GMI back to +5; Some potential winners; on moving averages

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

Friday’s decline does not alter my current strategy at all.  The GMI reflects relatively long term trends that last weeks or months, not days.  It would take a huge decline (4%) in the QQQQ, to below 36.50 to make me question this uptrend.Gmi605   The QQQQ closed Friday at  38.10.  The GMI did decline 1, to +5, because there were fewer than 100 (86) successful 10 day new highs.  There were almost no (9) successful 10 day new lows. ( See post from 4/26 for definitions of GMI components.) There were 206 new highs and only 22 new lows among my universe of 4,000 stocks.  Still, the stocks in the major indexes were weaker than they have been in weeks.  Only 14% of the Nasdaq 100 stocks rose on Friday, 26% of the S&P 500 stocks and 7% of the Dow 30 stocks.  We are in day 20 (U-20) of the QQQQ up trend……………………………………………

A lot of my current profitable holdings are stocks in triple digits (GOOG, CME, SHLD).  I wanted to share with you a realization I had in the strong market in the late 90’s.  I found that it was easier for me to trade expensive stocks profitably than cheaper stocks.  I know what you are thinking.  Price does not matter, only the percentage move is important.  But wait a minute.  Let’s assume that the typical stock moves up about 20% or so before consolidating. Twenty percent of a $10 stock is two dollars.  But I told you that I like to trade by making a small pilot buy and then buying more as a stock rises.  A two point move simply does not give me the time and confidence to accumulate a rising stock.  But a 20% move in a $100 stock is 20 points, plenty of time for me to get in as the trend develops.  Even though the percentage moves of the $10 and $100 stock are identical, the psychological impact of the rise on me is very different.  Nvr Moreover, another advantage to trading expensive stocks is that I suspect that they are less likely to be manipulated by traders than the cheapies. These in-and-out day traders just do not have the means to plunge in and out of the triple digit stocks with enough shares to influence the price or volume.  The chart patterns are therefore likely to be more reliable.  (See NVR monthly chart as an example.) Finally, the fact that a stock has experienced enough demand to raise it to triple digits is a good predictor of future demand. So, I love to buy stocks that are $80 or above.  They often sprint to $100 or more……………………………..

I ran a scan of the market for some potential rockets.  These stocks have all doubled in the past year, have good recent earnings and are near their all time highs.  They also have recent MoneyStream (a TC2005 proprietary indicator like on balance volume) values of 100%.  I think that these stocks are worthy of my consideration for future purchases:  NSI, SWN, SHLD, NDAQ, CRYP, CME and MW. (I already own some of these.)………………………………………………

The moving average is probably the most important tool in my technical arsenal.  Being a research psychologist, I conceptualize moving averages differently than your typical trader. I thought I would share some of my ideas with you. Social scientists typically collect information from a sample of persons and describe the results in terms of the average of the sample.  Thus, one might measure the IQ of each person in a class (our sample) and then add all the scores together and divide by the number of students in the class to obtain the class average.   If you came into the same classroom and I asked you to guess the IQ of a student "X" in the class and I told you the average IQ for the class was 100, you would have the most likelihood of guessing correct if you guessed that student "X’s" IQ was 100, the class average. For any sample, the best prediction of a sample member’s score is the average of the sample.

Now, consider we design a sample to consist of the closing prices of a stock for the last 5 days.  We could add together all of the closes from the past 5 days and divide by 5 to get the average close for the sample of 5 days.  As in the example of IQ scores above, the sample average is the best guess of the close for any of the 5 days in the sample.   But note that the average remains the same, regardless of the order of the closing prices from the last 5 days.  For example, the average of the daily closes:  8,8,6,6,7= 8+8+6+6+7=35/5=7.  But if the 5 daily closes occurred in a different order ( for example:8,8,7,6,6 or 6,8,7,6,8) the total of the closes always adds to 35, and when divided by 5, gives the same average = 7.  So the average tells us nothing about the order of the closes in the days making up the average.

