getting to that point, much headwind from all those buyers who bought during the doubling after the IPO and have been waiting for 2 years to dump their shares without taking a loss. Once they’re out of the way as the stock clears 18.50, everyone will own the stock with gains and it will be clear sailing to new highs with a tailwind.

One more points in passing. I’ve mentioned several other Oil & Gas stocks here that recently broke through resistance trendlines. Just click on the Oil and Gas Industry link below to see those postings.

It’s just my opinion but thanks for the question. I put made a tickler to check back on this in September to see what happened.

May 6th, 2008

Nuggets among 2007 IPO’s: KGS, COV, VISN, PMC

If you’re like me, you read as many blogs as possible, hear as many divergent opinions as you can and then make your own decision. Today, I’m amazed by the number who’ve commented about the “Sell in May ….” philosophy, everyone from yours truly (appropriately on May 1) to Mark Hulbert of Marketwatch, NYTimes and Hulbert Financial Report. I’m equally surprised by the number who see the market catching its breath after its nearly 10% sprint from the March low of 1276.60 to Friday’s close of 1399.34.

It’s at times like this that I like to step back from the tumult and try to get my bearings. One way I do this is read diverse sayings from assorted people who are generally recognized as being savvy traders and investors. Their pearls of wisdom help me keep my bearings, take a pause and prevent me from getting off my course. And a good place to go is a site called Trading Quotes. I have a link in my linkfarm of “Blogs I Read” to the right.

Here are a couple that seem to me to be appropriate in the current environment:

“When you are confused, it is best to do nothing. You are just going for a random walk and that is when you are liable to get mugged, because you don’t have staying power. You are likely to be faked out by some stray fluctuations because you lack the courage of your convictions. As my friend, Victor Niederhoffer says, the market destroys the weak – that is, investors who don’t have well founded convictions. You need some convictions to avoid getting faked out, but having the courage of your convictions could get you wiped out if your convictions are false. So, I prefer to take a stand only when I have well-founded convictions.”-George Soros

and

“The biggest things that keep a trader from meeting their plans are: getting sloppy a few times, forgetting to place a stop, or getting stubborn on one trade. These are the things I see. One mistake waiting to bite you in the rear.”-Linda Bradford Rashke

or

“The single most important advice I can give anybody is : Learn from your mistakes. That is the only way to become a successful trader.”-David Ryan

and, finally,

“While enthusiasm may be necessary for great accomplishment elsewhere, in Wall Street, it almost invariably leads to disaster.”-Benjamin Graham

Having said that, there are several stocks I’m excited about now. Specifically, it looks like the stocks that were winners last year and the beginning of this continue to be the stocks with momentum, stocks that continue to forge ahead to new highs. I mentioned several of them before (see April 28). Unfortunately, many of them are too far away from a suitable entry point but for the venturesome, there’s probably still run for them to run.

I look every day at the new high lists (12-mos and 4-year and all-time) but, so far, it still the same old (oil & gas, steel, coal, materials) names. An furtile area to scavenge for possible new winners is the list of and 2007 IPO’s. Among them are a few stocks that are recovering from their post-IPO fall and are about to move into new all-time high territory. Among these are click on symbol for chart):

  • KGS (Quicksilver Gas)
  • COV (Covidien)- best of the lot
  • VISN (VisionChina Media)
  • PMC (Pharmerica)

April 19th, 2008

IPO’s in the IBD 100 List

Once you become more comfortable that the clouds over the stock market might be breaking up and the sun may begin shinning again (a fitting metaphor with Spring busting out all over), the next step is narrowing the universe of 7000+ individual stocks and narrowing the range down to the 20-30 or so interesting investment candidates that I define as “stocks with positive price momentum”.

I’ve written recently about two of the four filtering methods I use, Industry Groups and New Highs. But there is a third that always yields a bunch of stocks with powerful momentum drives and those are tested and proven, relatively new IPO’s.

Take, for example, this Friday’s list of the IBD 100 top-rated stocks. Of the current 100, fully 34% become publicly traded on one of the US exchanges starting in 2000:

Many of these stocks have been on the list before, many have been on the list for some time. And there’s no telling how long they will remain on the list. But there’s a clear pattern here. IBD identifies IPO’s and evaluates them according to their various CANSLIM criteria. Hopefully, they flags them for you early enough for you to buy in before the herd hasn’t push the price too high.

Similar to the case of Industry Groups, I want to try to anticipate which IPO will be a winner before it’s published in the paper and mentioned by talking heads all over the airwaves. I do that by creating a watchlist of IPO’s for each year (I now have 8 watchlists starting in 2000). After about 60-90 days (and sometimes it may take a couple of years as the IPO creates a base), if an recent IPO breaks convincingly into New Highs territory and the Market climate is favorable, I identify the stock as one that worthy of a minimal investment. Additional shares will be added if it continues to perform.

