A couple days ago I received a few questions from a member and I thought my answers to these questions would be of benefit to a few more. This is something I’ll be doing more of from now on and once the new website is released I’ll be creating a section where past member emails and my answers will be archived for review.
Q: I got your email on DIVX, but I can’t find it listed anywhere on your site. Could you tell me what I’m overlooking?
A: DivX Corp (DIVX) is a recent IPO. Since the stock has not yet formed a proper base and near a breakout, the stock won’t yet appear in the Breakout Tracker. That being said, the hottest IPOs often run up significantly before ever forming a real base, trending higher and higher right out of the gates in a stair step pattern. This likelihood only increases in a bull market when their is great enthusiasm for the next hot stock. So what kind of pattern am I looking for in these situations? Basically, what I’m looking for is a run up, a retrace/consolidation, then a break. It may look a lot like a bullish pennant or flag formation. Be sure to keep an eye on three new IPO’s that came to market on Friday – eHealth.com (EHTH), Acme Packet (ACME) and SAIC (SAI). A new IPO Tracker section will be coming to the premium members area.. stay tuned for that!
I’ve posted a report in the members area showing the charts of two recent hot IPO’s, DivX (DIVX), a recent purchase in the Model Portfolio and Mindray Medical Technologies (MR).
Q: What methods do you use to know where the institutional money is flowing? Either into sectors or individual stocks.
A: Price and volume movements are used to track the footprints of institutional money flows. Here at SelfInvestors I came up with a fairly simple formula (called the Demand Indicator or DI score) which awards points for high volume up moves and low volume selling and subtracts points for high volume selling or low volume buying over the course of 15 and 30 days. The higher the score, the greater the demand for a stock or sector. For example, a stock that is carving out a base with sell volume drying up at the bottom followed by a surge in buy volume in the right side and at the breakout is going to receive a very good Demand Indicator score. Go to the Breakout Tracker when you get a chance, click the View All Stocks link near the bottom of the page, then sort the database by DI15 by clicking the column header. This brings stocks showing the greatest demand over the last 15 days to the top. Write down the top 15 tickers, then sort again to bring stocks showing the least demand to the top and write down those tickers. Compare and contrast the charts to get an idea of a very bullish chart vs. a bearish chart and how the first sign of great demand leads to further demand for a stock down the road.
For non premium members who may be reading this report, here’s a top 15 list of stocks showing the greatest demand over the past 15 days: ELE, ININ, EZPW, BFAM, CMG, AOB, CBEY, RICK, GCOM, CTCM, BITS, KNOT, ICON, XING, PRFT
Why track institutions through price and volume movements? It’s the institutional buys and sells that most often move a stock in a meaningful way. When institutions initiate a new position (which will often happen in the kinds of high growth, relatively undiscovered stocks we’re interested in), remember that they can’t possibly intitiate their entire position all at one time in most cases. For example, if a mutual fund wants to initiate a position of 500K shares in a company that only trades 250K shares a day, they are going to need to purchases in phases over the course of several days or weeks. Once you see these initial surges in price and volume you can safely assume that there is a good chance that the trend will continue down the road, possibly from multiple institutions if the stock is liquid enough. Basically, the goal is to hop on the back of this institutional wave of buying as early as possible.
Tracking institutional money into sectors or industries can be done through the analysis of ETFs using the same Demand Indicator scores. Premium members may currently use the ETF Tracker on a day to day basis to see those industries and sectors showing the greatest demand by clicking on "Leading ETF’s" in the ETF Tracker. Registered *free* members receive these top sectors/industries in the MidDay Market reports and will soon have access to the list throughout the day once the new site is finished.
At the top are the hottest ETF’s right now: Retail, Consumer Services, Software, Biotech and Semis. These are the sectors I would be focusing on right now.
** If you haven’t had a chance you may like to read a report I recently wrote which highlights how I go about tracking where the money is flowing in and out of the market
Q: How long do you typically hold a stock? I know that it depends on a lot of variables, but if a stock is fundamentally strong isn’t it a good idea to hold it longer? Is your approach to buy and sell stocks for a period of days, weeks, months, or longer?
A: If I were to find some sort of average holding period for a stock it would probably be a month or so, but it really depends on a number of variables. I have bought and sold a stock in one day and I have held on for several months (including through earnings which I don’t often do). In a strong bull market like we had in 2003 and like it appears we are having now, I might be willing to hold for longer periods. One thing I rarely do is hold a stock through its earnings report. It’s just one thing I do to eliminate risk of big downside moves surround earnings.
