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Friday, October 16 2009

 

MARKET STRATEGY:

 Always make a profit (Peter Lynch).  Always limit your risk of losses.  Since always is not always possible, and since you may have to weather a significant downturn in your stock or the market, it is imperative that you exercise unbending discipline in your buys and sells. At the very least you must honestly ask yourself if you can afford to hold a stock for many years, which means weathering its ups and downs.  Since we are now in a different world than we were many decades ago, buy and hold strategies can make one very nervous.  Evaluate your entire portfolio at least every six months.  Never turn over your decision making to a third party.  Although we do this via mutual funds, they are at least responsible for many, many investors and usually invest across the board (strongly diversified).    

Always make a profit means that you will pay very close attention to the factors that will affect your ability to profit from active participation in the market.  You will develop an overall set of rules that guide your actions, and you will evaluate each transaction based on its risk reward potential. The frame of mind that 'always make a profit' creates, is often humor because of its simplicity, discipline because its necessary and confidence because it is a map for continuous successful transactions.

 

     Do not allow yourself the emotional turmoil that normally accompanies winning or losing.  If you lose, clearly understand what happened and why, use it as a lesson and move on, the same goes for winning.  Fear based stress does not improve your decision making ability.

 DEFINITIONS:

 * EPS - Earnings per share.  This number (0-99) is a factor of the last five years of earnings coupled with the last two quarters.  The average of these two numbers is compared with all of the companies in the table and ranked 0-99.  Companies with superior earnings rank 80 and above.

 * RS - Relative Strength.  Measures the relative price change over a twelve month period on a daily basis compared with all other stocks in the table.  Stocks below 70 are weaker or lag the market.

 * A/D - Accumulation/Distribution.  This rating A-E is derived by multiplying daily volume by the change and direction of the stock price.  A is strongest and E is weakest.  Coupled with other factors, this would help to determine if a stock is under accumulation (buying strength) or distribution (selling strength).

 * Vol % Change - Shows each company's trading volume for that day in terms of its percent change above or below the average daily volume for the last 50 days.  This will indicate if a stock price change occurs on abnormally high or low volume. 

 General Guidelines:    

 * The prime objective is to buy those stocks with the maximum upside potential and the minimum downside risk.

* View all stocks as bad investments. Always listen to the news that might affect your stock.  Never own it forever.  Always be aware of what=s going on with the company and in the industry.  The maker of buggies may no longer be the company of choice.

      * Never defend a bad buy or timing decision.  Always exit a stock if your tolerance for a loss is minimal (10 %) below your buy price. This is called a stop loss order. Since many stocks fluctuate 10 to 15% in either direction, the key to this strategy/discipline is your awareness of the volatility of the stock and your buying time and price.

 * Stocks usually find a base level for some period of time, whether they have moved up in price or down.  Never buy a stock that has just recently extended downward more than 20% from its recent base level.

 * Buying a stock on the way down requires one to be very aware of its overall strength and what the whole sector is doing.  Buying on the way down, even if you are very familiar with it, is risky.  You never know where the bottom is.  The violation of this rule is most prevalent. 

 * Understand the overall market direction as well as the direction the industry that your stock is in is taking.  Trying to bet against the market movement, is difficult and often discouraging, if not fatal. The phrase is "don't fight the tape".  This means that to go contrary to the overall market movement is pure gambling. Hedging your decisions with puts and calls can be a great strategy but does require you to be more involved than many people have time for.  

      * Analyst and market watchers can severely affect a stock's price.  They not only set expectations for a company, their opinions weigh heavily in the market place.  They along with the company set expectations.  If these expectations are not met the stock can take an intermediate tumble. Always know when earnings are being reported and be aware of the expectation level that is being set.     

* Institutions can move a stock significantly in either direction.  If a stock has a large institutional following, and they decide to dump the stock, it may decline rapidly in price.

 * Understand when the market is nervous.  Nervous people make nervous decisions, your stocks can be affected, no matter how sound your buying decision is. 

 * A long term view of the market and your individual stocks is a critical factor in your emotional stability.  Buy with a long term strategy, sell with a profit, minimize your risks with a disciplined stop loss order.

     * Mutual funds provide a refuge from the daily swings of the market.  Stock trading is a daily research effort, if you do not have the time to spend on it do not carry a short term outlook, play the market long term (2 to 5 years) with a broad diversification.

 PERCEPTIONS and EXPECTATIONS:

 * Earnings are reported quarterly.  However, analysts project a company's earnings before they are reported.  This creates an expectation in the eyes of the people who buy stocks. If a company reports earnings that do not meet expectations significantly, the stock could be dumped regardless of its long term potential.  The degree of the discrepancy is a perception and cannot adequately be determined.  Also, even if a company reports terrific earnings, it may not jump in price.  For example a whole industry may be in disfavor.  This is the market weighing down a good stock, when the market weight is removed, these stocks generally take off.

 * Nervousness is created under many conditions.  If the government decides to reduce military spending, companies that are significant players in the defense industry may take it on the chin.  If the FDA fails to approve several drug applications in a row, this may create the perception that all stocks in that class are suspect and create a sell off.  If interest rates move up or down based on FED action, the whole market could take a turn, positive or negative based on the perceived result of the action taken. If a group of stocks have risen substantially during the year, and the perception is that they are overvalued, there may be a sell off in a particular industry.

 * We are in a world economy.  We are being integrated.

      A FEW TECHNICAL RELATIONSHIPS:

    * An EPS of 99 is great. It means that this company has had excellent earnings over 5 years and the last two quarters have exceeded the same quarters in the prior year (> 25%).    

      * A RS of 90 to 99 is also great. It means that the stock has out performed 90% of all other stocks in the table from a price performance point of view. 

 * A A/D of A means that the overall strength of volume of buying and selling relative to the price movement is in an accumulation phase. When volume is centered around selling the stock is in distribution.

 * A large volume change (>100% of average daily volume over last 50 days activity), could indicate several things. 

* Large block selling or buying (balanced)

* Significant interest with a breakout possible

* Significant disinterest with a decline possible.

 * The best performing stocks averaged a relative strength of 87 before their major increase in price actually began.

 * If the relative strength line has been stagnant for 7 months, or if there is an abnormal decline over 4 months, the stock is questionable.  Look at the charts.

* Large numbers of shares (The total shares of a given company) must be weighed against the average volume of buying and selling. For a portion of your investment capital look for companies with less than 25 million shares in their capitalization. Optimum is 10 to 15 million.

 * Look for large percentage increases in earnings per share.

 * The lower the debt ratio, the better.  Also a company's cash position can mean they have the strength to buy other companies.

 * A few institutional sponsors are better that many.

 * A new product or service, new management, or a beneficial change in the industry, or even a new high price in the stock should be looked for in your buy decisions.

 * Three out of four stocks will follow the market direction.

 * Buy stocks that have broken out of their base (not more than 10%).  If you buy within the base, they can fluctuate 10 to 15% and knock you out (if you follow the 7 to 10% sell rule).

MARKET DIRECTION

 * Tops in the market: Average moves to new highs, but does so on low volume (demand is poor), Volume surges for several days, but there is very little upside based on closing market prices.

* If the market leaders begin to break down, or if the discount rate is raised, the market may be heading down.

 * The advance/decline line fails to meet the market averages after the market averages reach new highs. I.E. few stocks are participating in the advance (more stocks decline than stocks advance).

* Watch for shorts.  At a market top, major short positions may be taken if the stock tries to break out and fails.  If a major short position develops in your stock, watch it very carefully. If it fails to continue on the upside, consider selling.

 

Posted by: RB Carpenter AT 05:25 pm   |  Permalink   |  Email
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