HTZ, AGN

[Mike]

Two of the stocks on my shorting list are starting to work. ARIA on a prior list worked in a spectacular fashion. HTZ offered an entry at yesterday's close as it stalled out at the 50-day. Today it is down more than 10%. I did not take a position in HTZ unfortunately. I do own AGN short from the stall out on 10/29. Today it may be failing the 50-day, a sign that it might work.
Stocks that can be shorted is may be a sign of an underlying change in the market. The leading stocks however have started to perk up. So we are in a confused state. I bought KORS off my watchlist early this morning on a pocket pivot signal.

[MTman]

Mike,
I often find it difficult to know how long to hold a stock or when to take profits. In your experience, do most of your CANSLIM quality stocks reach the 20-25% profit zone from which you take profits? Or, do you take profits more based on the stocks previous move and other general market condition factors? I realize there is a different set of rules for holding the big winners that O'Neili discusses in his book, but it seems that little direction is given on the other stocks that often make or break a persons portfolio and confidence (other than the 20-25% rule). Your insights are appreciated.

Mark

[Mike]

Mike,
I often find it difficult to know how long to hold a stock or when to take profits. In your experience, do most of your CANSLIM quality stocks reach the 20-25% profit zone from which you take profits? Or, do you take profits more based on the stocks previous move and other general market condition factors? I realize there is a different set of rules for holding the big winners that O'Neili discusses in his book, but it seems that little direction is given on the other stocks that often make or break a persons portfolio and confidence (other than the 20-25% rule). Your insights are appreciated.

Mark

Mark,

I like it when they reach 25% but there are times when stocks don't seem to get there and I need to adjust my sights downward toward taking profits at 15%. I know when to do this when the market just isn't robust enough to allow most stocks to run up. I monitor breakouts and just eyeball what is happening to them. If I adjust my profit taking to 15% I must reset the loss taking to 5% vs. the 7-8% O'Neil suggests. This is to maintain a 3:1 profit:loss ratio.

Some other sell rules I use are as follows:

1. Cut all positions at 7% loss (if not before). I actually hate taking a 7% loss and will be out earlier.
2. Sell stocks that break a long-term upper trend line (more on this later)
3. Sell stocks that have held the 10-day moving average for at least 7 weeks if they fail the 10-day moving average. Otherwise use the 50-day as your selling guide.
4. Sell stocks that exhibit a sharp pullback and recovery to a new high. This pattern needs to be 4 weeks or less. Something like two weeks down followed by two weeks up to a new high.
5. Sell largest daily down volume since the beginning of the advance.
6. Don't let a stock roundtrip to zero after advancing 15% or more.

Establishing a long-term upper trend line. This is drawn only on a weekly chart over 18-weeks or more. The line should contact at least three bars with six or more weeks between the bars. The break should come at least six weeks after the last touch.

One other thing. Mostly monitor your positions using a weekly interval chart. Daily charts can cause people to sell early. I stay away from intraday interval charts.

[MTman]

Mike,
Thank you for your reply and advice - very helpful. Some additional questions on this topic:
-In general, what are your profit targets for smaller positions such as a 3 weeks tight or a 50 day MA rebound when these are your initial entry points in a position?
-When the market trend goes 'under pressure' will you sell your laggards automatically even if they have not reached 20-25% profit?
-What stocks will you try and hold through an intermediate correction assuming they have not reached the 20-25% profit target?
-How do you determine how aggressive to be in buying and selling?

Thank you!
Mark

[Mike]

Mike,
Thank you for your reply and advice - very helpful. Some additional questions on this topic:
-In general, what are your profit targets for smaller positions such as a 3 weeks tight or a 50 day MA rebound when these are your initial entry points in a position?
-When the market trend goes 'under pressure' will you sell your laggards automatically even if they have not reached 20-25% profit?
-What stocks will you try and hold through an intermediate correction assuming they have not reached the 20-25% profit target?
-How do you determine how aggressive to be in buying and selling?

