February 22nd, 2013

Postmortem on Stock Sales

imageThe jarring correction over the past couple of days understandably sent shivers down my back.  Should I start selling some of my winners in order to lock in those gains or just steel my nerves and hold on until this passes?  I like most of my positions (currently over 70 stocks in the Model Portfolio) and the market is close to testing the strength of its momentum as it approaches what I have labeled the “Crunch Zone”, the area between the 2001 and 2007 all-time highs.  Shouldn’t I do nothing and just wait?  There is nothing in the technicals other than the fact of the approach to the all-time high to indicate that this is only another correction that the market has successfully weathered during the current bull market run since the 2009 bottom.

All of us are continually caught on the horns of this dilemma but even more so when the market is correcting: 1) hold on and run the risk of more significant losses or 2) sell and run the risk of unwinding some excellent positions.  We usually evaluate our success as investors is to see whether our total returns (dividends and appreciation) are respectable.  If we’re honest, we compare those returns against a benchmark [I use the S&P 500 Index] to see whether our efforts have produced returns in excess of what we would have earned in an Index Fund or ETF.  What we don’t do often enough, however, is move beyond our current positions and analyze the previous trading that got us to where we are today.

  • When did we sell stocks?
  • How have the stocks that we did sell (often in panic in response to a market correction) perform after we had sold them?
  • How did the portfolios of investors who bought our stocks from us perform after they took those stocks off our hands?

Since January 1, 2012, there were 87 sales transactions from the Model Portfolio.  Some of those sales were swaps to move into other stocks and others were sales to reduce risk by moving into cash.  I wanted to find out whether those sales were actually necessary?  How did the sold stocks perform had I held on to them to the present?  Did I sell winners or losers?  Were the sales made as the market was rising or falling?  What I can I learn from about my trading habits from those sales?  For each transaction, I captured the gain/(loss) prior the sale, the gain/(loss) from the sale to current and the stock’s performance vs. the S&P 500 since the sale.  Some of the results were surprising and revealing (click on image to enlarge):

Sales Performance 1

Most interesting is that 65.5% of the sold stocks actually appreciated after the were sold.  Luckily, most of the stocks sold continued to underperform since only 47% kept pace and 53% lagged the S&P 500 Index since their sale.  Interestingly, the stocks with the largest gains after their sale were losers when I sold them.  As a matter of fact, nearly 60% of the sold stocks that had losses prior to their sale have appreciated since.  One of the largest post-sale gains was MTZ (click here for chart).

When were those stocks sold and should they have been?  What was the market doing at the time of the sale?  Except for one extremely short periods, the Market Momentum Meter has been Bullish Green since the end of January 2012 suggesting to Instant Alert Members that they have a fully invested posture (click on image to enlarge):

Sales Performance 2

What stands out is that many of the sales occurred during months during and after the end of market corrections.  For example, there were 19 sales in June and July after the Spring correction but only 9 in May and June when the correction was occurring; there were 11 sales during the Sept-Nov correction but 33 in the months after it had ended.

This may sound like overly personal but I think there are several lessons that anyone can take away from this exercise:

  • It’s important to periodically review stock sales in addition to tracking stocks you currently own.
  • Stick to a market timing discipline to avoid being unnecessarily scared out of the market when it is correcting.
  • Continue to monitor stocks you’ve sold and buy them back rather than taking a risk on something untried if, after the correction ends, the stock continues its advance.
  • Move into cash only when your market timing discipline indicates that the correction is likely to turn into a bear market reversal.

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July 6th, 2012

In Celebration of New Beginnings

Hope everyone is having a nice day off celebrating the birth of the nation on this Fourth of July. It also seems to be a fitting time to celebrate what perhaps might turn out to be the beginning of a strong second half for the stock market. Each day since the beginning of June, the market has successfully knocked over one obstacle after another and could be free to ascend all the way to the market’s previous all-time high close of 1565.15 set on October 9, 2007. The last remaining hurdle is the previous interim high close of 1419.04 set this past April 2. It would be fitting indeed if that high-water mark were reached on its fifth anniversary this coming October, a 13.9% increase above Friday’s close.