The greater the degree of uncertainty, the greater your risk in holding a position in a stock. All stocks are uncertainties, but there is no moment of greater uncertainty than that of an earnings report. It’s the time when the company reports on how well it is doing now and how well it expects to do in the future. Often times, other major announcements are made as well. It can be a time of extreme volatility, especially with small cap, high growth stocks. Sure, the upside potential can be great, but there are too many things that can go wrong, which could cause the stock to plummet. Remember, the name of the game is preservation of capital. You can always repurchase the stock once the coast is clear. A company may report below analyst estimates, or the whisper number (earnings that the company is rumored to report, often leaked by an insider). There are times when a company will beat the analyst estimate, but not the whisper number and sell off. They may release negative news about the company, the industry, or reveal a less than optimistic outlook for the future. "Buy the rumor, sell the news". Often times a stock will rise ahead of expected good earnings, only to sell off once the great earnings are released.
Is it a good idea to hold a stock longer if the stock has great fundamentals? It really depends… on the charts. The charts will tell you when to get out. Whether you are more of a short term trader looking to lock in a quick profit (something I have been leaning more towards recently) by focusing more on the intraday and daily charts or looking for a longer hold and focusing more on the daily and weekly charts, high volume selling and a breach of support levels on those time frames will let you know when it’s time to get out. One thing to caution against is falling in love with a company and "riding it out". The market always looks well into the future by several months and it’s the charts that often forecast bad news down the road. Remember, someone always knows something. Whether it be insiders or the detailed research of the institutions. By the time the company is reporting earning and sales not consistent with the great results of the past, you may find that the stock is already down 30, 40, 50%.
Knowing when to sell is the most difficult part of trading because there are so many variables involved, not to mention elements of fear of and greed. Many experts say to have an idea of where to sell before you purchase the stock in order to take out the emotion of trading.. have a game plan and make it as mechanical as possible. I don’t believe in using a mechanical approach to investing because the market itself is not mechanical and predictable. While I do use support lines and price and volume movements to dictate when to get out, I absolutely don’t use profit targets and stop losses. For example, some strategies advise cutting your loss at 8% no matter what. I prefer greater flexibility. Sometimes I’ll cut my loss at 1%, other times I may let a stock ride out a bit longer and take a loss more than 10%. It really depends on what the market is doing and the relationship of price/volume and support/resistance.
Q: I get frustrated at buying a stock then just see it stall out or fall. I look for a stock that is fundamentally strong, in a good industry/sector, good ROE, growing sales and earnings, low debt, good management ownership and in a breakout pattern or bouncing off the 50 day moving average. Where should I concentrate my efforts on your website and just what should I look for in a company that would make it attractive to big buyers?
A: Yes, trading stocks can be quite humbling at times can’t it! There will be times when you follow all the rules and trade the best companies in the best industries at just the right time, yet the stock fails to meet your expectations. It may even happen a few times in a row. The bottom line is that this business is far from easy and nothing is certain, but by by sticking to the best companies and buying at the right time you give yourself the best PROBABILITY of success over the long haul. Be prepared to go on streaks where nothing is working, but don’t let it get you down. Learn from any mistakes and move on with confidence. Also be prepared to experience streaks where everything you touch turns to gold, but don’t let it get to your head and start making mistakes.
The second part of your question asks about how to best use the Self Investors service to locate the best opportunities. You should take a top down approach to investing – always know what the overall market is doing. Are we in a bull market, a bear market, chopping sideways? Next, focus on those industries/sectors that are leading the market (see 2nd question above), then trade leading stocks in those industries/sectors at the right time.
This is all easier said than done and would require a tremendous amount of time on your part to keep track of all this information from week to week. That is the reason for creating SelfInvestors.com.. to save you a ton of research time. The Breakout Watch screen is a list of the best breakout stocks updated nearly daily, with the best opportunities right at the top (ranked according to fundamental and technical analysis). The Play the 50 Day screen is a table of stocks near the 50 Day moving average which is a great tool for finding stocks that have previously broken out and returned to support (providing you with another point). The Hot Stocks screen combines these two tables, but takes it a step further by filtering so that only stocks showing the greatest demand are listed. This is where I typically start my research.
During the trading day, I use the SelfInvestors database to track stocks moving up and down with volume. Take a look at the Today’s Market Movers list and do a sort by % Gain from BO (percentage gain from the breakout or pivot point). Focus on stocks that are no more than 5% extended from this point. Looking at Friday’s data I see there are 9 such stocks that meet this criteria, 4 of which were breaking out of nice looking bases: CHIC, PSEM, KNXA and EZPW. All are nice looking opportunities and were were showing up in this screen very early in the trading day. Another way to use this screen during the trading day is to sort by % from 50DMA (percentage from the 50 day moving average) which will allow you to easily see stocks just moving above the 50 day moving average with volume.
Rather than checking the database several times during the day, you have the opportunity to receive all of these opportunities in your email inbox by signing up for the email alerts.
That’s the service in a nutshell anyway. As always, unlimited live chat sessions may be scheduled where I walk you through the entire service (even during the trading day if you wish).
These were all great questions, keep them coming!