There are many examples but one that clearly tells this story is Psychiatric Solutions (PSYS). Unfortunately, it’s only one that I wish I’d owned:

As a matter of information, PSYS was in the IBD 100 for 32 of the 133 weeks between April 1, 2005 and December 31, 2007 (that’s when my records of IBD 100 stocks began). During the month of April, 2005 it was ranked between 3rd and 6th; and then it fell off the list and reappearing off an on starting in June, 2005 in rankings between 15 and 75.

July 29th, 2007

IPOs Like MeadWestVaco (MWV)

I have been doing my weekly scan of charts in my watchlist and am amazed at the amount of damage the past week did to the charts of stocks that looked like they were setting up for breakouts over the coming weeks. Perhaps this is action to be expected just prior to a major upside break (action that elsewhere is called the formation of a “handle” in cup-and-handle patterns) but it’s still unnerving.

Even stocks that broke recently through resistance trendlines have, over the past week or so, not only retreated but failed the test of those lines as support. What this means is that new price target areas will have to be found at lower levels.

Here’s an example of one that I own, MeadWestVaco Corp (MWV):

The stock broke out on the upside at the beginning of June, immediately formed a consolidation channel and then continued to move up. I don’t know whether it was coincidental or just the chart “gods” doint their thing but when it hit 36.50 on July 12 it froze. It closed this past Friday at 31.86, substantially below the upper boundary resistance trendline of the ascending triangle at 34.00, the point where I bought.

What makes 36.50 interesting and important? It’s the exact same price, the all time high, that MWV hit back in March, 2002 a few trading days after it’s IPO! Wow, I think that’s amazing.

Perhaps I should have expected that since I’ve written before about the importance and the reliability of stocks that move into new all-time high territory, especially recent (or relatively recent, like 2002) IPOs. But here is a case of a stock that hit that high and retreated.

When the market regains its footing and starts moving back into bull mode, I expect MWV to also turn back up completing the formation of that “handle” (the cup, or double cup being the long spans I’ve labeled an ascending triangle). And the next penetration of the 36.50 resistance trendline will be permanent followed by a huge long-term up-trend.

My experience indicates that charts such as MWV often belong to companies that soon after the breakthrough end up being acquisition targets (or the breakthrough is as a result of an announced acquisition bid).

But this is all taking place within the context of a step correction in the overall markets. In the shadows of a credit crunch and concerns about the strength of the consumer and business spending.

Let’s see whether MWV will be taken over, if this chart isn’t violated and successfully recovers and ultimately breaks out on the upside.

June 4th, 2007

Life Cycle Investing: IBD 100 and IPO’s

There are about 7000 publicly traded stocks on the major markets (NYSE, NASDAQ and Amex) and, according to the Forbes table I included in that article (see my post of May 30, 2007), there were 2200 IPO’s over the past 10 years, or about 28% of all those being traded today. I’ve often wondered how the IBD 100 stocks, as represented by the index, always seems to out-performe the S&P500 by such a large margin. I’ve discovered that the answer is that the list IBD’s top stocks (what they call the “market leaders”) is so heavily weighted to relatively newly issued stocks.

The following table lists the current stocks in the IBD 100 list according to the IPO date. What is interesting is that 40% of them became available for public ownership only since the beginning of 2000; the IPO’s of more than 50% of them was 10 years ago.


But that’s not to say that IBD has included these stocks since their IPO’s. Actually, many are only recent additions to the list and many have had spectacular moves since their IPO’s prior to their addition to the list.

IBD’s heavy focus on strong IPO’s may have been obvious based on the writings of William O’Neill and the principals of CANSLIM. However, the strategy doesn’t actually register until you look at the actually statistics as outlined above. So, it’s back at the same challenge. To make better than average returns, you need to identify early those IPO’s that will have great moves, avoid those that will be duds and know how to avoid those that don’t move.

(more to follow)

May 30th, 2007

Life Cycle Investing: Loser IPOs Class of 2006

O.K., so those were the winners in the IPO Class of 2006. But what about the remaining 80% and, specifically, the biggest losers? Are there characteristics about those stocks that would suggest they’re not being suitable for taking a risk, not going to lead to any significant increases or, simple, they should be avoided.

Of course, the performance of any individual stock must be viewed within the context of the total market’s action during the same period (it’s RSI, Relative Strength Indicator). On that basis, several IPO’s clearly stand out as big, recent IPO losers (click on symbol to see chart):

  • Fuwie Films Holdings (FFHL)
  • Divx (DIVX)
  • Aurora Oil & Gas (AOG)
  • House of Taylor Jewelry (HOTJ)
  • Melco PBL Entertainment (MPEL)
  • Isilon Systems (ISLN)
  • Raser Technologies (RZ)
  • Achillion Pharm (ACHN)
  • Altus Pharm (ALTU)
  • Acme Packet (APKT)
  • American Mold Guard (AMGI)
  • Alphatec Holdings (ATEC)
  • Aventine Renewable Energy Holdings (AVR)

Enough, this is too depressing. You get the picture. If you had purchased any of these stocks as part of the IPO and held them as they cratered, you would have endured on average around a 50% decline over 6-9 months. That’s in contrast to a 100% increase experienced by the best performers in the previous post.

