“I often think of trading as similar to a hobo trying to catch a ride on a freight train. The hobo knows he wants to travel West and knows the direction. So he waits by the track for a train to come by heading West. He jumps on. He does not have a schedule and does not know how far the train will go. If the train stops or changes direction he jumps off. If the train then restarts or turns back towards the West, he jumps back on. He does not argue with the train and refuse to jump back on. He knows that every move in the right direction brings him closer to his goal.” (Copyright © 2005, by Eric D. Wish. All rights reserved.)
I remember when I was first getting into the market in the 60’s and talking with my uncle about the fact that the NYSE volume would soon break 10 million shares a day. I also noticed that after each bear market, during the next bull market the NYSE trading volume records would again be smashed. Things have changed and now we also have the NASDAQ exchange. It makes sense that the owners of these great casinos would see to it that they profit immensely during all types of markets. It takes a financially strong organization to pay a Dick Grasso $140 million in parting benefits. As you know, in recent weeks both of these organizations have undergone big changes through planned mergers. Given the huge appetite that people have for stocks it makes sense that these 2 dominant exchanges have a very bright future.
Why am I waxing on about NASDAQ? Because I ran a scan of the market for potential rockets, and what up came up, but NDAQ. Some institutions are buying an awful lot of it. It closed Friday at the highest it has ever traded since it came public in 2002. It has almost tripled since September, 04. On April 22, it broke out on huge volume and climbed 26.1% when its acquisition of Instinet was announced. The monthly price chart (click on to enlarge) shows a huge spike in volume this month and 2 months ago. Apparently, some institutions were accumulating the stock 2 months before the deal was announced. (Alert the SEC?)
Now, when a stock breaks out on huge volume to an all time high, a rocket has been launched. Will the rocket keep climbing? No one knows. So, if I am interested, I might buy a small number of shares, place my stop loss at a tolerable place below my purchase price and wait patiently for things to develop. If I am right, the stock will rise and I will increase my stake slowly and raise my stops for protection. If I am wrong, the stock will stall or drop enough for me to be sold out. No emotion. If the stock misbehaves, I cut it loose on my terms, and pay a small tuition price. Remember I told you that if you cannot accept a lot of small losses in your search for a rocket, you need to find another, less risky avocation. It is not necessary to buy 100 shares of a new purchase. Buy 10 or 25 or 50. Most of the time your timing will be off and you will get out safely with a very small loss. (I assume you are paying no more than $15 per trade at a deep discount broker.) You can always buy it back if it starts to rise again. As the Loeb quote yesterday on pyramiding eloquently said, the idea is to end up concentrating your money in your proven winners.
My scan found a number of other possible rockets: IRIS, BLUD, SWN, VLCCF, LB, CMTL, ALDA, AET, ENWV. These are not buy recommendations. Just study them and write down what you would have done, along with your purchase price, stop loss point and when you would accumulate more. Do some research on each company’s products, industry and recent financials. I go first to http://finance.yahoo.com/, enter the stock symbol, review the information, and then click on “profile” on the left side of the page. Here is a profile for BLUD. There are always rockets being launched in the market and you can take your time learning how to find them and ride them. (I own none of the stocks listed today.)
By the way, I have always found it easiest to find winners when the market is in a correction. During those times, there are a small number of stocks hitting new all-time highs and resisting the downtrend. When the market really turns, these stocks often become the new leaders. Our job is to track the savvy insiders and institutions who are accumulating stocks in businesses only they know will thrive.
The reason I am willing to look for strong stocks now is that the market is acting better. The WW-GMI is at +2 and on the verge of going to +3. The Daily QQQQ Index is almost positive. In my universe of 4,000 stocks, 111 stocks hit new highs and 47 hit new lows on Friday. In addition, more than one half (26/46) of the stocks that hit new highs 10 days ago closed higher Friday than they did 10 days earlier when they hit their new highs. So buying new highs 10 days ago had a pretty good chance of proving profitable, a promising sign for those of us who buy rockets. (See my strategy post, 4/30/05)
Regardless of the above promising indications, I don’t like this market. For reasons that I have gone over the past 2 weeks, I think it should go down. But who am I to argue with a freight train when it may be turning West? By the end of this week we should know whether this is a real turn or a head fake.
I value your comments. Let me know if I missed something or was unclear. Alex–Please do not publish any more of my posts without listing my contact information and my caveats below.
I’ll post again Monday evening, around midnight.