Member E-mail Question:

Chris -
Is it just because of the recent news stories - auto manufacturers axing jobs at Christmas time - that the market seems to be moving sideways again?

I have been encouraged because of the NH-NL ratio. Also I had some early fortune with my first 2 or 3 attempts at Options trading. So, when I invested more, and things turned south, I’m wondering what’s up.

It looks like QSII will need to find support at the 50-MA. Is that what you see? What’s going on with WC I bought at the break out above $78 and hasn’t done much but flounder. ESRX is also down. Is the rally over? Is it because of all the talking heads that people sat up and thought they’d take profits? Maybe we’re getting set up for a fix in 2006?

The only Option I’m doing well in right now is DO.

I try not to get too anxious thinking that the 60-100 route may take 7 - 12 months to complete and I’ve got until June on my Options, but…

Thanks for your feedback.

MSW Member

My Answer:

The market has been going up for several consecutive weeks so I believe it is taking a well deserved breather. The NH-NL ratio has been increasing when looking at the weekly averages but it has never crossed over the critical 500 new highs per day (a key level for long term rally success). In any event, the rally is still intact and is allowed to pull back from time to time. The ideal time to enter the market was in late October and early November so your gains can cope with a correction similar to what we are seeing. IBD confirmed the rally before I did because I was cautious but I still confirmed the rally in October (weekly screen on 10/22/05). This is when I started to place new positions in MSW Index stocks and when I gave the green light to start buying.
I think you are looking at these stocks from a very short term perspective. Take a look at each stock’s two year chart and you will see that they have all corrected from peak prices from time to time. You need to tell yourself that stocks can’t go up everyday and they must correct when they make a strong move similar to what we have seen in ESRX.

QSII should find support near $74 and then down at the 50-d moving average. The stock corrected in October before the recent run and had a big correction in May and June of this year. Look at the longer term picture and characteristics of the stock.

WC has struggled since breaking above $78 but I have seen this pattern in the past for this stock. The key support level is the 50-d m.a., a support line it has used several times over the past few months. Until it breaks this line, I will not start to turn bearish on this stock. I will admit that yesterday’s action was a bit disturbing for the intraday reversal.

ESRX has moved from $62 to $88 in six weeks so a correction is greatly expected. This stock can’t continue to advance like it has for another six weeks. If you own ESRX, you may want to take the profit if you are worried about the rally ending because the support level is not anywhere near the current price (it’s down in the $60’s). As I said on the daily screen last night, I have placed a physical sell stop in this stock to protect my recent profits.

As far as the rally is concerned, continue to watch the stocks in your portfolio and the MSW Index. If they fall for one or two consecutive weeks, start to lock in profits because the “market” is telling you to do so. Don’t sell after one or two bad days because you could miss the “bigger, more important” profits. Also focus on the NH-NL ratio as you have been doing because this indicator is extremely powerful and can give you a quick glance of the overall trend of the market because it tracks the leaders.

As for your options, give them room to breathe because June still seven months away and a lot can happen (look back seven months for the stocks you own because I am sure they corrected along the way but still managed big advances).

Chris

Question from Member:
Chris,

You said, “I am looking for the big, long term moves, not the short quick gains. The big moves make you rich, not the quick little gains; they make you impatient and hesitant. Patience is the key to success if you want to make the big bucks on Wall Street.”

You bring up a very interesting point and I just want to run something by you to hear what you have to say.

Say I have a portfolio of $10,000 and I’m trying to strategize how I will trade stocks with this money. And let’s assume, just for this example, that it is a bull market and I’m looking for a 100% return. Here are (2) examples:

–I could buy (1) quality stock, hold it for a year (long-term), and hope it goes from $60 to $120.

So…
–$10,000 @ 100% = $20,000

OR
–I could buy (3) quality stocks separately (short-term) and hope that when I hold them they go from $60 to $75 (a 26% increase).
So…
–$10,000 @ 26% = $12,600 (1st stock)
–$12,600 @ 26% = $15,876 (2nd stock)
–$15,876 @ 26% = $20,003 (3rd stock)

Gotta love the 8th wonder of the world: Compound Interest. Do you see where I’m going with this? In one example you get to 100% increase in one shot, in the other example you get to 100% with only a gain of 78%. In both instances you get to your goal of $20,000. Now I understand that I’m not taking into account commissions, but would I have to if I had $100,000?

And then I also have to take into consideration, what are my chances that
(1) stock will go up 100% VS. My chances of (3) consecutive trades that will go up 26% each. It just seems to me that the (3) trades would be easier to accomplish. Can you shed some light on this?

I hope I don’t seem like I’m rambling (I’ve been know to do so too often).
This has just been something that I’ve been thinking about more often, and especially after you stated the point above.

As always you comments are greatly appreciated.
MSW Member

My Answer:

MSW Member,
You are right and wrong at the same time. If you are trading $10,000, your scenario may work but what are the chances that 3 or 4 of the stocks you buy (anticipating they go up 26%) actually go down 7% or 10% before you hit the 3 winners. Not every stock will be a winner. Now you may need 5 or 6 consecutive stocks to go up before you hit that 100% objective. Your theory is not wrong and may be exactly what you want to accomplish and it can work.

