Month: May 2005

GMI rises to +5, The Google Rocket, Lucky Bill Miller

@ 11:03 pm

The WW-GMI moved to a +5, indicating that the markets, especially the NASDAQ stocks, are in an uptrend.  Gmi522 The only component not yet positive is the Successful New High Index.  Nevertheless, that Index shows that 65 of the 104 stocks in my universe that hit a new high 10 days ago closed higher on Friday than they did 10 days earlier when they hit their highs.  Thus, a trader buying new highs 1o days ago had about a 65% chance of owning a stock that increased on the subsequent 10 days.  In contrast, only about one third (15/44) of the stocks that hit new lows 10 days ago were trading lower on Friday. (Even the majority of the new lows 10 days ago rose!) The market is telling us that buying new highs has been a better strategy than shorting new lows.

Remember a few days ago I said that my gut was telling me the market should go down but my instruments were telling me to buy.  One must always go with his/her instruments–the market action.  I do not waste a lot of time trying to divine the market’s direction by focusing on economic news or current events. Don’t get attached to a scenario.  Just watch the market and tune out all of the rest.

So, I am content to own stocks now and to stay with this rising trend.  That does not mean that I will plunge into the market.  Instead, I look for the stocks that are moving to new highs on good volume and I take a small initial position.  If I am right and the stock moves up, I make more small purchases, each one higher than the other. I do not want bargains.  Goog2 The same is true of real estate.  The beach front property that looked too expensive a few years ago today is much more expensive.    Thus, I began buying GOOG at around 221 after it gapped up, and have slowly added more each time it broke to a new high, after it had rested for a few days.  I have kept my sell stops in place and raised them as the stock rises and each time I make a new purchase.

Is GOOG too expensive?  I do not know.  One never knows the answer to such questions until after the fact.  I guess you could say that GOOG was too cheap at 221.  Since GOOG gapped up on 4/22 there have been 20 trading days, 15 up days and 5 down days,  so people are bidding the shares up 3 times more often than down.  So, I just ride the rocket up, knowing that my sell stops will get me out if the stock falters–I have limited my emotion and limited any pontificating about the stock’s likely future.

In a rising market, 70% of the stocks rise, and I am content to hold on with the odds in my favor. How many stocks have come through this year’s sloppy market and are trading at their all time highs? Isn’t that the type of strength we should be seeking in our purchases?  I suspect that many of the rockets to the moon have already been launched………………………………

I had hoped to write about some technical strategy matters this weekend but could not get to it. In the near future I want to cover  moving averages, my tragedy (911) watch list, and  stop orders.  Let me know whether you are interested in any of  these, or other, topics…………………………………….

As you may know, Bill Miller’s Value Trust Fund  receives a lot of accolades for beating the S&P 500 index for 14 consecutive years. I have a somewhat different opinion of the fund’s most recent record than is espoused by the article that I linked to above.  I thought I would share it with you, and welcome your comments.  This fund holds a limited number of stocks (one has to, in order to beat the averages–see my post on the limitations of diversification) and I happened to be examining the fund’s top holdings a few months ago.Amzn  What caught my attention was that AMZN, one of the fund’s largest holdings, had an unusual jump in price and volume in the last few days of 2004, and then immediately tanked in 2005. Between 12/23 and 12/31, AMZN rose 13.77%, while the S&P 500 rose just 0.15%.  Another big Value Fund holding, IACI, also had a huge December rise (+11.87%), followed by a New Year’s collapse. What an extraordinary piece of luck for B.M.—and for his record, that the two stocks making up so much of the fund’s portfolio enjoyed such a surge in year end buying. I wonder, would a big mutual fund family concentrate its buying in a few stocks to preserve the reputation of its star performer?

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.

GMI hits 4+

@ 10:49 pm

The WW-GMI hit 4+ today.  The IBD Mutual Fund Index finallyGmi519  closed above its 50 day moving average, indicating that growth mutual funds are climbing.  The Weekly QQQQ Index is borderline positive.   There were 86 successful 10 day new highs. (See 4/26 post for elements of the GMI)  In fact more than 80% of the 106 stocks that hit new highs 10 days ago closed higher today than 10 days ago.   There were also 157 new highs today and only 31 new lows. Seventy percent of the NASDAQ 100 stocks rose today, 62% of the S&P500 stocks and 60% of the Dow 30 stocks. This market rally is firing on all cylinders.

Last week I transferred all of my 401-k funds from money market funds to equity funds.  Over the past 7 years I have succeeded in avoiding all serious market declines by being in cash.  There is no necessity to take a buy and hold approach with company 401-k plans. Most fund families allow you to switch funds a limited number of times.  In October, 2000, I sold out my growth funds around 103 and watched them drop to below 40.  I hope my timing is correct this time.

Even though I think the trend is up, I religiously place sell stops below every purchase.  We can never take the market for granted.  This weekend I will return to strategy. Next Wednesday is the IBD meetup.

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.

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.