How I find the next AAPL growth stock; New GMI buy signal; IBD50 out-performs again

GMI5/6
GMI-26/8
T210860%

When I presented at the DC Worden Seminar two weeks ago, I asked the audience how many would buy a stock at a new high.   Only about 5% of the 200 people in attendance raised their hands. I was incredulous. All of them admitted they wanted to buy a stock that went to the moon, but failed to understand that a stock that climbs to the sky has to hit new daily highs many times along the journey.   People want to buy bargains, when stocks typically sell at a bargain price for a reason.   If one wants to buy a terrific winner, one should not look for bargains.   The greatest stock traders bought stocks at highs and sold them at higher levels.

Everyone would like to have profited from AAPL’s meteoric rise.   How might someone have identified AAPL’s potential for growth before it took off?   I went back and looked at AAPL’s performance from late 2011 on, just before the start of the December market rally.   On October 17, AAPL hit an all-time high of $426.70.   That high was broken on January 9, at $427.75.   On January 18, AAPL hit a new high of $429.47 and by the end of January it had hit a new high on 4 days.   The final new high that month was on January 31, at $458.24.   This collection of 4 all-time highs in January was a clue of things to come.   In February, AAPL hit a new all-time high on 13 days, or 65% of the trading days in that month!   By the end of February, AAPL had hit $547.61, a gain of about $90 per share from the end of January.   AAPL proceeded to hit a new high on 50% of the trading days in March, with the March top of $621.45. To date, AAPL has hit 4 more daily highs in April, topping out at $644.

There are some very important lessons from the above.   First, if you refuse to buy or hold a stock at an all-time high, you will never ride a wonderful stock like AAPL.   Second, if you want to find the next AAPL, begin by looking at the list of stocks that hit a 52 week high the prior day.   Then weed out the stocks that are not near their all-time high. Then research the remaining stocks’ fundamental and technical characteristics.

If my GMI has a buy signal, I concentrate solely on stocks at or near their all-time highs that have risen strongly for months and are now breaking out of multi-month consolidations.   The best way to see such stocks is to look at their monthly charts.   Here is an example of the type of stock that interests me. I bought some PSMT last week when it touched $80.   This monthly chart shows the stock breaking out of a 6-7 month consolidation, coming after a 7 month rise when it doubled in price.   I make a small pilot buy of such a stock and place a stop loss below the break-out level.   If the stock continues to rise, I will add to my position and raise my stop.   I love to pay more for a stock that I have already bought.   I never average down. I found PSMT simply by using TC2000 to scan for all stocks that hit a new high and then charting their monthly price patterns. The fact that the stock was flagged as having appeared on an IBD 50 or New America list increased my confidence in the stock. Other stocks that hit a new high last week and that had promising monthly charts were: CF, DSW, WPI, ECL, LKQX, CB, KMB, ULTI, FDO, SBNY, GEOI.   These are worth researching.   I always check out whether earnings are imminent–I stay away from stocks that will report earnings soon…..

I am willing to go long again because the GMI just issued a buy signal. I am slowly going long and have bought some QLD.   I also sold some weekly cash secured puts on SPY.   I am basically betting that the SPY will close next Friday above the strike price (140) on the put options that I sold.   If I am wrong, I will have to buy back the puts at a higher price, or buy the underlying SPY shares at the strike price.   I feel comfortable with these short term bets on the SPY as long as the GMI is bullish. Furthermore, the SPY is about the only thing I would be willing to have put to me.   I do not do this with individual stocks that can be much more volatile. If I can pocket a premium of 1/2 to 1% each week, it gives me a nice monthly return on my money….

The GMI is now at 5 and the GMI2 is at 6.   The GMI was >3 for two consecutive days, which is my criterion for a buy signal. So I am closing all shorts and going long in my trading account.   The   Daily QQQ Index component of the GMI will turn positive with an up or flat day on Monday.   I use a very stringent criterion for a change in the short term trend of the QQQ.   Thus, Friday was the 10th day of the QQQ short term down-trend, within a longer term up-trend.   I will be much more confident of the new up-trend once it lasts 5 days. The QQQ and SPY have now closed above their 10 week averages, an important sign of strength.   52% of the NASDAQ 100 stocks closed with their MACD above its signal line, another sign of a strengthening market. The Worden T2108 Indicator is in neutral territory, at 60%. IBD continues to see the market in a confirmed up-trend…..