How do you make this decision? You can do what I have always done … avoid any stock that hasn’t traded for at least a year. But, of course, you have an significant opportunity cost by not participating in some serious gains. Another approach is to make your decision only a thoroughly study each prospectus. But, of course, you need the time, the expertese and the experience to distinguish between hard cold facts and marketing puffery. There is yet another approach …. a discipline based on experience derived from the study of stock charts.

While gathering the 2006-7 IPO’s into separate watchlists for better monitoring, I attended an IBD Meetup Group where, coincidentally, a presenter reported on a recent IBD training. Interestingly, one of the topics covered at the session was new research being conducted by IBD on developing specific rules for successfully trading IPOs. This was sufficient to encourage me to continue my on study of charts of recent IPO’s. I did a Internet search for the symbols of the IPO’s in the Forbes article mentioned in my last posting and came across IPOMonitor.com. The site has lists of all IPO’s for each year of 2000-2004.

I downloaded the information into separate watchlists for each year’s class of IPO’s. Parenthetically, each year’s watchlist of IPO’s didn’t match exactly the number of stocks in the Forbes list (which they obtained from Bloomberg Financial Markets, FT Interactive Data Thomson Financial and Wilshire Associates and their own sources). Since their going public, several things could have happened to several of those companies, including:

  • acquisition or merger
  • bankruptcy
  • being spun off rather than IPO
  • ADR’s listed of foreign corporations

In any event, I now had a database of stock charts for each year’s class of IPO’s that were still being traded:

IPO Class of Number of IPO’s
2007 168
2006 141
2005 143
2004 243
2003 69
2002 61
2001 51
2000 197

Scrolling through these stocks, performing a visual inspection of their characteristics, comparing the winners and losers, inserting trend lines and overlaying RSI’s with the S&P 500 should leads to several trading rules.

(more to follow)

May 28th, 2007

Life Cycle Investing: Winning IPOs Class of 2006

I described here earlier how I integrate Industry Group and various IBD lists (IBD 100, New America, Stocks on the Move) into my Telechart activity. Recently, however, I noticed for the first time the table of recent IPO’s printed several times a week in Investors Business Daily. I’ve rarely paid much attention to that information since, long ago, I decided to avoid any involvement in recent IPO’s because they lacked prior price data and, consequently, no interesting or meaningful charts to speak of. However, several diverse things recently piqued my curiosity.

IBD often includes several recent IPO’s in their New America and IBD 100 lists. Additionally, several stocks consistently hitting the New Highs list and their list of “Leading Stocks” are recent IPO’s. Take, for example, the following 24 (nearly 20% of a total 131) from last year’s 2006 Class of IPO’s (click on symbol to see chart);

  • AmTrust Financial Services (AFSI)
  • American Railroad Industries (ARII)
  • Allied World Assurance Holdings (AWH)
  • Buckeye Group Holdings (BGH)
  • Chipolte Mexican Grill (CMG)
  • Capella Education Company (CPLA)
  • Crocs (CROX)
  • Danaos Corp (DAC)
  • New Orient Edu and Tech (EDU)
  • Energy Metals Corp (EMU)
  • Energy Transfer Equity (ETE)
  • Hansen Medical (HNSN)
  • Houston Wire and Cable (HWCC)
  • Mastercard (MA)
  • NTELOS Holdings (NTLS)
  • Omrix Biopharmaceuticals (OMRI)
  • Omniture (OMTR)
  • Penson Worldwide (PNSN)
  • Synchronoss Technologies (SNCR)
  • Systems Xcellence (SXCI)
  • Volcano Corp (VOLC)
  • Verigy (VRGY)
  • Winn-Dixie Stores (WINN)
  • Western Refining (WNR)

This is an unbelievable list of performers. Had you bought any of them some time early in their listed history, and had the stomach to hold on to them since, you would have seen a 100%+ ride over less than 6 months in most of them! However, Forbes Magazine recently ran an article in their Investment Guide issue entitled “Ground-Floor Stocks.” They concluded that:

“The U.S. new-issues market is on a pace to have one of its quietest years of the past decade. That’s probably good news for investors. When the fish aren’t biting, Wall Street underwriters have to be choosy. Only the strongest prospects make it to market…..Although there are several exceptions to the rule–and although 2007 offerings are off to a terrible start–the general pattern is that lean years, like 2001 and 2002, deliver excellent returns. Busy years for the new-issues docket are bad years in which to speculate.”

The following table accompanies the article:

There seems to be a conflict. Are there indicators that help separate the smaller percentage of prospective winners from the larger pool of losers? Are there rules for timing these investments (when to buy and when to sell)? And has this experience been true for IPO’s in each of the past several years. It seems that if one were able to buy winners like these and avoid and/or limit losses on the losers, your portfolio could grow, so fast, that there wouldn’t be enough stock available to satiate your appetite for them.

(to be continued)