Some Wall Street Wisdom to Remember
A Few Selling Pointers
Three Commodity Stock Ideas
Timothy Lutts has written about the Contrary Opinion Forum in past issues of Cabot Wealth Advisory, so I won’t go into all the details of this wonderful conference. Suffice to say that I’ve been to the conference a handful of times since I joined Cabot back in 1999, Tim has been more than 20 years in a row, and we both love the setting, the speakers and the friendly attitude among attendees. It really is a unique experience.
But I bring it up today because of … buttons. Every year for decades, the Forum has given out one or two lapel buttons that have a cute, catchy investing slogan, along with a generally simple illustration. At first, reading them just makes you smile or giggle. If you stop to think about them, however, there is much to be learned.
Anyway, Tim has been collecting these buttons for years, and now has more than 70 of them. A few years ago, he made a list of all the buttons he has collected. I came across that list a couple of days ago, and want to pass along a few of these sayings, along with the lessons any investor can learn from them. Without further ado …
“If It Is To Be It Is Up To Me” This is probably my favorite. The lesson here is to take things into your own hands and to be responsible for your actions; no one is going to do it all for you! I’m happy to make recommendations, but the fact is it’s going to be you that actually makes the decision to buy and sell a stock. And it has to be you that realizes your own strengths and weaknesses as an investor, and adjusts accordingly.
“Excitement is Highest as the Roller Coaster goes Over the Top” Cabot Founder Carlton Lutts loved this one; he actually wore it around on his jacket with some regularity. The lesson: When everyone’s excited, the market’s usually near a top, at least shorter-term.
“Live in Worry Lose in a Hurry” Worrying about everything is not compatible with making money in stocks. Worrying about everything really means a person doesn’t have confidence in himself, or his system (if he’s using a system at all). And that almost always leads to losses.
“Push Yourself Beyond Conflict and Complacency” One of the big problems many investors have is the inability to make a decision. Having a system and sticking to it forces you to make decisions, and hence, allows you to stay in gear with the market.
“Unexpected Events Occur Frequently” I should’ve harped on this a year ago! Every financial pundit will tell you that the market goes up 7% per year, blah blah blah. But the fact is, the market often makes big moves, and the so-called unexpected occurs a lot more frequently than is widely believed. Example: We just had two 50% bear markets in the past eight years, after just one in the prior 70!
“Patience Precedes Profits” You probably know that letting winners run is a good strategy. But this saying also applies to the time before you buy a stock–the patient investor who waits for the proper environment, both for the market as a whole as well as a good buy point for an individual stock, is far more likely to make money than someone who’s always in a rush.
Like I wrote above, there are dozens more of these buttons, and in the future, we might even scan them into a computer and write about them somewhere on our Web site. But for now, these are my favorites. Refer to them often when emotions are running high!
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With the market acting like a champ, and leading stocks doing what they’re supposed to do (LEAD the market higher), I thought it would be a good idea to …. are you ready for this? … talk about selling.
That’s right! Now that investors are getting a bit more giddy (gone are the fears of a financial collapse, although few are truly excited about the economy’s future) it’s a good time to review some selling rules and tools that will allow you to do what few investors do–make, AND KEEP, good profits.
I’ve written about a few of these tools before, but I think now’s a good time to review them, and to shed some light on what works well for me.
#1 Use the 50-day moving average: If you’re investing in growth stocks, and you buy during normal pullbacks (as opposed to after a stock’s skyrocketed for a few days), selling on a decisive break below the 50-day line is probably as good a sell rule as you’ll get. Sure, sometimes you’ll get shaken out of an uptrending stock, but more often than not, the 50-day will provide a good trailing stop-loss level for your stock.
#2 Engage in some Offensive Selling: Too many investors make an investment and stick with it through hell and high water. That might sound brave, but it’s not a great way to make money. For most investors, selling is hard to do, so my advice is to sell small amounts (maybe 10% or 20% of your shares) should your stock have a few good days in a row, and you have a decent profit. If you sell some offensively (on the way up), it can cushion you a bit from the inevitable correction.
#3 Sell Some on Weak-Volume Rallies: Watching volume is a must for the serious investor. If a stock you own has already advanced for many weeks (or months), then suffers a huge (at least 100%, sometimes 200% or more above average) volume decline, that’s a red flag. If it then rallies for a few days on much weaker volume, consider selling some shares on the second, third or fourth day of the bounce.
#4 Don’t Ignore Market Timing: When our Cabot Tides (one of our trend-following market timing measures) turn negative, it needs to be respected. So you should sell about 10% to 20% of your portfolio right away–so if you own 10 stocks, sell a stock or two. Or, if you’re fully invested, try to raise 10% to 20% in cash.
#5 Beware Sloppy Action: Granted, this isn’t a hard-and-fast rule, but we’ve noticed that, if a stock has advanced strongly for many weeks, and then starts gyrating wildly–up 5 points one day, down 5 the next, then rallying 7 the day after, followed by a 4 point decline, etc.–it’s a sign that the bulls are bears are battling it out. You should usually let go of some of your shares during this period, as a correction is possible.
In general, my rule of thumb is this: Force yourself to do a little (not too much!) offensive selling when your stocks are up a few days in a row and you’ll feel like a genius. I’ve found that taking a little off the table here and there does a lot not just for your wallet, but also for your psyche–it allows you to hold on to your remaining shares longer, waiting for a break of the 50-day line (which can be 20% or more off the stocks’ peak).
While my heart is with growth stocks, there’s no question that many commodity stocks are doing well. My bias against them at this time is that most lack any sort of sales or earnings growth. And my own experience investing in shrinking or money-losing operations, frankly, is not good. I usually lose money when I toil in such fundamentally unsound stocks.
However, I’m also a tape-reader, and some of the best price-volume patterns today are found in a few commodity names, so I’m going to give you a few stock ideas, and let you decide what to do with them.
First is Massey Energy (MEE), one of the most institutional-quality coal stocks. The stock formed a bottom around 10 for months, and then exploded from 12 to 22 in just four days; all four produced huge volume, with two of the days producing more than triple-average volume. The stock has now consolidated for the better part of six weeks, and the next big move is likely up. It shouldn’t drop below 21 if all is well.
Another coal stock to watch is James River Coal (JRCC). The pattern is similar–a large bottoming process, and then an earnings-induced surge at the start of May. JRCC jumped from 14 to 18 on the day of its earnings, with volume nearly six times average! It has consolidated between 20 and 25 since; MEE is slightly stronger, but odds favor JRCC making a good run if (when?) it gets decisively above 25. Support is around 20.
Intrepid Potash (IPI) makes (you guessed it) potash, a key ingredient in fertilizer. The stock soared from 20 to 34 in four weeks, all of them on above-average volume. In fact, during that run, there were four separate days when volume was more than double average; somebody was buying! Now IPI has moved sideways on its chart for 15 trading days on light volume. This one could take a bit longer to catch its breath, but we think any strong move above 34 is buyable; support is in the 29-30 range.
All the best,
For Cabot Wealth Advisory
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