Some Potential Rockets WW-GMI: +2

@ 8:50 am

“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. Ndaq 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.Index506 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.

Is the Fed Done? WW-GMI: +2

@ 10:34 pm

“The right way to do it is to pyramid.   I have a buying power of 1,000 shares.   I think Studebaker is going up.   I buy 100 shares.   It doesn’t go up when it should, or worse, goes down.   I sell it out.   The loss can be charged to insurance, or experience, or as necessary cost of getting started right.   Next, I buy 100 Chrysler.   It begins to advance as I anticipated.   So I buy 200 more.   It still does well, so I buy another lot.   And so on.   First thing you know, if it’s good I am long a big line of the right stock with a small initial risk.   I lost only 100 shares in Studebaker; I risked only 100 in Chrysler.   To a degree, the risk in the stock I bought on the way up was mainly the risk of my paper profits; it was not like entirely risking capital as in the initial purchase.”   Gerald Loeb, The Battle for Investment Survival, 1965, p. 81.

Note the perceptive title of Loeb’s book–battle for survival.   All of the great stock traders speak of pyramiding their purchases.   Don’t plunge into a stock and risk a lot of money.   The idea is to make a small pilot buy, test the waters, and then add more shares as the stock moves as you predicted.   I am not talking about day trading.   I am talking about rockets that will rise for maybe a year or so.   This is how to make big money–it is in the big swing, not the minute daily gyrations in price.   I don’t have the time or interest to be glued to the stock monitor every day.   I would rather select stocks that I think will rise for a while, place my stops, and let them rise or be sold out with a small loss.   I will return to this theme later in this post.

For the past week, I have noticed something strange happening in the short term interest rate index. Interestindex505 The steady rising trend seemed to be stalling.   And then the last 2 days it has been in a steep decline.   Could it be that the Fed is startled bythe news   suggesting a slowing economy, and by today’s announcements of downgrades in GM and FORD’s credit status? It was really interesting to see that the market bounced back from a big decline today.   And the charts of FNM and the housing stocks actually held up well today.   A lot of the big caps also seem to be forming bases or are in uptrends–INTC, MSFT, KO, MO,PFE, C, MRK, JPM, AXP,PG, to name a few.   (I am intrigued by IVGN–check it out.)

Perhaps most telling was the action of the WW-GMI today.Index505 It moved to +2 with a positive reading from the Daily SPY index.   And the Daily QQQQ Index is very close to turning positive.   I do not receive IBD until tomorrow, so I do not know if their mutual fund index has moved above its 50 day average yet. You may have seen it by the time you read this. There were also 115 new highs today and only 44 new lows in my universe of 4,000 stocks.

So, what should I do with all of these indications?   As much as I was comfortable with the bear case, I have to heed them.   I sold out my put options and made pilot buys in stocks that looked strong.   Remember the discussion of pyramiding above?   I always wade slowly into a stock.   The bottom line is that interest rates may have stabilized, the Fed is on hold, and the market may be turning. I do not predict the market action.   I only try to read what is happening now.   Things could reverse tomorrow again.   However, I have found that at the beginning of an uptrend no one believes in it, and the indexes often go back and forth for a bit.   About 5-10 days after the trend begins it becomes obvious to most people. I guess we will just have to wait and see what develops.—————————————————————-

Some people have sent me questions about trading stocks in their IRA.   I found a somewhat dated site about some of the benefits of doing that.   This link is somewhat more timely now, given that most of us recently completed our tax returns.   Most people do not know they can go short in an IRA by buying put options.   IRA accounts do not allow margin transactions, so we cannot actually short stocks.   I will write about these issues in a future post.   Right now it may be more appropriate to think about ways to go long, rather than short.

A Google Confession–WW-GMI: +1

@ 8:52 pm

I have a confession tonight.   The past few days I have been saying that I do not fight a downtrend and stay mainly in cash or short.   Well, I am not perfect. I could not resist nibbling at a stock that was resisting the downtrend.   For several weeks now, Cramer has been recommending GOOG as a great buy.   (I know I criticized Cramer yesterday for not urging viewers to go short or to cash, but he is not perfect either. We can forgive him.)   Cramer maintains that GOOG will earn about $7 per share (total profit/total number of shares) this year.   If the company has a PE ratio (price per share/earnings per share) like Yahoo’s (PE=55), then the stock could reach a price of around $385 (PE: 55=385/7).   Now, I can’t just take Cramer’s word for it.   I have to go to the charts to see if the stock is acting well. Wklygoog_1 You may remember that GOOG came public in a Dutch auction around August, 2004 at around $100.   (Click on weekly chart to enlarge.) The media pundits all said that the stock was too expensive.   That was a buy signal.   The pros probably wanted to accumulate the stock without competing with the little guys.   So the stock hesitated for a few days and then climbed to $216 by February, 2005.   The stock doubled in less than one year!