Over the years I have investigated how well the IBD100, now IBD50, stocks perform versus other groups of stocks.   The stocks that meet the IBD growth criteria usually outperform other stocks in a rising market, but under-perform in a falling market. I replicated my past analyses by looking at the performance of the IBD 50 stocks published on 12/22/2011 at the beginning of this year’s rise, through last Friday.   The IBD50 stocks did much better than the NASDAQ 100 stocks or the S&P500 stocks.   The median change in the IBD50 stocks was +20%, compared with +15% for the NASDAQ 100 stocks and +10% for the S&P 500 stocks.   Moreover, the IBD 50 stocks really shined when looking at the likelihood of a larger ,+30% gain.   34% of the IBD 50 stocks gained 30% or more, compared with only 16% of the NASDAQ 100 stocks and 9% of the S&P500 stocks.   Clearly, the IBD selection criteria resulted in a lot more winners than one would find among the stocks in these other two indexes. That is why I focus largely on watch lists and scans containing stocks that have appeared on IBD 50 stock lists published every Monday.

 

 

My strategy for trading stocks that will advance $25 per share in a month

GMI5/6
GMI-26/8
T210869%

I am going to share with you   a strategy that has helped me to make money the past year.   It conflicts with most of the truisms that we have been taught about the market. But if we trade like most people do, than we can expect to have the results most have— to not make money.   One has to   pursue one’s own ideas to be successful trading.

So, first note that the title to this post involves finding stocks that will appreciate $25 in a month, and not a percentage increase.   I have been told by many, and it is mathematically true,   that a rise from $5 to $10 is the same percentage increase as a stock that goes from $50 to $100. But psychologically, I find it easier to trade a stock that is rising $50 on the way to a double, than   a stock that must go up $5 to double.   In other words, it is not the percentage move that I am after, it is the   number of points in the rise.

Let’s assume for this discussion that the typical stock that breaks out of a base goes up 20% before it consolidates or reverses.   A 20% move in a $10 stock is only $2, but it is $20 in a $100 stock.   I have more time (at least psychologically) and courage to add to a position in a stock that is rising for $20 than to one that is only on the way to a $2 rise.

So I want to hop on board a stock that is breaking from a base or support and that is likely to advance $20+ if I am right. How do I find such stocks?   Well, I used TC2000 to look at all stocks that advanced $25 or more in the past 30 days.   I found 21 stocks as of Friday.   The most consistent characteristic of these stocks was that 90% (19/21) were priced at $80 or more 30 days ago;   17 were greater than $100 per share.   I have done this analysis before and it always comes out the same.   Most stocks that   rise $20 or $25 or more in the past 30 days were above $80 at the beginning of the period. During this period, GOOG rose +$101, AAPL +$61 and ISRG +$63.

So, if I want to ride a stock that will advance a lot of points, I should be looking at stocks that are already expensive, more than $80 per share. Other reasons I like expensive stocks is that the in and out high frequency day-traders are less likely to have the money to play with these stocks. And expensive stocks are there for a reason, people, mainly funds, are bidding them up.

So, trading expensive stocks may be a fine strategy, but   many people, you say,   cannot buy many shares of an $80+ stock.   This is true, but the missing ingredient is deep in the money (DITM) call options.   I use DITM call options to buy expensive stocks for 10%-20% of the cost of the stock.   What I do is to find an expensive stock that I think is bouncing off of support or breaking out.   Once I find one, I look for a near month call option that has 3-6 weeks before expiration and which will cost me under 20% of the price of buying the stock.

This example should illustrate the strategy.   If I believe that NFLX, which closed Friday at $276.58,   is in an up-trend and bouncing off of support, I go to yahoo.com and look up the August call options.   I find that the August 230 call can be bought for about $49 per share, or $4900 (each option covers 100 shares).   This option would give me the right, but not the obligation, to purchase 100 shares of NFLX at $230 each through August 19.   Since I am paying $49 per share for the options, if I were to use the option to buy the shares, my cost or break even point is $279 (230+49), just about $2.50 above the current price of NFLX.   (With a DITM option the break even price is close to the current price of the stock.) Once NFLX rises above $279, I make $100 per point, just as if I owned the 100 shares of stock.   If NFLX rises $25 to around $301 per share before the option expires in August, my profit would be about $2200 (301-279 x 100).   And I never have to buy the 100 shares of NFLX because I could now sell the option that I bought for $49 for the price of $71 (301-279).