Since I’m in a celebratory mood, I thought I’d share with you some of the more successful stock picks that Members and I have enjoyed over the past six months. I offer them more as a tribute to the truth of market timing and chart analysis than my own foresight. The stocks were purchased at different times over the past six months but they all have one thing in common; they were all purchased when they crossed above significant resistance levels.

The comments below on each stock were excerpted from the Instant Alerts emailed to Members at the time of the purchase; each was also accompanied by a chart as of that date. The symbols are links to charts as of Wednesday’s close:

  • IPHS (June 14 at 52.77; last 58.01): “The stock has steadily moved significantly higher since the 2009 Financial Crisis Crash bottom; it had its IPO in 2006. The stock appears to have completed what IBD calls a cup-and-handle formation and by crossing above the resistance area is now entering new all-time highs.”
  • CRUS (February 29 at 23.74; last 29.11): “Another stock that’s been trapped by several recent “Stocks on the Move” scans. The stock has an extremely interesting pattern which, like many others now, could be interpreted as either a reversal top or a consolidation depending on your outlook (bull or bear) and the market’s future direction. One can see in the chart either a partially-completed “double head-and-shoulders” reversal top or a horizontal consolidation channel with a possible near-term cross above the upper boundary. Since my current view of the market is bullish (and the fact that I’ve seen many other stocks break on the upside), I’m taking a chance that the pattern will eventually turn out to have been a consolidation channel.”
  • MED (March 14 at 16.58; last 20.46): “The stock is a product of yesterday’s Stocks on the Move scan. It has formed an inverted head-and-shoulders reversal pattern at what I hope will be the bottom of a multi-year descending wedge pattern.”
  • CYMI (May 3 at 52.51; last 60.00): “The stock was on the recent Watchlist. It is primed and with a supportive push from a strong market is hopefully ready to cross above a multi-year resistance level into all-time new high territory.”
  • VTR (June 26 at 61.07; last 63.85): “Technically, it looks as if VTR completed an 18 month “cup-and-handle” consolidation formation and may resume its upward advance.”
  • DDD (May 2 at 31.07; last 35.57): “I’ve had my eye on DDD ever since I noticed it crossing into all-time new high territory and beginning what appeared to be a “buyers’ remorse correction”. Just recently it crossed above what could be considered the upper resistance boundary of that correction and ready to be one of the leading stocks that continues moving further into all-time new high territory when the market resumes its ascent.”
  • EQIX (February 2 at 122.65; last 177.38): “Stock has crossed into all-time new-high territory set at its IPO at the peak of the Tech Bubble in 2000. This stock is also a momentum scan favorite.”
  • EBAY (March 2 at 36.01; last 41.02): “The stock is another Stocks on the Move scan result. The chart has formed and is now crossing out of a buyers’ remorse pattern that might be interpreted as a channel, complex inverted head-and-shoulder or complex cup-and-handle. This congestion follows EBAY successfully moving out of a long-term descending wedge and crossing above the neckline of a multi-year reversal base after the Tech Bubble Burst.”

The Model Portfolio currently includes 55 stocks; these are among the best performers of the lot. Several poor performers have been sold and a couple were sold when they were the subject of an acquisition or merger. I still have confidence in these and the rest of the stocks in the Portfolio and believe they will continue advancing in the wake of a strong market. As far as whether I will continue to hold them even with substantial profits, I refer you to my “Sell Rules” discipline.

June 7th, 2012

When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)

My wife ran into my office yesterday and said that somebody on CNBC was saying that the market was making lower highs and higher lows and that, based on that “analysis” she said we should be either selling stock or buying some Ultrashort SPY ETFs.  I looked at my charts and I couldn’t see to what that “talking head” might be referring.  Or, to be more correct, I saw many situations on the S&P 500 chart to which the statement could be applied but it all depended on the time horizon, hourly, daily, weekly or monthly.