Now, social scientists know that the number of persons or cases in a sample is very important to determining the usefulness of the sample average that is computed.  If I want to estimate the average IQ in a group of 100 people, I may have more confidence if I sample 30 people than 5 people.  The average based on 5 people may be very biased and unrepresentative of the 100 people, compared to an average based on 30 of the 100 people.   (We scientists sample a small number of people because in most cases we cannot obtain measurements of all of the people–the population– we want to study.  For example, voter surveys may select 3,000 people to interview to obtain an estimate of future election results for the entire country.)

Question–how many days’ closing prices do we need, to get an  accurate summary estimate of a stock’s closes?   Do we compute an average of 5 days, or 10 days or 50 days or 200 days or more?  Most technicians compute an average of 50 or 200 days (or periods) without any justification for choosing a sample of that many days.  If anyone has seen a published rationale for why so many people choose 50 and 200 day samples to compute averages please let me know.  I can find no reason other than tradition.  I believe that it is much better to compute an average based on the number of days that produces an average that works for a particular stock, not on some arbitrary standard.

The only difference between the average and a moving average is that the moving average continually changes the sample of closes.  In a sense, we choose a new sample each day.  A moving average of 10 days consists of the last 10 days’ closes for a stock as of today.  Tomorrow, we drop from the sample the closing price from 11 days ago as we add in the current day’s close.   Thus in a moving average the order of the days is important in determining which day to drop from the sample.  But, again, the resulting average is the same regardless of the order of the days within the sample. 

Some people are bothered by the fact that all of the days in the sample count equally in the average.  They think that the closes from the more recent days should count more than the earlier days and they weight the recent days’ closes more using exponential weights or some other set of weights.  I prefer to use the simple moving average, because it works, and because I think the differential weighting of the days contradicts the whole idea that we are just computing the average of a sample of closes.  The final fact you need to know about moving averages is that the only way a moving average changes is if the new day being added to the sample is different from the day being dropped.  (If the oldest day to be dropped and the new day to be added have the same close, the sum of the closes does not change and therefore the average remains the same.)  Thus, a moving average of 10 days increases only if the current day’s close is greater than the close 11 days ago that is being dropped from the sample.  Now this is a most important point.  It means that in addition to the value of the moving average, we should pay attention to its direction.

Say stock XYZ is trading at 25 and its 30 day average of its closes is 25.  Do we want to own a stock where its current price is the same as its average price over the past 30 days?  I think not.  I would think that a rising stock should close today above its average price over the past 30 days. Second, is the moving average rising?  Remember, in order for its 30 day moving average to be rising, the close today must be higher than the close 31 days ago.  Why would I want to own a stock with a flat or declining 30 day average?  Don’t I want to own a stock that is at least closing  higher today than it closed 31 days ago?

To summarize my strategy rules:  1) One needs to pick a period for computing a moving average based on how useful the resulting average has been for tracking that stock’s prior price trends; 2) The stock should be trading above the moving average that we select; and 3) The moving average must be rising.  If you want to know more about the benefits  of using moving averages for tracking trends, see Weinstein’s classic book.  It is a simple strategy, but oh so valuable. Weinstein’s recommended moving average techniques have helped me to time most bull and bear market moves since 1995.

Did any of this description of moving averages make sense to you?  Send me your questions and feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GMI goes to the max: +6, CME, QSII, CMN

Well, it finally happened–the GMI (see archive: 4/26 post) hit +6! Gmii601 For the first time since we began to post the GMI, there were more than 100 successful 10 day new highs–stocks that hit a new 52 week high 10 days ago and closed higher today than 10 days ago when they hit their highs.   This result assures us that buying   stocks at new highs has become profitable and relatively common.   In contrast, there were only 10 “successful” 10 day new lows. (Shorting new lows is not the way to go now.) There were almost 13x more new highs today than new lows (194/15) in my universe of almost 4,000 actively traded stocks.   And 71% of the Nasdaq 100 stocks rose today, 54% of the S&P 500 stocks and 50% of the Dow 30 stocks.   The Nasdaq tech stocks continue to lead this market.

The GMI indicates this market has begun a solid up trend.   How long will it last?   No one knows.   The QQQQ index is in its 19th day of the up trend (U-19).   Many of you may think that you missed this market.   However, the last time the GMI indicators looked like this, the QQQQ up trend lasted about 92 trading days (August, 2004 through January, 2005.) Of course, the rise could end tomorrow–past performance does not predict future results…………………………………….