It is very hard to find stocks that go up 100% and actually have them in your portfolio the entire time through all dips and corrections. This is why I like the $60-$100 theory because I can continue to grab gains in the range of 40%-65% with some small losses that average 5%-7%. My goal is to compound my gains with this theory as you can see that I am not looking for anything more than $100.

In an account that has over $100,000, the investor can sit patiently as their investments grow larger for the longer term gains. Keep in mind that capital gains are hefty when you have larger sums of money in the market. The short term capital gains and commissions will add up. Taking a 25% or 35% short term capital gains tax hit on any profit is hefty, especially when the gains are only 26% in size. Now, I don’t make my buy and sell decisions based on tax implications but I never overlook them either. I hope this helps answer the question. Let me know.

Chris

…I consider this site a stock market research and education service that is offered to anyone interested in learning how to invest in the market for themselves. I do not manage money and I do not make specific stock picks for anyone in the MSW community. I like to believe that this service is different from most of the stock market services offered on the internet because I aim to teach you how to invest in the market so you do not have to depend on my research for the rest of you trading life. I teach a method, a philosophy that I have developed so you can build a foundation for success; but you the investor must personalize your own system and perform your own due diligence and test what works for you and your trading characteristics and emotions.

It is easy to lead an individual to water but I can’t force this same individual to drink the water if they are thirsty. The same logic holds true for the stock market because I can show you how to invest successfully but you and ONLY YOU can make the proper decisions to show a profit at the end of the year.

I always wonder how many of my members take the opportunity to make money from our MSW Index stocks. This past weekend, I asked them to look in the mirror and be honest about their results over the past year (and their decisions since the rally was confirmed weekly on MSW on 10/22/05). Since we confirmed the rally on October 22, 2005 (on the weekly screen) our MSW Index stocks have been up over 17% as a group (this groups contains 18 stocks that were listed on the weekly screen on 10/22/05 – very impressive results for so many stocks).

The Index has provided us with many buying opportunities at moving average support, consolidations and pivot point breakouts. Since the last weekly screen (November 19, 2005), the MSW Index has advanced by 6.25% with only two stocks falling for a loss (CRDN and FORD). Forward Industries was the largest loser, falling 6.13%. Our best gainer over the past couple of weeks was LMS which was up 23.25% on big time volume. Of the 26 stocks on the MSW Index, eight of them were up more than 10% while another three stocks were up at least 5% or more. Things move so fast in the market, it is tough to sit back and realize how successful our MSW Index stocks have performed in 2005 versus the rest of the market. A new page will be added as the year closes that will update the performance of the MSW Index versus the major market indices (NASDAQ, DOW, S&P 500). We are currently calculating a weighted MSW Index going back to early 2005 to see how well we have performed compared to the major market indices throughout this entire year.

If members have not taken the opportunity to capitalize on our MSW Index stocks, it is completely okay because we plan to perform even better in 2006 if the market cooperates and the NH-NL ratio continues to gather strength. Even more, many of our members have started to capitalize on their own stocks due to the education and information we have provided them. We screen the top 30 stocks in our opinion but that doesn’t mean that other stocks (outside of MSW) can’t perform better and our members are armed to find these “other” stocks if they want. If you don’t have the time to research your own stocks, we provide the most complete and comprehensive list that will allow you to make solid market decisions based on a limited time schedule. Where else will you find such a diverse list of 26 stocks that perform as well as our stocks do? We don’t change our stocks very quickly because we only deal with the best and we know we can give them room to correct and to grow (examples include but are not limited to WFMI, COH, URBN, LMS, QSII, CBG, etc.).

Our double digit gainers over the past two weeks include: AAPL, NWRE, CUTR, ESRX, OXPS, KNOT, HANS, & LMS. Three of them were priced within the $60-$100 range as these impressive gains accumulated over the Thanksgiving holiday.

Here are our impressive Results since the start of the latest Rally (10/22/05)
Only 6 weeks of trading time:
Many of the stocks listed on our MSW Index have been on our screens since early 2005 and have held up better than most of the market because we stick with stocks that have high relative strength ratings. As of yesterday, 18 of the current 26 MSW Index Stocks were listed on the 10/22/05 weekly screen when we confirmed the rally in late October. The eighteen stocks are up a combined 17.11% as a group with only three of them giving us a loss since the rally began (ADSK, FORD, CTRP). Our biggest winner from the rally start is CUTR with a 63.83% gain; LMS comes in a close second with a 50.69% gain; ESRX follows up third with a 37.79% gain. Overall, ten of the eighteen stocks have gains in the double digit range with eight of them reaching gains of 20% or more. Two of the stocks that have given us losses have been removed from the MSW Index this week and this is not a coincidence. Forward Industries (down over 14% since the start of the rally) has been violating moving averages and support areas so we must remove the stock from our MSW Index (even though it is our #1 gainer in 2005 with more than a 300% gain sine it was first covered on 1/23/05 at $6.38). FORD has made 32 weekly screens MSW in 2005 as it climbed from $6.38 to over $29 at its peak. CTRP, a stock that has been up and down in recent weeks, failed to recover the moving average as the week closed so we are removing it from the MSW Index as we feel it may be headed in the wrong direction.

