Hi there. I thought the chart a couple days ago looked like it could run strong into yr-end. Yesterday’s higher-volume lower-low gave me pause. If I was less exposed overall, I would have gave it more rope, certainly. That said, this one is ripe for correction once 2013 begins (if not sooner); January is generally dangerous for the previous year’s 200%+ gainers.
I’d prefer quiet strength for the overall market just now, if I could write how things progress. A negative session for Friday, jobs numbers numbing; but mild declines compared to the mood.
Okay, well, Friday’s action was more downside than I was voting on. We’re back into question-mark territory now - hanging like Tuesday’s chads near the correction lows; momentum re-established to the downside.
It was kind of a high school rally then. It looked good early, but parents returned unexpectedly and ran everybody home.
The good news - there’s still too many good looking charts to expect doom. Defense is warranted, mandatory, etc., but we can see clearly where the strength lies; should the market keep it together and the party reorganize.*
If we close the indices at lower lows, I will move to full defense (market-neutral or else slightly net-short). Be careful though, about previous intraday lows. Don’t get excited until it becomes clear we will close below previous intra-day lows (I’m talking about the indices here - your quality stocks should be well above previous lows; relative to the broad market).
This requires foregoing twitter-time, since bearcat calls will swell once we’ve “broken support!” But time of day is important here. Many early and mid-session breaches end up marking lows on the chart. A successful retest does not forbid a lower-low; it’s a test of lows, which ultimately finds support…or not.
Allow the market to close below previous intraday lows. That’s when Piggy’s dead. That’s when you can blow the conch.
Important note - if there is a breach of index lows and market breadth is resolutely negative (8-1 or worse declining vs. gaining stocks after the first 90 minutes of trading; or 7-1 or worse after mid-day), your odds of reversing that session are extremely low (we’re far more likely to close near lows in this case; lows considerably lower than mid-session). Look under the hood, measure breadth and leadership compared to the indices themselves; measure your darlings compared to Maria’s shrill. If Maria, Twitter and the bile in your stomach are more elevated than the actual damage itself, then wait for the final hour to determine faith. There may be a stick save yet. Now that you’re sufficiently flushed.
*Final note - I should be posting my smaller list of Liquid Darlings sometime before the open Monday. If it’s not the end of the world, it might still be the start of something good. Something I want to hold into year-end if we’re pushing higher. Bars of soap finally released under the surface.
There are a lot of good looking leadership charts right now.
I’ll assume for a reason.
I’m not concerned AAPL is not one of them. Not at this stage. I can think of Roman Candle scenarios whereby AAPL remains a warning sign, lagging, lagging, lagging, while other leaders storm higher. Or AAPL can swing again (swing like Darwin); now that we’re committed to doubting it.
What would paint me more bearish right now? Actually, not too much as far as percentages go. Close the indices at lower lows and this bet’s off - the market will have re-opened the question of how deep the correction will go.
In the meantime, there is power showing-up in the charts now and we’ve only just turned higher. That’s a favorable set-up. I won’t measure this move beforehand, but I respect the power under the hood. There’s sufficient potential overhead.
I’d prefer quiet strength for the overall market just now, if I could write how things progress. A negative session for Friday, jobs numbers numbing; but mild declines compared to the mood. A slower, back-and-fill start.
That would be my vote. That would suggest a more sustained rally is in the works.
More obvious, perhaps, would be a punch further-higher. Right through to elections - right through investor’s better judgements. More obvious, since not so convenient; for those waiting on certainty.
Now is a good time to review leadership. Now, after this storm. What’s floating best. What’s going to lead higher late in the year.
I’m working on a couple newer lists. The broader version (New Leaders) is public now for Marketsmith subscribers (go to Community/select Shared-lists on right. Note: I suggest sorting according to Vol% change on the day, to quickly see which names are pulsing).
Shortly then, I’ll have the short-list out. The newer, liquid darlings for the year-end season.
I’m wrong all the time - don’t do what I do. At least not because I am doing it.
From over the weekend in IBD, the point was made - Big, winning stocks will sometimes retest buy-points before a major run higher.
The article is useful, true and worth a read, but, I was reminded of another conventional wisdom…
Never let a winning trade turn into a loser - Ever!
Okay, this well-intentioned axiom has partial merit, especially if you’re day-trading. Widow, orphans and even you have to protect against losses. I’ll never mock that - you’ll be crushed. But the half-baked notion you cannot let a position where you have a gain drop back through your entry price is wrong on too many levels. Let’s rip into it.
Markets don’t care what coffee you drink and certainly not what prices you’ve paid. It’s not about you - ever! If you buy a stock and it goes up, keep your head about it. Are you good on the chart? Were you ever good? In many cases, you bought wrong and you’re still wrong. Long and wrong - pour another cup and sell that nag.
But what if it’s a higher-beta, leadership stock and you’re hit with a typical 5% market reaction; some insider selling; an analyst downgrade based on valuation (my favorite); a secondary offering just announced; a nuclear event; hurricane - an article in Barron’s!
You’ve got to measure performance in a position relative to itself and the world which surrounds it. Your entry price, in and of itself, is insignificant. Granted, if you bought at a level of specific support, the price paid might then be relevant (settle down), but not because it’s your entry.
Let’s say, oddly, Magic Johnson announces he’s HIV positive and you are long a couple of Biotech stocks (true story). The next morning, besides you feeling schmucky, the group is sharply higher. All but one. This holding is up only fractionally, and on heavy volume. Not only that, the company has an AIDS drug in development and that’s about it for their pipeline.
Thanks pal - for holding that bag.