A reader alerted me this week to the growing strength in CME, one of the big winners of 2004. Cme(I meant to mention CME last night–sorry.)   Often times a stock doubles or triples and then when it looks like it has topped out I forget about it only to see it surge back to new peaks.   CME quadrupled and then hibernated for 4 months and then started up again in the past month (see monthly chart).   So I decided to make a pilot buy of a very small number   (30) of shares on Tuesday morning at the open at 212.20.   I then placed a sell stop in below the prior day’s low at 209 and a buy stop in above the day’s high around 218, thinking it might rise to that in a few days.   If it fell, I was only risking 3 points. Well, CME broke through today and I automatically bought more around 219 and the stock closed at a new all time high of 232 today on very high volume.    This is the type of action one gets in rockets in a strong market. Note that this trade all began with a modest 30 share pilot buy, so that I had minimal risk and only added more when the stock moved up nicely…

Now for the ugly dogs of the day. In spite of a powerful market, sudden declines happen.   We must protect ourselves from these situations by using stops, by making pilot buys and gradually accumulating   shares, and by not   concentrating more than 20% of our funds in one position.

One Foolish writer said   that people were offered QSII   today at a discount. I say that owners of the stock were decimated by the stock’s sudden 15%+ drop today–no welcome bargain to them.Qsii Here is a stock that was rated #1 in the IBD 100 list 2 weeks ago and rated #2 last week with an A+ composite rating, and EPS rating of 99 and an RS of 98, that just fell apart on huge daily volume without any news. I was stopped out of this stock today at about 55.95.   I had placed my stop below the low of the day on May 18 when the stock went to a new high on considerable volume.   I figured if the stock fell below that day’s low it was a bad sign.   So, I was automatically sold out at 55.95 and the stock closed at 50.91 today after hitting a low of 49.80.   I could find no advance technical warning of this decline.   So, even stocks with great IBD ratings can suddenly drop–a perfect reason why one must slowly accumulate a position and not concentrate most of one’s funds in one stock.

A die hard O’Neil follower would say that if the stock had been bought at the proper pivot point, around 52, a trader would have had a minimal loss today.   Note that the stock did stop at its 50 day average today. One way to play this stock, if I still held it, would be to place a sell stop below today’s low, around 49.70.   At the end of April, QSII had a similar large decline but bounced back the next day.   After a sudden one day decline, it often works to place the sell stop right below that day’s low.   We’ll see if it works for QSII tomorrow…

Another train wreck today that was brought to my attention by a reader, was CMN. (Click on chart to enlarge.)Cmn Here was another stock with high IBD ratings (Composite of 98, EPS-97, RS-96), that fell 41% today. I did not own it, but I like to think I might have seen the technical warning signs.   First, there was that big decline on huge volume in early April.   Second, notice the low volume, consistently below the 50 day average (blue horizontal line) during the subsequent rebound, until today. Finally, note that the Money Stream value (red horizontal line) never regained the level it reached prior to the April decline.   MoneyStream is a proprietary indicator in the TC2005 software that is a modified on balance volume indicator.   It basically is a cumulative total of the volume on up days minus the volume on down days.   There is no way a stop loss order would have prevented a huge loss today, given that the stock opened far below yesterday’s close.   The only people who got out with less of a loss are those who sold the stock in extended hours trading, Wednesday night.   On Thursday, after it was too late, the reason for Cantel’s decline was announced. Looks like someone may have known something about this contract termination in early April. (Don’t you wish you could track down those sellers and question them, under oath, about their fortuitous early sales.)

