Question:

I appreciate all the upgrades you’ve made to selfinvestors.com since I
started subscribing in July.  However, about the only thing I’ve accomplished,
since resuming my active investing last June, has been to limit my
losses.  After numerous trades, my only significant gain was 21% on DHB.

I’m sure some of this resulted from poor decisions on my part.  But one
problem is that, even if I could arrange to watch specific stocks in
real time and/or receive your buy & sell e-mails in a timely manner, my
day job doesn’t lend itself to making immediate trades.  With few
exceptions, I must make my buy & sell decisions in the evening or early
in the morning–before the market opens & before you send your buy &
sell e-mails.

Last night I made another decision that is not working out well.  After
reading about OMM on your watch list, I researched it at investors.com
& other internet sites.  The fundamentals & earnings report seemed very
good, and the stock was up nicely in after-hours trading.  I bought at
the open today (with a limit order) and am already down more than 7%.

I’m seriously wondering whether I should return to investing in mutual
funds–which I don’t find particularly interesting.

I’d welcome your comments.  Thank you.

My Response:

As far as the time issue I understand.  Other members have expressed similar
concern about implementing this method successfully while maintaining a full
time job.  It can be done.  I’m willing to work with you until you are
successful if you’re willing.  You sound like you are.

A couple of key things from what you are telling me:
1.  I think I have mentioned this a couple to times before in emails, but
now I realize I haven’t highlighted this enough.  It is very important.  You
almost NEVER want to buy a stock in the first half hour of trading,
ESPECIALLY on a gap up after an earnings report.  In the first half hour
trading, overnight orders are filled and there is much manipulation going on
from market makers.  You get a much more accurate direction of a stock after
that first half hour.  In the OMM example, I was looking to pull the trigger
only if it proved the breakout.  What do I mean by this?  It proves the
breakout only if the stock clears the high that it made in the first half
hour.  The stock never confirmed a buy.  In your situation you probably
would not have been around long enough to wait to see if it would confirm a
purchase – what you could have done is set a buy stop order above the high
point of the first half hour.  The order will execute only if it clears the
high for the first half hour (you would just need to make sure that the high
point of that first half hour would still be within 5% from the pivot, which
in this case I would have been).

That is one strategy.  A safer strategy would be to just hold off on the
breakout and wait for a return to the pivot area, which about half of stocks
will do.  There is nothing wrong with holding off on the initial breakout
and waiting for the stock to return to an acceptable buy range (0 – 5% from
the breakout point).  The Buy Watch screen lists stocks near a breakout, but
also lists stocks that are still within an acceptable buy range.  For
example, INFY remains in a buyable range, but I’m waiting for a drop to
around the 72 range before entering.  There is a good chance the stock could
do this in the morning when you are able to watch or you could set a buy
limit order at 72, so that your order gets filled if it drops to that point.
DOW is another great company highlighed that has been slow to breakout which
could have been purchased this morning.

Question:

Do the stocks in the "Portfolio" always follow the CANSLIM
criteria.  It seems that some of the "Watch" stocks aren’t always above
$15,  earnings aren’t always in the excellent category, trading volume
is on the slim side, etc.  Are there some CANSLIM criteria that are more
important than others?  Are we mostly looking for breakouts and
interesting technical analysis?  Do I just need a little more experience
in CANSLIM?

My Response:

[the originial response has been edited to reflect changes in the Model Portfolio]

First off, I’ll say that I don’t follow a strict CANSLIM approach but rather elements
of it that are common to many successful investing strategies, such as focusing
on companies that are exhibiting strong earnings/sales growth and technically
superior.  Where I tend to differ is that I won’t hesitate to purchase stocks under
$10/share or that may not have a history of strong earnings but are expected to
increase earnings dramatically in the near future.  In addition I tend to hold more
positions than what would be recommended in a classic CANSLIM approach.

I would characterize the SelfInvestors Model Portfolio as one that ecompasses
a variety of strategies to achieve market beating returns.  Short plays are used
in a market downturn and recently (last half of 2006) I have added the use of ETF’s
and what I call Quick Strike Profit plays (technical swing plays with big short term
profit potential) to add some oomph to portfolio gains.  While the portfolio focuses
almost exclusively on high growth stocks, it’s fairly conservative and well diversifed.

Question:

I am not sure I completely follow how you decide when we are in
a bull or bear market.  I guess I would like a little tutorial in this
area or maybe I should I just be following the "Big Picture" in IBD?  It
seems to me that IBD never really comes right out and says whether they
think it’s a bull or a bear market.

My Response:

The strength of the market, like the strength of an individual stock is determined by price and volume levels as well as support and resistance areas.  I’d say more than half of my time spent on blog articles is focused on the health of the overall market. IBD’s The Big Picture is helpful and you may like to look at the tutorial here.  I suggest you read through the entire tutorial, specifically the section  regarding Market Direction.  Once you’re comfortable with the idea behind that and are familiar with distribution and accumulation, you’ll understand why I track those days in the calendar on the Market Outlook page (accumulation – green days, distribution – red days). 

Question:

Would you cover on an intra-day bounce above 31 or closing above 31?

My Response:

The reason for waiting until market close would be  to see what the so
called "smart money" will do (institutions do much of their trading in
the last hour of the day).  Many traders will avoid making a sell decision
(or in this case, a cover decision until then).  However, if SFA surges
above 31with heavy volume I would be covering regardless of when that occurs,
considering that volume levels will tell you what institutions are
doing. The only exception might be in the first 30 – 60 min. of trading, where I
typically avoid making any trading decision. 

Follow up question:

Thanks.  Just curious, do you use more of a mental stop than a hard stop
order so you can watch volume?  And if SFA goes above 31 on light volume
will you not sell.

Since I don’t trade full time and have trouble monitoring trades
throughout the day I enter stop orders immediately after a trade has
been entered.  I have placed my stop on SFA at 31.  This seems to work
best for me but always open to suggestions if you have any (I feel exits
are one of the more important aspects to trading and always looking to
improve in this area).

My Response:

Since I am able to watch the market most days, I don’t use stop orders.
This way I can base my decision on volume levels as well as the strength
of the market.  To answer your question, I would be less likely to cover if
the stock rises through resistance with light volume.  Although, it would be
surprising to see it get past those resistance levels with light volume.

Most are not able to watch the market during the day, so you MUST use
stops.  Here’s a hint though.  Never place a stop on a whole number.  You
increase your chances of getting shaken out.  Remember that market makers know
all stop loss levels.  It is human nature to want to set stops at even numbers,
so there will be a large number of stops at those places.  Market makers
may run a stock up in order to cause a short squeeze.  I don’t want to get
too complicated here.. make sure you place stops at odd numbers where others
wont’.  So maybe 31.23 or something like that.

Question:

It looks like you didn’t make the ADBL and CRDN shorts part of the portfolio. Will you notify by email a buy to cover or should I just follow you targets you gave? Both look great so far. I’m kicking myself for not realizing the climax tops of DHB and XXIA as I’m sure you are, too. Good picks but both went down so quickly. Such is life. This is the first time I’ve shorted a stock so I’m pretty anxious about the whole thing. It helps that they both dropped on good volume yesterday. Thanks for your efforts. The web site looks great. Dave

My Response: