…I wanted to share a letter that I just received as I opened my e-mail. Many of you send me e-mails telling me about success stories and some disappointing stories but they all interest me. The market is my passion but reading letters like this really keep me going over the long term, each and every night, grinding out my research and organizing it for everyone in the community. So continue to send me e-mails for your questions and definitely share your stories with me because I am very interested!

Member E-mail:

“The bigger success for me would be to hear stories from the community that you witnessed the data coming in and took action and locked in gains when things started to turn south.”

The above quote was from your weekly report. Here’s a success story for you, Chris. I bought Well Choice after it had pulled back. I sold it again for an 8% gain, before it started to drop. I heeded your warnings. I also had bought SSNC but my timing was off. After a couple of weeks, I sold for a slight (.5%) loss. I’m ahead for the year! It’s really great.

Thanks
Catherine

My Response:

Catherine,
That is wonderful! I am so glad for your results and can see that you are making great progress. I can’t help but think that you will do even better when we get a solid rally in the market. I have a great community because the majority of the people seem to “get-it”, they are starting to understand how investing really works. So many beginners believe that losing is a bad thing but it is not. When stocks drop, it is for a reason and it usually means to get out and lock in gains or cut your losses short.

I enjoy speaking with you every month, so keep the e-mail coming.

Chris

Someone I have had conversations with on another forum posted his frustration with AFFX and the 20% drop last week. I completely understand his frustration and have lived through the same type of drop that has blown past my stop loss. I don’t use stop limits but a drop like the one AFFX had would never trigger the stop limit unless the stock moved back up to the limit price, then the stock would be sold automatically. I responded to this investor’s post and his two comments about AFFX and the general market conditions:

“I know what you mean when it fell overnight. I have been hit by that kind of action and trailing stops are crushed. A stop limit would never get triggered and a stop loss would get filled much lower than the target price. It happens and is part of the game; this is why I use mental stops. I talked at length about this early last year when I kept getting burned by the MM’s. I still use physical stops but I try to sell “at the market” during earnings season and from MM’s. You may want to buy a put option to hedge your position during earnings season. For a minimal fee, you can buy the put option and use the leverage when a 20% drop happens like the one you witnessed. I rarely use this method (but have on a few occasions) but know of several people that feel comfortable employing this strategy often.

As for your market analysis, I agree. Something is up with the market but I don’t see a huge downturn. Maybe a correction as Kevin (MSW community member) pointed out. I was sold out of two of my positions last week and my watch list for new buys got hit with red ink. The daily new highs are still positive so I am not getting all of the concrete red flags that this market will totally flop. This year is just another post election year with sideways action. Tough investing year! Watch the critical 2100 level for the NASDAQ, this provides major support.”
Piranha

…I decided to share last night’s daily screen with my blog readers to give you an idea of the type of analysis that I perform every night after the markets close. The daily screens are formatted for the site but I pasted them here to resemble a blog post. Enjoy

Energy, Medical and Retail sectors lifted the market today with oil and gas stocks outperforming everyone. We managed to list a few energy related stocks below but the majority of the stocks making new highs or nearing a breakout didn’t completely qualify for the daily screen. Overall, sixty two energy related stocks made my initial fundamental screen with the main criteria set with EPS ratings of 70 and above and RS ratings at 70 and above with the stock making a new 52-week high. Ninety one stocks made a new 52-week high within the sector without using any fundamental screeners. Half of those stocks did it on above average volume but only three stocks made it to the final MSW daily screen. Possibly, a couple other stocks could have made the final cut but we will wait to see how the week plays out.

The medical sector also stepped forward with 42 total stocks making new highs with 24 of them passing the initial fundamental screens. Nine of those stocks passed the technical criteria with four of the stocks as members of the most recent weekly screen. Syneron Medical has made over 50 daily and weekly screens since the fall of 2004 but has made a few daily screens in recent months, listed under the “interesting stocks within 10% of a new high” section of our screens. ELOS, an MSW All-Star stock, has a total gain of 152% in less than one year (9 months). We also listed the pivot point at $39.10 on the recent weekly screen appearances. Laserscope (LSCP) and LCA Vision (LCAV) are both members of our All-Star stocks of 2004 and 2005. LCAV is nearing a 200% gain while LSCP is now above a 125% gain.

The markets were up today on volume larger than the quiet pre-holiday close last Friday but still well below average volume levels. We need a strong follow-through later this week with above average volume to make this advance mean anything. The strongest evidence of strength today was the daily new high/new low ratio which ended at 534-42. A ratio with new highs topping 534 is a positive sign, one that I always speak about. The next step is to look for consecutive 500+ days with large volume accompanying breakouts for both individual stocks and major market indices.

The most recent Weekly Screen Members are highlighted with blue text.

Medical:

ELOS – 39.89, a new 52-week high with a 4.48% rise on volume 259% larger than the 50-d m.a. Made a weekly screen in May and June with 20 additional weekly screens since October. Eleven total weekly screens in 2005 with more than 20 daily screens. Recently, the
daily screen occurrences have been in the “stocks within 10% section”. Our pivot point was listed as $39.10 on its recent weekly screen appearance. I will note that the stock fell from intraday highs ($42.22).

AFFX – 56.58, frequent daily screen member made a new high with a 5.19% gain

LCAV – 49.83, broke above $50 intraday, only to close slightly below on above average volume.

MATR – 33.60, sloppy daily screen but a new high on the weekly screen. Nice triple top breakout on the P&F.

CVH – 72.84, hit a low of $63.16 in mid-may, only to make a new high on above average volume. The ceiling of $72 was finally sliced after two prior failures.

KOSP – 69.11, up 3.82% on average volume. I wrote off Kos in early June but it has continued to trend higher. Very extended from the 200-d m.a.

LSCP – 43.25, new high with volume 17% lower than the 50-d m.a.

HITK – 33.39, seventh consecutive up-day but the volume stayed below the average

IVGN – 84.90, a 1.58% move to close within $0.10 of $85. Up $10 since the first weekly screen in 2005, May 2005.

Retail:

LUB – 12.24, Lubys is back on the daily screens this week. Up 3.2% on volume 101% larger than the 50-d m.a.

PEET – 35.13, familiar face making a new high with a 3.32% jump on volume 66% larger than the 50-d m.a.

HIBB – 39.30, new 52-week high but volume was weak.

CTRN – 20.37, recent IPO with an interesting chart setting up. Triple top breakout confirmed today above $19.50. First screen ever.

Energy:

GMXR – 15.27, up 5.53% on volume 135% larger than the 50-d m.a.

SWN – 52.90, a 2 for 1 split early last month. The stock is up 48% since the split. We screened the stock (weekly) two times in May. ($33.49)

UPL – 32.04, weekly screen member 14 times from February 2004 to February 2005. Ultra hasn’t made the screens until now, due to the sideways movement.

Others:

TS – 81.47, closed above the round number of $80. Closed at $58.76 on May 2, 2005 and moved above the $60 threshold the following day. Now it is halfway to $100. Screened in March and May and mentioned as a $60-$100 candidate.

RMCF – 22.40, new high on average volume.

Interesting Stocks within 10% of a New High:

CTRP – 54.79, cup, handle, breakout! Still below the 52-week high. RS line in new high territory.

FORD – 20.04, removed from the weekly screen this past week but it recovered the 50-d m.a. on above average volume. We will watch to see what happens. I have been shaken out of this stock in the past, only to see it recover and move higher. Not a big deal to reestablish a position if strength continues.

…I would like to share some words of wisdom from Steven A. Cohen, the founder and famous hedge fund manager for S.A.C. Capital Advisors. Mr. Cohen was profiled in the book Stock Market Wizards by Jack Schwager, released in 2001. Last year, his salary topped $450 million as he remained in the top 10 highest paid managers in the world. In 2003, he trailed the leader, George Soros but passed him on the latest list. Now that you have a brief background on Mr. Cohen, I will pass on some words of wisdom from his interview with Mr. Schwager in the Market Wizards book.

Mr. Schwager Question:
When you put on a trade and it goes against you, how do you decide when you’re wrong? (The question actually relates to him and his traders)

Mr. Cohen Answer:
“This is not a perfect game. I compile statistics on my traders. My best trader makes money only 63% of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better make sure your losses are as small as they can be, and that your winners are bigger”

Mr. Cohen Answer (to another question):
“If you think you’re wrong, or if the market is moving against you and you don’t know why, take in half. You can always put it on again. If you do that twice, you’ve taken in three-quarters of your position. Then what’s left is no longer a big deal. The smart thing is to start moving your feet. I find that too many traders just stand there and let the truck roll over them.”

Mr. Schwager Question (asked in early 2000 – before the bear breakdown):
Do you have a scenario about how the current long-running bull market will end?

Mr. Cohen Answer:
“It’s going to end badly; it always ends badly. Everyone in the world is talking stocks now.”

Mr. Cohen Final Words:
“You can’t control what the market does, but you can control your reactions to the market. I examine what I do all the time. That’s what trading is all about.”

I decided to write this blog entry because our philosophy here at MSW is similar to the wisdom that Cohen shares. Market wisdom and education such as the inserts above typically go in one ear and out the other for most novice traders and investors. His rules and words sound so simple yet 90% of all traders fail to follow the basic rules for stock market success.

Similar to what I say every night in the daily commentary, you can control your own actions but not the market’s actions. From 2000 to 2002, Mr. Cohen did not have one losing month with his hedge fund and the fund was actually up over 100% during this two year bear stretch. I would listen to his advice as he may be the best living trader on the planet.

Piranha

Just an interesting article that I would like to add to the blog:

George Soros of New York-based Soros Fund Management earned an estimated $750 million in 2003, making him No. 1 in the latest ranking by Institutional Investor’s Alpha of the world’s most highly paid hedge fund managers.

Junk-bond specialist David Tepper of Chatham, New Jersey-based Appaloosa Management takes second place, earning an estimated $510 million in 2003, followed by James Simons of Renaissance Technologies Corp. in East Setauket, New York, who pulled down $500 million.

Soros regains the top spot in Alpha’s third annual ranking of top hedge fund earners after falling off the list last year, when Bruce Kovner of New York-based Caxton Associates led the pack. This year Kovner ties for fifth place with Steven Cohen of SAC Capital Advisors in Stamford, Connecticut.

Both earned $350 million in 2003, according to Alpha estimates. They trailed fourth-ranked Edward Lampert of ESL Investments in Greenwich, Connecticut, who earned $420 million last year by Alpha’s reckoning.

The wealth being created by hedge fund managers is simply staggering. Never have so few made so much so fast. The lowest earner on Alpha’s 2003 ranking took home $65 million in 2003. Seventeen managers pulled down nine figures — $100 million or more — compared with just seven in 2002. The average take-home pay for the top 25 in 2003 was $207 million, nearly double 2002’s $110 million.

The top ten earners in the hedge fund industry in 2003 were:
1. $750 million George Soros, SOROS FUND MANAGEMENT
2. $510 million David Tepper, APPALOOSA MANAGEMENT
3. $500 million James Simons, RENAISSANCE TECHNOLOGIES CORP.
4. $420 million Edward Lampert, ESL INVESTMENTS
5. $350 million Steven Cohen, SAC CAPITAL ADVISORS
5. $350 million Bruce Kovner, CAXTON ASSOCIATES
7. $300 million Paul Tudor Jones II, TUDOR INVESTMENT CORP.
8. $230 million Kenneth Griffin, CITADEL INVESTMENT GROUP
9. $150 million Daniel Och, OCH-ZIFF CAPITAL MANAGEMENT GROUP
10. $145 million Leon Cooperman, OMEGA ADVISORS

Hedge fund managers overwhelmingly run private operations and guard their secrecy. Alpha’s formula for determining which hedge fund managers earned the most was based on two key factors: their share of the fees generated by the funds they managed, and their gains on their own capital in the funds.
These numbers were arrived at based on knowledge or estimates of the firms’ capital at the beginning of the year, their performances, their fee structures and managers’ ownership stakes. Publicly available sources were used, as well as the Institutional Investor’s Alpha Hedge Fund 100 ranking of the biggest hedge funds (April/May 2004), which lists capital positions and fund performances. In making these judgments, II tried to choose conservative estimates.