Googlemania, GMI +5 and growing stronger

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

Everywhere I turn I find articles on GOOG. Cramer was on CNBC today and on his MadMoney show this evening, taking credit for being an early believer in this stock.  (I have to admit I became interested in GOOG after listening to Cramer’s reasoning about projected earnings and suitable PE levels.) Goog601  This is all fine, but when the bandwagon gets so crowded I become a little skeptical. And when the chart starts to go into a vertical rise on the highest daily volume in 4 months, I need to take stock (pun intended).  The stock is very far from its 50 day average.  I think GOOG is an excellent long term play.  And I suspect that there will be serious buying at the end of this month (quarter too).  Cramer mentioned this possibility today, too–he must have read my post yesterday about mutual fund end-of-quarter window dressing.  So, even if we get this end of the month surge in GOOG, we still could get some weakness before then.  I do not know what will happen, nobody does.  Therefore I intend to hold my shares and not make new purchases until the stock reacts a little or forms a plateau.  As you know, I began SLOWLY accumulating GOOG in April after that delicious gap up.  Throughout the rise, I have my stops in place just in case something ugly happens. So, for now, I will just watch the action from the sidelines…………………………….

The GMI remains at +5, but is getting close to a +6.  Gmi601 This is because there were 243 new 52 week highs in my universe of 4,000 stocks.  That means we will probably  get 100 successful 10 day highs soon. The Nasdaq 100 stocks (measured by the QQQQ) is now in the 18th day of the uptrend (U-18).  There were more than 10 times as many new highs today than new lows in my universe of stocks.  In addition, 81% of the Nasdaq 100 stocks rose, 80% of the S&P 500 stocks and 77% of the Dow 30 stocks.  There were 54 successful 10 day new highs and only 10 successful new lows.  (See my post on 4/26 in the archives for components of the GMI.)  The train has left the station.  The question remains as to where and when the train will stop and/or reverse. Right now, I remain comfortably long stocks with my stops in place just below suitable support levels.  I hope all of you are profiting from this uptrend and are not resisting it.

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

A mixed day, trend-followers, GMI: +5

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

Today was a mixed day, and the GMI remains at +5, as we complete day 17 of this QQQQ uptrend (U-17).  Gmi531 There were 35 successful 10 day new highs and only 11 "successful" new lows.  More than 70% of the 49 stocks that hit new highs 10 days ago, closed higher today than they closed 10 days ago.  There were 155 new 52 week highs in my universe of nearly 4,000 stocks, and only 23 new lows.  What is somewhat troubling is that only 36% of the Nasdaq 100 stocks rose today, 32% of the S&P 500 stocks and only 7% (2) of the 30 Dow stocks.  So, while there were a large number of new highs, most stocks did not rise today.

Still, some of the stocks I have been discussing hit new highs today, including GOOG, BOOM, NSI, MW, PNRA  (I own some of these).  A sign of a bull market top is weakness in the leaders.  We will therefore continue to monitor these stocks for any signs of weakness–clearly they are still very strong.  Moreover, given the strength of the GMI, I am not in a defensive mode yet.  It will be interesting to see whether the market can bounce back tomorrow……………………………………..

In my prior post, I said I was an orthodox agnostic when it came to believing in a rationale for market moves.  Since then I read an interview in Technical Analysis of Stocks & Commodities, June edition, with Michael W. Covel.  Mr. Covel recently published the book, Trend Following: How Great Traders Make Millions in Up or Down Markets. In the interview, Covel says, "A trend-follower doesn’t need to know the "why" of market behavior during trends.  They just need to know the price.  A lot of trend-followers don’t even want the name of the markets.  They just want the price data and they can tell you whether they can trade it by the price data alone.  I think this kind of mentality is odd to most people."(p. 55)

I guess Darvas, Livermore, O’Neil and a host of other gurus would be called trend-followers today.  I don’t feel so weird about my orthodox agnostic comment anymore.  I am in good company.  However, Covel is describing the most extreme case of trend following, someone who needs no fundamental information about a stock other than its price and volume–an approach we call in my field, blind empiricism.  Most of the successful gurus I admire wanted to trade with the trend, but also factored in other information about the company’s profitability and industry.  By the way, I was disappointed with Covel’s book.  It merely makes the case that specific trend-followers have been successful, without providing any details of how these people achieved their success. Borrow it from your local library.

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GOOG, MW, Other rockets, fabricated fantasy revisited, GMI +5

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

The GMI (see post 4/26) remains at +5 and the QQQQ uptrend is in its 16th (U-16) day.Gmi529 There were 131 new 52 week highs (in my universe of close to 4,000 stocks) and only 14 new lows on Friday.  The successful 10 day new high index was quite low, at 16.  Nevertheless, most (16/26) of the stocks that hit new highs 10 days ago did close higher Friday than they closed 10 days earlier. While there were 21 successful new 10 day lows, they constituted a minority of the 117 stocks that hit new lows 10 days earlier. Thus, betting on new highs 10 days ago tended to be more profitable, even though there were not many……………………….