Thank you!
Mark

Mark,
I don't have different profit targets from buy points that begin with at breakout such at the normal 7-week bases, flat bases, 3-weeks tight, and short stroke. Pocket pivots, shakeout plus $3, and 50-day buys can be different. If I buy at a 50-day bounce and the stock moves up and then breaks out of a standard pattern, I start measuring the 20-25% profit target at the breakout. Thus if the 50-day bounce was 5% below the breakout the profit target becomes 25-30% from my buy point. Pocket pivot buys are the same. Sometimes a pocket pivot coincides with a normal breakout. All of my pocket pivot buys are above the 50-day and some are above the 10-day. A shakeout plus $3 is an early buy in a double bottom pattern or some other kind of shakeout below a prior low. The buy point is $3 above the first low for stocks trading from $30 to $60 and proportionately for other priced stocks.

I much prefer to buy a pocket pivot or 50-day bounce than a breakout. The profit targets are greater and there is a well-defined exit point at the 50-day or 10-day such that the risk becomes a few percent vs. 7-8% loss. 50-day bounces and pocket pivots are essentially early buy points in a base. You must analyze the base and see what is forming and whether the base is proper. If it is and has constructive price and volume action, as long as the price and volume action continues along your assumed lines, you can stay in the position. Lets look at a recent example. LEN was a leading issue but seemed to have topped out last May. It now appears to have possibly formed a bottom in what may be a cup or cup and handle formation. That possible bottom was in August. LEN subsequently retested that bottom successfully and regained the 50-day moving average on 11/26 on pocket pivot volume. The pocket pivot volume signature as defined by Chris Kacher means it made the highest up volume over the last ten trading days than any down volume in the period. The buy point becomes the 50-day moving average. As long as LEN remains above the 50-day and continues building my assumed pattern I can stay with the position. Note that this means that you need to predetermine when you make the purchase that you can hold it if it retests the 50-day, so don't chase more than say 5% above the proper place. A 5% chase would be large for me. If the 50-day is declining this can present problems, stay with flat or rising 50 day lines.

Early in a new cyclical bull market advance is when to be aggressive. These can be volatile times so it can be the toughest investing of your life. 2009 was like that. 2003 was more normal. 2009 really required a different tool set to do well (junk off the bottom) at the start.

Late in a bull market cycle can be a time to be cautious but here is where experience comes in. Many bull markets end up in a blow off stage presenting an easy investing period that can be short lived. I was on 200% margin going into the October 2007 top assuming that we were probably in a topping stage. When October 31 came with its large move up into new high ground after a rather good move up after 4 1/2 years of a bull market run I assumed that was the end and began selling into the blow off.

The current environment is giving me a different set of challenges. We have been in what appears a continuous rally since November of last year. All of the usual tools and techniques advising caution or raising cash along the way have been superseded by QE. No set of tools work in all environments. Again this is where experience comes in. My experience level has not been as high as I wished. So along the way this is what happened to me: I took profits at the normal profit levels in my positions only to find that I can find few replacement positions in this weird market. Usually pullbacks produce proper bases, the abbreviated pull backs have either left positions extended or broken. So I am currently underinvested.

[MTman]

Mike,
The Internet Content group has some strong stocks that are all basing (as I know you are aware). From my anaysis the 3 top stocks are QIHU, FB, and YY. They each have corrected about the same amount and have solid CANSLIM fundamentals. How do you determine which is the best growth stock to go with in this type of scenerio? Does the first stock that breaks out in big volume typically mean it will be the strongest of the group?

Thanks so much,
Mark

[Mike]

Mike,
The Internet Content group has some strong stocks that are all basing (as I know you are aware). From my anaysis the 3 top stocks are QIHU, FB, and YY. They each have corrected about the same amount and have solid CANSLIM fundamentals. How do you determine which is the best growth stock to go with in this type of scenerio? Does the first stock that breaks out in big volume typically mean it will be the strongest of the group?