Remember I wrote a few posts ago about my desire to find rockets as Darvas did–stocks that will go to the moon?   Well, Darvas wrote that one thing he looked for in a stock was a doubling in the past year.   The best predictor of a person’s behavior is his/her past behavior.   The same is true for stocks.   Want to find a stock that will double in the next year–find one that has already doubled in the past year.   Don’t take my word for it.   Look up some of the winners of the past bull market– DELL, CSCO and more recently, CME, BOOM, FORD and HANS.   Rockets keep doubling and hitting new highs and always appear too expensive. You do want to go to the moon, don’t you?   So GOOG passed that test.   It was also trading near an all time high, another characteristic of a rocket.

GOOG declined for a few months and gapped up to a new high in late April (see daily chart) on huge volume, when great earnings were released.Googdly_1 Clearly, people with a lot of money were purchasing this $200 stock.   Was it too late for me to buy?   Was the rise just caused by bears covering their short sales? (buying back the shares they had borrowed from their brokers and sold in anticipation that they could buy back them back at a cheaper price, and pocket the difference in price)   Well, this is what I am trying to share with you tonight– I have found that many stocks begin their advance or decline with a huge gap in price. The trick is to wait to see if the gap is filled.   If the stock keeps on rising to new heights without closing the gap, it is often a sign of tremendous strength. (Note that in January, 2005, a similar gap up was quickly filled—and failed.)   I use TC2005 to scan the entire market for   stocks that have gapped up or down.

So, I bought a few shares of GOOG a few days after the gap, at around 220, and immediately placed a stop order to sell them around $214, if the stock started to close the gap.   In other words, I was willing to take the risk of losing about $7 per share in exchange for the possibility of a profit of $50 or more per share.   I have no idea if GOOG will continue to rise or not.   My point is that I have placed my wager and can now separate myself emotionally from the stock.   I will either profit or lose a little.   (If you are unwilling to have a lot of small losses you should not trade stocks.) I don’t even watch GOOG very much.   Remember, Darvas made his fortune when he was out of the country and far away from the market.   The further one is away from the market, the less the emotion that can kill one’s judgment, and the trade. GOOG closed today at $228.50.

What I want you to understand from this example is the strategy to purchase a potential rocket, and then to place an immediate stop order to control your potential loss if you are wrong.   (Note: A stop order to sell at $214 becomes a market order to sell as soon as the stock trades at or below the stop price.   This does not guarantee the price I will get when I sell the stock.   If GOOG gapped down from above $214 and opened at $210 one day, I would be sold out at the next price, probably around $210.   This would be a relatively rare event, but there is always this risk when using sell stops.)   The next decision I have is when to increase my position if the   stock continues to rise and where to raise my sell stop to.   Livermore and Darvas would make a small pilot buy and then add to the position only if the stock rose, proving them correct in their first purchase.   NEVER BUY MORE OF A STOCK THAT HAS DECLINED–NEVER THROW GOOD $$$ AFTER BAD.   Just take your loss, admit you were wrong and learn from your mistake.

——————————————————–

The WW-GMI moved to +1 today!   Wwmi504 There were 103 new 52 week   highs in the universe of 4,000 stocks that I follow.   However, the IBD Mutual Fund Index remains below its declining 50 day moving average.   The WW-Daily SPY index will turn positive tomorrow if SPY closes above 117 tomorrow.   If this rally proves to have legs, I will begin to close out my put options and go long. The private education stocks were weak again today– APOL (-3.56%) and COCO (-.80%).   I am ready to turn on a dime if this market shows me a definite change in trend.   If it is a real change in trend, I will have plenty of time to gradually take on my line of stocks.   Have a great trading day.

Let’s hope that Charles Kirk’s relative will get better soon and that he will return to writing his excellent blog soon, at www.thekirkreport.com.