I am still amazed by the pundits who are remaining skeptical about this rally, including Alan Abelson, the author of Barron’s Up & Down Wall Street column.  As I wrote on Thursday, this has been a good tradeable rally and if you somehow missed it or are still resisting it, you may want to re-examine your methods and your psychology. Why do so many people need a reason for the market to rally.  If there are good reasons, they almost always come out after the move.  If the train or rocket is moving, why should we fixate on an explanation–just jump on board.  I guess I am an orthodox agnostic when it comes to believing in a rationale for stock movements.  Meanwhile, the IBD Mutual Fund Index is rising nicely above its 50 day average, signifying that growth oriented funds are rising–so someone is buying growth stocks…………………………………………….

I told you I started buying GOOG after it gapped up around 221 in the last week in April.  GOOG closed near its all time high on Friday at 266, up +24.39 for the week. Goog3   I am starting to become worried that too many pundits are recommending GOOG–it even became the number one stock in IBD’s 100 list in Tuesday’s edition. While I have told you that I disavow all stock scenarios, let me suggest one.  I would not be surprised to see GOOG close around 300 by the end of June.  The end of the quarter brings that famous "window dressing" period when mutual fund managers are rumored to load up on the current quarter’s winners so that they can look smart when they publish their quarterly reports listing their holdings.  (If this misleading practice really happens–and John Bogle told me a few years ago that it does not, why doesn’t the SEC require that all funds list the date and price of all stocks purchased in the reporting quarter?) Anyway, since GOOG was initially offered to the public in a dutch auction and most mutual funds could not load up at the initial offering price, maybe there will be a stampede in June by the fund managers trying to accumulate the high flying GOOG?  Hence my hunch that $300 per share may be attainable in June………………………..

I talked to you last post, about Peter Lynch’s strategy of finding possible winners by scouting the shopping malls.  It occurred to me that there is a store I often visit that seems to offer the best combination of service and prices in men’s clothing.Mw   I like their stores much better than the department stores and their prices are more reasonable.  It just so happens that their stock, MW, has popped up on some of my market scans.  Mens Warehouse meets my criteria of a launched rocket.  The company gapped up on large volume after it announced its earnings on May 18 and declared a 3 for 2 split.  MW is also rated A+ by the IBD stock checkup.  So, MW is a winner.  The question is where to buy it.  It clearly is extended, far above its moving average.  If I were to take a chance on MW now, I would buy a few shares on Tuesday and place an immediate sell stop below the last mini reaction low of 49.40, perhaps at 49.20 or 48.95. If I got stopped out, I would buy it again if it bounces near its 50 day average.  (This is not a recommendation but only for illustrative purposes.)

My rocket scan picked up several other promising stocks, all rated A+ by IBD:  FORD, PTC, LCAV, FTO, QSII, HANS.  Check them out. (I own one of these.)  If the rally continues, I may bet on more of these rockets……………………

I’ve been thinking about my comment on fabricated fantasies on 5/24. I wrote, "What if Darvas is right?  All of these people and institutions who are paid millions of dollars for their financial advice are simply involved in a world of fabricated fantasy."  The more I thought about it the more I thought I was unduly critical of the fundamental approach.  In a sense, we are all looking for the criteria for picking winning stocks, we just employ different criteria.  The technician uses mainly price and volume patterns, while the fundamental analyst uses estimated value and economic statistics.  This is what I have realized since my post:  both strategies fit well within Darvas’ concept of the market as a big casino.  We are all using our tools to predict other persons’ buying our stock from us at a higher level.  Both groups are playing the same gambling game he described!

By the way, fundamental analysts sometimes ridicule technicians’  search for "momentum" stocks.  Correct me if I am wrong, momentum means movement, and we all want a stock that will move up quickly after we buy it.  What’s so wrong with momentum? Stagnation is deadly and costly in life and in stocks…………………………………………

Send me your feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.