Thanks so much,
Mark

Mark,
The internet content group has been steadily rising amongst the 197 IBD industry groups. It is currently the third ranked group. A week ago it was number 4, 3 months ago it was number 10 and six months ago it was number 26. There are 46 stocks in the group. With a group that has been a leader for a long time I would expect to find some tired leadership; it is important to find stocks that are not extended or exhibiting wide and loose technical action. However starting with fundamentals first my ranking is as follows:
SFUN, FB, QIHU, YNDX, GOOG, BCOR, YY

I include in my fundamentals Liquidity (Avg $ traded per day), Demand/Supply (percent of float traded per day on average) and margins (either ROE or pre-tax margin). BCOR is a bit illiquid for me. YY is acceptable but at the bottom of my list because its margins are not as good as the others. Now on to each stock:

SFUN is acting very strong, shows high margins and strong earnings and sales. High volume has recently entered this stock. Currently 4.6% of the float changes hands every day. Anything more than 3% is high demand, anything less than 1% is low demand. SFUN unfortunately is very much extended above its last 2nd stage base. So the best I can say is that it bears watching for a future low risk entry, perhaps after it establishes a new base. The reason you should watch even the extended stocks is that some of them offer a pocket pivot entry such as SFUN did last Monday where it busted through the ten-day moving average on volume higher than any down volume day in the prior ten days.

FB shows accelerating earnings and sales, its ROE is minimal but its pre-tax margins are high at 44%. It trades 4.1% of its float per day on average. It is currently building a reasonably tight second stage base. The highest weekly volume in this base was a down bar but closed in the upper half of the bar which is actually a positive support sign. FB is attempting to bust through its 50-day moving average. This can sometimes offer a safe buy point if you buy close to the moving average and hold it as long as it behaves like you expect (stays above the 50-day). This is on my watch list.

QIHU has been acting very strong showing strong demand trading 5.1% of the float every day. It advanced 177% above its 2nd stage base and to my eye is now acting loose. On a weekly chart there are no tight closes (bars where successive closes are within 1 or 1 1/2% of each other.) Loose action is a sign of institutional indecision or outright selling. Perhaps QIHU needs to work off that 177% advance for a longer period. Loose action is a major flaw and I will stay away from it until it tightens up.

YNDX (I own this with the recovery of the 50-day) is forming a reasonably tight 2nd stage cup base. It trades an average 1.2% of the float per day and has good margins. YNDX preferably should form a handle before breaking out. Some stocks blast out of a cup without forming a handle. Success rates for cups with no handles are worse than cups with handles and late in a market cycle the percentages are no greater than 50-50. Early in a new bull market most of them work.

GOOG is really here because of its strong liquidity, institutional sponsorship, good chart action and good margins. It is not a pick that I like however with choppy earnings. It is acting very tight however which demonstrates institutional buying. GOOG might be a better pick than the loose acting QIHU however.

BCOR is a bit thinly traded. It trades $18.6M per day on average. This is light for many institutions and perhaps because of this it trades only 1.4% of the float per day. It has been acting well however. It is quite extended from its last base breakout and probably needs a rest and a new low probability set up.

YY shows strong earnings and sales growth. Its ROE is minus 72.3% but countering this is a 26% pre-tax margin. Of all the candidates it shows the highest demand/supply trading 11.2% of the float per day. Its float is tiny at 16.3M shares. YY has the same problem as QIHU, it went up 172% above its last 2nd stage base and is now acting very loose. Notice on a weekly chart that each bar closes significantly up and then down on each successive week. This is the opposite of what we want. To be fair the last three closes have tightened up some but much more of this is needed. Take a look at its first base formed early this year. Notice how that base looks compared to what you see now. I will avoid this for a while.

Now what about the market? We had a Hindenburg omen on Friday, an indication of a mounting number of new 52-week lows being formed in an advancing market. This is the kind of action that can accompany market tops. I know that every bear has been slain over the last year but this may be an indication of excessive complacency.

[Dallas]

Hi, Mike -

What would you consider a reasonable time period over which to calculate the supply/demand ratios such as those cited in today's post?

Thanks

[Mike]

Hi, Mike -

What would you consider a reasonable time period over which to calculate the supply/demand ratios such as those cited in today's post?

Thanks

I calculate %Demand / Supply as 100 * (50-day average volume / float)

I use 50-day also as my calculation of Liquidity = 50-day average volume * price

[Dallas]

Thanks, Mike. One quick follow-up:

I can understand equating high float turnover with high demand in the context of a bullish view on a given security. Would the reverse be true in a bearish context?