[Immune Response was a high-priced, small biotech in the early 90’s. Shortly after, it would fall sharply; ultimately, it died a slow death; Magic is still going strong]
Or try this - you paid an average of $118 for a LNKD (also true; chart below) early this month (October), because A): it was a leading stock within a leading industry group. B): the name was attempting to breakout to new highs following its constructive 17-week base. And C: it fit the criteria whereby newer-winning-liquid-institutional stocks typically outperform to a higher degree in the 4th quarter. Very good. Soon after, at 122, the stock looks fabulous still and the coffee is hot, right?
But the name stalls now and begins to decline. And, leader that it is, this precedes a reaction in the overall market (something to pay attention to). If you were being exceptionally careful because you were either bearish on the market, or else over-exposed long, I can understand selling this name near the close of October 5th (118.83); it breached its 20-day moving average (MA) on modest, yet rising volume. If you are holding a working, healthy position in a not-over-exposed portfolio though, what is the point of selling just because it went through your 118 entry? An entry is only rarely perfect -that was a good entry (the reason: the biggest of winners usually do not hand-out invitations for you to get aboard late - it’s okay to pay-up some for quality).
Indeed, there is nothing really wrong with this chart until the end of October 12th, when it closes below its 50-day MA on strong, rising volume (110.41). Now you can be stopped. Now you can complain.
While I’m not convinced LNKD is truly breaking down, I respect and understand exiting or reducing the position October 12th and shifting more defensive. Again, guarding against serious loss is exceptionally important. We’re down 6.4% now in this example - volatile or not, it’s enough to hurt.
LNKD will report earnings this Thursday, after the close. I’m out of the position, presently, licking that sticky wound. But even though LNKD is lower still (closing Friday at 104.55), being out of the name has never felt quite right to me. Perhaps we’re about to see it, perhaps another conventional idea of avoiding 200+ PE stocks will re-render itself useful. Or, perhaps we’ll see why this chart was so strong and lovely in the first place.
Either way, entry price be damned. You may have bought LNKD only Friday and you’re holding a winner, but come Thursday night your printed onto Friday’s lunch, as that winning trade cuts like gapped teeth through hopeless island-stops.
Sell for a reason, and make it a good one - not because the horse you rode in on sports the #7.
Quicknote - if you see me scale-back into an initial speck of LNKD before Thursday’s numbers, don’t do what I do; at least not because I’m doing it. I’m a professional and I’m trained in how to crash. I live in padded rooms and I wear Buster Posey helmets. So cut my teeth!
Nice to hear - thanks :)
Sitting idly in California while the East Coast braces for Hurricane Sandy, I’m taking advantage of the surprise day off to study markets, strategy and discipline.
I’m also free to share a bit of thinking, so let’s attack some conventional wisdom…
You’ll never go broke by taking a profit
I mentioned on the stream a couple weeks ago not to buy into the oft-uttered notion you will never go broke by taking a profit. Guess what - you’ll never really get ahead either.
The reason - you need big winners to post big years in a portfolio. As years progress then, it’s the big winners which ultimately change lives.
Study past results - I can assure you your best years had big winning positions. Yes, there are day-traders who can push back 14 caramel colored cans of fructose every session and pound their way to 100%+ gains. But you’re not one of them. The percentage of traders who manage this consistently is very small, their age is very young, and their duration of success is short-lived (try it for a few years and see if you can stand-up straight).
For the rest of us, that natural tendency to take profits when you have them is costly, since it is generally met with an equally natural reluctance to take uncomfortable losses. While this post is more about managing profits, you must protect against losses, certainly.
It feels good to take a profit. But It doesn’t take a math genius to calculate where you’re headed when you harvest gains quickly, yet hesitate to book loses. If you’re sufficiently disciplined, you might squeak-out uninspiring net-gains in the end, heroic trader that you are. But you’re fighting a constant state of erosion (spreads, commissions, the important fact that stocks break-down more rapidly than they rise, etc.). You’re working against the grain, much too hard, just to feel good about being an idiot.
This is not to say you cannot trade around positions (lighten-up when a stock is extended, or as a market environment weakens; add-back at an area of potential support, or in an improving environment). William O’Neil will still kick your ass in the end, as he holds onto a CSCO throughout the 90’s, adding-only at progressively higher prices as the stock set-up fresh buy entries; then selling the entire fortune only after the name finally broke-down on major volume - some 10 years and close to 10,000% higher from the initial buys.
Take some off, that’s fine. We’re not Bill O’Neil and it’s not the 1990’s. Trading around a position (varying a position’s size while a name ebbs and flows higher) can work to your advantage. I’m not recommending this, necessarily. It’s too easy to screw-up (paring-back just before a fresh breakout, beefing-up ahead of a sharper reaction, whipsawing yourself into frothy pulp, etc.). Just be sure to allow for big winners as they emerge, however you manage it.
And since markets do not always trend, you have to work with what the market gives you. Be patient, as opportunity eventually reappears (typically after you’ve convinced yourself not to expect a major move). And ask yourself this - in your investing career, have you not been repeatedly surprised by the duration of a market or stock’s trend?
That is the important point - when markets are trending there exists the potential to trend further than you expect (a good reason to reign-in those many predictions and expectations). And taking small profits regularly, because it feels good and you’ll never go broke, means you’re eliminating yourself from all the greatest trends - the trends that change lives.
If it sounds like I might be lecturing to myself, perhaps I am. I could do better at this, and this year in particular. So apologies for using you as a sounding board in an effort to tighten-up my discipline. I’m looking to hold to my better principles by sharing them aloud. Or, as Downtown Josh Brown referenced Friday night in uptown Coronado - I write in order to know what I think.
More on attacking conventional wisdom later - East Coast stay safe!