We don’t expect every member to trade exclusively off of our MSW Index but we know that almost every member learns using our index since we show them how, when, where and why we add and remove stocks to our screens. Using this knowledge to their advantage, they can fine tune their own trading method and become successful trading the markets for many years to come without the aid of our screens. We lead our members to the water and they typically drink the water when they are ready (and we never force them to drink it). The next time around, they find their own water source and remain hydrated for the rest of their trading lives. This is the goal of MSW, to teach “successful investing through education”. No one will ever be successful trading another investor’s system so we teach each and every member to develop their own system using our philosophy only as a foundation. This is how I developed my system, with a foundation using CANSLIM. I have tailored the system to my style of investing and have added and subtracted what works for me and I expect every member in MSW to do the same!

Chris Perruna “Piranha”
Founder, President and Chief Analyst
www.MarketStockWatch.com

…E-mail Question:
Hey Chris,

I wanted to ask you a few questions regarding the blog you posted today…

You said at the end of your blog, “You should never try and chase an extended stock.” I think I might have done that a little w/ QSII. I bought @ 78.39 and as you can see today there was a gap down. I feel like it still has some strength (making weekly screens) to continue the 60-100 run, but was curious… (and I know it is somewhat of a general question, but) If you feel that a stock that you own is a bit extended do you immediately sell and take your profits? It is pretty obvious that you don’t buy extended stocks very often, but it does seem to me that you are more likely to buy a stock at the time it pulls back to one of the moving averages. But I was just thinking, is a good rule to sometimes follow: buy @ pullbacks and bases, sell when it feels extended to take your profits?

Have a great day!
MSW Member

My Answer:

Currently at 10am, QSII is trading above $82 per share so you are now showing a 5% profit. I will try to answer your questions from several angles. If I own a stock that I purchased at the proper buy point (either a pivot point, a three or four week consolidation or a moving average pull-back), I will place a trailing stop to protect profits only if my profit is already above 25%. Anything less than 25% does not warrant a physical sell stop in my set of rules. Currently, I have made it known that I own HANS and entered the stock as it approached the $60-$100 range. I do not have a physical sell stop placed at this time and I do believe that the stock is extended so I may place one shortly (next few days). If I see a sharp correction or gap-down, I will place a stop to protect profits but I am letting the profit run at this point.

If I buy a stock that is extended (and I have done this) because I am human like anyone else, I will sell immediately if the stock starts to fall more than 5% below my entry area. Just because the stock drops below my entry area (which was extended to begin with) doesn’t mean that the stock is no good. It may still hold the original (correct) pivot point and allow me to get back in on a new high or a breakout on the point and figure chart.

I try to steer clear of extended stocks as I have said on many occasions and I can give you a current example using OXPS (a stock I like and a company I love). I could have grabbed it at $21 (extended in my opinion) but I missed it so I refuse to buy it at the current $24 level. In my experience, I have seen these stocks correct or pull back slightly near $20, especially when the NH-NL ratio is not super strong. In this case, the NH-NL ratio has not topped the critical 500 new highs yet during this rally so I decided not to chase the stock into extended territory. Maybe I missed OXPS at this level but that is fine because if it is as good as I think, I will grab it at the first pullback to a moving average or the first consolidation that sets up a new entry area, even if that area is several dollars higher than the current price level. I trade based on reduced risk and currently I think an entry is risky and vulnerable to a correction if bad news hits the market. In a solid bull market, I may have chased the stock thinking that it was not going to come back down even with bad news.

You ask if I should sell when a stock becomes extended. I will reply by saying this: never sell a stock for “no reason” such as boredom, because you think it is too high or because you want a small profit. Was HANS too high when I purchased it at $66 last May after a 700% gain? I didn’t think so and I was right. Recently at a split adjusted $58, I entered again even though the stock was worth $116 before the split. Is that too high? Again, I didn’t think so and now it is reaching a pre-split adjusted level of $156 ($78 today with the split). So, is $78 too high? I ride the winners and I don’t sell just because they are too extended. A good rule of thumb is to sell when the trend reverses. One way to tell if the trend reverses is if the stock drops by 20% from its highest peak during the move. Another rule I use for the $60-$100 theory is to place a physical stop at $89.89 once the stock crosses over $90 (this is to protect profits).

So, I do buy pullbacks, corrections and pivot point breakouts but I only sell when it shows a red flag such as a climax run or exhaustion gap or if it reverses trend and violates a moving average. Another great clue to a reversal is a recent leader making new highs on very low volume after making previous highs on powerful volume (this may signal churning and a possible topping area). I am looking for the big, long term moves, not the short quick gains. The big moves make you rich, not the quick little gains; they make you impatient and hesitant. Patience is the key to success if you want to make the big bucks on Wall Street.

I hope this helps and answers your questions.
Chris