I saw another instance of this principle this morning when I clicked open a post by Corey Rosenbloom, well known for his internet go-to website dedicated to a technical approach to the market, Afraid to Trade, and frequent contributor to many other commentary sites like  Green Faucet.  In the ETF Daily News post, entitled “Watching Converging Trendlines in Gold“, Rosenbloom includes the following hourly intraday chart covering the period since December, 2011:

and  writes:

While there’s many other ways you can analyze the current Gold price chart, be sure to take into account this trendline convergence or overlap into the $1,630 area ….  That doesn’t mean price is required to reverse here – it’s just a key level on which to focus and plan short-term trades depending on whether trendline resistance holds (bearish if so) or breaks (bullish above $1,640 for confirmation) ….. A push/ breakthrough beyond $1,640 strongly suggests a Structural Reversal of the short-term trend, implying higher targets ($1,670, $1,700, etc) could be achieved in the context of a new intraday uptrend ….. The recent push above $1,600 locked in a “Higher High” which is the first step to a structural reversal).

My trading horizon is longer than that inferred in Rosenbloom’s strategy.  If precious metals is a good place to put my money in the hope of appreciation (the only form of return since precious metals don’t  pay dividends or interest) as an alternative to other opportunities then I want to make sure that the percentage gain will be significant.  I own a large number of stocks and, once I put precious metals (or any other stock for that matter) in my portfolio I don’t want to necessary have to make hourly or daily decisions as to whether it’s worthy of continuing it being held.  The only way of doing that is to focus on more elongated trendlines, longer waves and bigger swings.

That’s why included a longer term chart a month ago (updated to yesterday’s close), in “Buffett and Precious Metals

and wrote

Both charts [I’d also included a chart of silver] contain familiar features:

  • descending channels;
  • potential necklines;
  • a zone that could indicate whether the controlling pattern is a consolidation or reversal;
  • lack of clarity as to whether price will cross below the potential neckline

With all that upcoming uncertainty in the $US, I can’t imaging that the emerging pattern in precious metals isn’t a consolidation and, with all due respect to Warren Buffet, there won’t be another run higher beginning towards the end of the summer.

Rosenbloom looks at possible breakout from his “converging trendlines” and sees a move to the 1670-1700 (or, approximately, 167-170 in GLD) presumably over several weeks.  But then what is he going to do with this 4.3% move?  I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.

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.

April 16th, 2012

HALO: What’s the response?

One of the most difficult and disappointing experiences as an investor/trader is when a stock, recently purchased based on an excellent chart with excellent prospects blows up in your face.  That happened to me today.

I purchased HALO (Halozyme Therapeutics, Inc.) in January for all the right reasons at the time.  The market had been steadily moving higher and biotechs were an Industry Group had been among the highest ranked of all 197 IBD Industry Groups for over a year.When the stock successfully crossed a significant resistance level, it would enter into all-time new high territory, a clear indication of further momentum moves higher.  The chart at the time was:

Everything was going along swimmingly; after following through on the breakout move, HALO advanced to 14.50.  But then it all came to a screeching halt today when the company announced that the FDA was requesting more information to complete its review of the HyQ Biologics License Application. The company expects these requests will require additional time to complete delaying the anticipated regulatory review and approval timeline.  The stock plunged over 25% to 8.50.  What was a nice, quick profit of over 40% turned into a loss.

Was the gap down last week (when the market itself was correcting) that should have been paid closer attention to and reacted accordingly (easy to say in retrospect)?  What is one to do now?  Is the market over reacting?  Are the shares “dead money” and, if so, for how long?  How long will it take for the stock close the gap?  Are there lessons to be learned about buying and selling from a stock like HALO (and an industry like biotech) blowing up like it did today?

There’s no a big supply overhanging on the stock and it even if it did slowly crawl back to the resistance level it would take some time before it could try another assault on that all-time new high territory.

Fortunately, my portfolio is well-diversified and the stock didn’t represent a large percentage share of total.  Today, other stocks in the portfolio more than made up for the loss in the HALO.  But the question remains …. hold or abandon the position and, if so, when?