So what we have manged to to with a DITM call option that cost $4900 is to control 100 shares of NFLX, which would have cost $27,658.   In a sense, we only had to put down and risk   about 18% of the price of the stock.   I say risk, because it is accurate.   If I bought the 100 shares of NFLX and it fell to zero, I could lose the entire cost, $27,658.   But with a call option, the most I could lose is the $4900 that I paid for the option.   If the stock is below the strike price, $230, at expiration, it expires worthless.   But I would never wait for that to occur.   If NFLX declines below support. I would just sell the option at the best price available at the time.   For example, if on August 19, NFLX is trading around $270 per share, my option would trade for about $40 (270-230 strike). In other words, at expiration someone would use the option to buy 100 shares of NFLX at $230 and be able to sell the stock immediately in the market for the current   price of around $270, a $40 per share profit.

So this all comes down to that, all other things being equal,   if one wants to buy a stock with a better chance of appreciating many dollars during the next month, it is preferable   to buy a very expensive stock by using DITM call options. Chapter 7 of Jim Cramer’s latest book, Getting Back to Even,   gives some examples of the uses of DITM call options. I assign Michael Sincere’s book, Understanding Options,   to my students who want an options primer…….

The GMI closed the week at 5 and the GMI2 at 6.   So I am comfortable being long.   It looks like the money is rotating into tech stocks again, so I own QLD as a way of riding this trend.   QLD is a leveraged ETH that aims to rise or fall each day twice as much as the QQQ, or Nasdaq 100 index. Once the short term trend changes, I slowly accumulate QLD (for up-trends) or QID (for down-trends).   On Friday the QQQ completed its 17th day of the short term up-trend. The QQQ and SPY have now closed above their critical 10 week averages for 4 weeks.

I try to trade consistent with the market’s direction, and to ignore all other factors, including the news and politics.   The market has a mind of its own and I msut trade in synch with it.

Where are we in the market cycle? Riding the up-trend.

GMI6/6
GMI-R10/10
T210863%

I used my favorite indicators to review the Dow 30 Index’s action since 1915, as this is how far back TC2007 allows me to track this index.   I looked at the monthly chart and the following indicators: 5 and 30 month simple moving averages and the 25.4.4 monthly stochastic. I am posting a chart of the Dow 30 since late 1992. A few patterns leap out at me.   First, notice how the Dow spent most of the time in the roaring 90’s   up-trend above the rising 30 month moving average (red line) and with the 5 month average (dotted line) rising above the 30 month average.   (Click on chart to enlarge.) The stochastic (in the lower window) with two exceptions, spent almost all of the time above the 80% “overbought” level (top parallel line), until it began a steady decline in 1999, foreshadowing the major decline in the Dow. The 5 month average declined below the 30 month average. The bear market bottomed out with the Dow below the declining 30 month average and with the stochastic around oversold territory, near 20% (bottom parallel line). The market turned up, the 5 month average rose above the 30 month average and the stochastic returned to near 80% again.   In 2008, the process repeated itself, with the 5 month turning down below the 30 month average and the stochastic declining until it became very oversold again, around 20%.   The market has now rebounded, the 5 month average is rising nicely above the 30 month average and the stochastic has just returned to overbought territory, an area where it has stayed for years in some previous rising markets.

So where are we in the current cycle?   It looks like we are in a strong up-trend with no sign of any weakening yet.   In fact, the 30 month average has not yet reversed up, but the 5 month average is moving up nicely above it.   Now I have learned in trading   over the past 40 years that patterns are meant to be broken.   The road is littered with the carcasses of Ph.D.’s who wagered heavily and lost, based upon complicated mathematical relationships that worked in the past.   I can tell you that the simple patterns I have discussed below seem to me to have worked well over the past 95 years.   Major bottoms in the Dow have occurred with this stochastic below 50% and the more severe ones, around 20%.   So, I won’t begin to suspect the end of the current up-trend until I see the stochastic turn down and the 5 month average decline below the 30 month average. I’ll let you   know when that happens…….

Meanwhile, my General Market Indicator (GMI) remains at the maximum reading (6 of 6) and the more sensitive GMI-R is at 10 (of 10). Thus, all of my short term and longer term indicators for the   QQQQ (Nadaq 100 tech stocks), and the SPY (S&P 500 stocks) remain positive. The QQQQ and SPY have closed above their critical 10 week averages for 15 straight weeks. However, Friday was only the 15th day of the QQQQ short term up-trend.   The Worden T2108 Indicator is at 63%, in neutral territory. And 68% of the Nasdaq 100 stocks closed with their MACD above its signal line, a sign of short term strength. The weekly GMMA chart below shows that all of the short term averages (red) are above the rising longer term averages (blue), reflecting an established up-trend. So with my more conservative funds, I am adding to my positions in the major index ETF’s like QLD, SPY and DIA, a comfortable way for me to ride the up-trend.