Nicolas Darvas

Livermore on profits, Cramer on sleepers and 15 Hot Stocks–WW-GMI: +3+

@ 8:32 pm

In explaining to Walter Chrysler (yes, THE man) why it was a mistake when he, Livermore, took a profit too soon in a trade, Jesse said:

"You remember that old joke about the guy who goes to the race track and bets on the daily double and wins, then takes all his winnings and bets it on the third race and wins. He does the same on all the other races, and wins.  Then on the eighth and final race, he takes his hundred thousand dollars in winnings and bets it all to win on a horse, and the horse loses.

Well, he’s walking out of the track and he meets a pal of his, who says, ‘How’d you do today?’

‘Not bad,’ he answers, smiling.  ‘I lost two bucks.’ " (the money he started with)

     Jesse Livermore, World’s Greatest Stock Trader, by Richard Smitten, 2001, p. 226

Livermore was saying he made a mistake by selling when he had a profit because he was scared of losing the money he had made.  He should not have been scared, however, because he was playing with the track’s money (the profits) and was not risking the money he started with.  Fear was not a valid reason for selling, the only good reason to exit a profitable trade, according to Livermore, is a technical signal resulting from the stock’s behavior.

One of the reasons that Jesse Livermore made (and lost) several fortunes in the market was that he averaged up on profitable trades and was not afraid to risk his profits.  Risking your capital, however, was suicide for a trader. This approach is similar to the one espoused by Loeb when he said to slowly average up as the trade worked out.  That way, you would not risk much of your original money.

Today, Jim Cramer espoused a strategy that was as antithetical as possible from the way the great traders (see book by John Boik) operated.  Cramer said to look for stocks that have not moved up, the sleepers, and to buy them because they would be more bullet proof in a possible decline.  Remember the quote from Crane that I posted a while ago saying that buy signals were simply evidence that a stock was already being bought by others?  Both Livermore and O’Neil  and Darvas talk about buying stocks that have demonstrated strength by bursting to new highs on unusual volume.  Why would anyone attempt to seek winners by finding stocks that are not moving in a rally!  (Now I can surmise why Cramer has said his wife, The Trading Goddess, had to rescue his hedge fund several times.) We already talked about not buying rockets that are sitting on the launch pad–they may never take off. The gurus I listen to have written that the big money is to be made in buying the leading stocks–the ones that burst to new highs as soon as the market gains strength.

So, I decided to run a scan using TC2005, to find all  stocks (in my universe of 4,000) that hit a new 52 week high in the past 10 days.  I found 371 stocks.  I then ranked them by EPS gain in the past quarter and excluded all stocks with less than a 100% gain in earnings, that had not at least doubled in the past year and that were not trading near all time highs. Tc2000 The matrix shown here (click on it to enlarge) presents the 15 stocks that survived my screen, ranked by earnings gain the past quarter (the first EPS column).  The second EPS column is the increase in earnings 2 quarters ago, and the last EPS column is the increase over the past year.  An interesting characteristic of these stocks is that the PE (price divided by earnings per share) ratios are all below their earnings growth rates. This may be symptomatic of a market that has not yet bid up growth stocks to astronomical levels. The revenue column is revenue growth over the last 4 quarters.  The next column presents MoneyStream, the Worden TC2005 indicator similar to on-balance volume I described a few posts ago.  The next column shows the price today divided by the price 250 days ago, and the final column shows the volume this month divided by the volume 6 months ago.  A  rocket often has extraordinary increases in volume as it rises.

Not all of these stocks are buys.  However, I wanted to show you an effective way of screening powerful stocks and a way to present the information so it is easy to obtain a snapshot of some important fundamental and technical indicators by which to compare stocks. Of course, I want to buy such strong stocks only if the market is rising—-like now!!

The market keeps growing stronger.  The GMI is +3+.  It is probably Gmi518_1 really a 4, because the IBD Mutual Fund Index was very close to its 50 day average as of this morning’s edition and the index probably broke above it with today’s advance.  When this index turns positive, it indicates that the mutual funds that concentrate in growth stocks are beginning to do well and augurs well for those of us who buy growth stocks.  There were 197 new 52 week highs in my universe of almost 4,000 stocks and only 30 new lows.  There were 65 successful 10 day highs and only 16 successful 10 day lows.  Increases occurred in 84% of the NASDAQ 100 stocks, 80% of the S+P500 stocks, and 87% of the DOW 30 stocks.

Right now the trend is up—finally.  Another sign of the turn is that some of my trader friends have abandoned the market and thrown in the towel on trading. Those of us who went short or stayed in cash these past difficult months can now take advantage of the bull trend. There is a time for every season…….

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 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.

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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.

CNBC: Forever Bullish

@ 8:10 pm

I think you do your listeners a disservice.

Mutual funds must stay invested, individuals do not.   About 70% of stocks go with the market indexes.   When the indexes are declining as they have been for weeks, it is your duty to tell people not to fight the trend.   Get out of the way, safely in cash,   or go short.   Why try to find the few exceptions that can fight the trend.   Go with the odds, as Livermore, Baruch and O’Neil did.

There are enough pundits urging people to buy–you are smarter than that. Or will you lose your audience if you tell people to stay in cash?

Sent to Jim Cramer,   MadMoney show, April 15, 2005

Today, Cramer told his audience to “AVOID” 80% of stocks in this economic environment.   He then went on to describe the stocks they could buy and proceeded to the lightning round of rapid buy/sell/hold advice.   Why does a talented hedge fund manager who clearly sold short and traded options, never advise his listeners to do what he did?   Why is he always looking for buys, when he thinks 80% of stocks are declining?   Does he think the rest of us cannot be trained to use these techniques which he, himself, used, to profit from declines?   Buy in a declining market?   This is insane–now I know why they named the show MadMoney.

One reader sent me a quote from the professor, Peter Navarro, www.peternavarro.com, suggesting why CNBC has a penchant for bullishness:

“Ah, those bullish fumes that so very often make the CNBC bubbleheads such wonderful contrarian indicators.   Oil prices off the charts, interest rates moving inexorably up, inflation pressures building.   No worries.   Be happy at CNBC- cause bearish rhetoric makes for bad ratings- and besides, it’s not their money they are losing for you.”   Navarro’s Broad Outlook for the Market: Smile for the CNBC Camera, 4/4/2005.

Now, I thought I was irreverent!   In researching this quote, I looked over Peter Navarro’s free weekly report and was very impressed.   You might want to check it out at www.peternavarro.com, click on   weekly column. It is nice to see someone else who is not afraid to talk about shorting stocks or to be in cash! Do you think that if Cramer advised listeners to short some stocks, it would destroy his ratings? I think it sure would help his credibility.   This weekend I will begin to discuss how we little people can take advantage of shorting like the big guys–unless the market should undergo a sudden metamorphasis.

Speaking of the market, the WW-GMI for today remains at zero.Index503 There were only 14 stocks   that hit a new high 10 days ago and closed higher today than they closed   10 days ago (when the stock made the new high).   Thus, few of these new highs were successful.   The analogous number for new lows 10 days ago is 43.   In addition, there were more new 52 week lows today than highs (79 vs. 69 in our universe of 4,000 stocks).   However, the SPY is very close to the area where my daily index will turn positive.   If it closes above 117 for 2 days , the index will turn positive and suggest to me that a tradeable rally has begun. The QQQQ is still far away from signaling a turn.

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I hate to say I told you so, but remember I said Monday night that COCO, CECO and APOL looked sick?   They declined , -4.26%, -9.74% and -1.31%, respectively, today. I guess it was a lucky call.   I sure didn’t know any news about CECO; it was all in the chart. Ceco I identified the downtrend in the weekly chart but have printed the daily chart here to show you the tremendous decline   it had today.   Click on the chart to enlarge it.   Notice how the 50 day moving average (green line)   had topped out in February and that the stock met resistance at this average.   Note the large gap down in February on high volume- a sign of massive institutional selling.   (Gaps in price are worthwhile tracking.) The stock rose back to the 50 day and closed the gap and then began its decline.   The selling was all visible in the chart, and I never knew anything about a class action lawsuit against the company.   Nicolas Darvas would say if he shorted the stock, that he had become a silent partner with the sellers by jumping on board after them.

The housing stocks with the ugly charts   tended to decline today too.   I think this weekend I will post a table tracking the performance of the ugly charts after I   commented on them.   Maybe I should compute a pulchritude index for stocks.   Tomorrow will be a pivotal day for the SPY.   Will it close above 117?