…I was recently asked about new additions to the MSW Index (weekly screens) over the past couple of months. In response to the question, I sent this member the results of our stocks from October and November (2005). I told him that our stocks typically take a couple of months before they start to show solid gains. After going through a brief analysis of the stocks added to the screens in October and November, I wasn’t surprised to see an 85% success ratio for the 13 stocks selected. Of the 13 stocks added to the screens during this period of time, only one has been removed to date (PWAV) due to a loss. The stock was removed due to a violation of the Index 10% sell rule. Another stock has been removed (KNOT) but it was showing a 2% gain when it was cut yesterday. I decided to remove the stock before the very small gain turned into a loss. SSAG is the only stock from these two months to currently show a loss at 1%.

Together, the 13 stocks have an average gain of 26%, very impressive if you ask me. Below is a simple table to display the results of the stocks added to the MSW Index in October and November:

*Stocks in red have been removed from the MSW Index

10/1/2005—Then—Now—Gain/Loss
(LMS): $18.32 $27.69 51%
(SSAG): $17.60 $17.38 -1%
(GMXR): $26.27 $35.87 37%
(PWAV) : $12.99 $11.26 -13%

10/15/2005
(ESRX): $61.16 $89.82 47%

10/29/2005
(CRDN): $37.89, $46.62, 23%
(KNOT): $11.37, $11.62, 2%
(CTRN): $27.40, $40.80, 49%
(TWGP): $18.53, $22.21, 20%

11/5/2005
(HANS): $57.63, $85.66, 49%
(NWRE): $20.30, $27.15, 34%

11/12/2005
(NETL): $23.56, $27.15, 15%
(OXPS): $21.81, $27.36, 25%

Be patient with our MSW Index stocks and don’t expect them to gain 25% or more within a few weeks, this is not very typical. Also keep in mind that we don’t day trade, we trade within a time from of three months to twelve months (or more in certain situations). If a stock violates a sell rule, we sell immediately, even if it is only one day after we purchase the stock.

If the start of 2006 is as kind as the fall of 2005, I hope the recent editions to the MSW screen will provide us with similar results in two months.

Piranha

…Today’s question comes from an MSW member that owns shares in Coach (COH), an MSW Index stock for many months. We told you that the pivot point sits at $36.94 and the triple top breakout has now setup with a move above $37. On the flip side, strong support sits at the $30 area, below the 200-day moving average. Below is what I had to say earlier in the day:

MSW Member Question:
Chris,
Well, is it time to bail on Coach? Several ugly days on volume and I am negative. Should get xmas sale results soon, either help or kill the stock.

Thanks.

My Answer:
Looking at a two year chart, the stock has held 200-d m.a. every single time (exactly where it is now). If you are personally questioning the stock and feeling uncomfortable: at least take down half of your shares. Remember, you can always get back in. If you are very uncomfortable, sell it all and reassess the situation with an unbiased approach.

Look at this way: If you didn’t own Coach, would you enter right now?

Look at the two year chart:

http://stockcharts.com/gallery/?coh

I don’t want to influence your decision either way but I know momentum traders are buying at this point due to past performance at the 200-d m.a.

Again, sell half and let it prove itself if you are worried. Good Luck with your decision.

By the way, support is $30 and breakout is $37 and yes the holiday numbers will make or break the stock near support.

Piranha

…Many of Wall Street’s well known guru’s tell prospective investors to buy low and sell high but is this really a solid strategy. I don’t think so especially when buying low usually means bottom fishing or looking for badly beaten down stocks that are no where near new high territory. When I started investing, I didn’t like the concept of buying stocks as they move into new 52-week high ground but I have come to realize that this may be the best strategy on the street. I first read about this type of strategy from Jesse Livermore, then William O’Neil, then Bernard Baruch and finally Gerald Loeb. My entire philosophy has been developed around this idea of buying high and selling higher and my results speak for themselves. I don’t have to prove anything; the numbers do it for me.

Without getting into a lengthy discussion on the topic, I will highlight a present day example that I posted last night on GMXR on the daily screen:

12/28/05 Daily Screen Excerpt:
“Many of you may remember that we first started to screen GMXR on 6/28/05 at $14.58 (daily screens only). We then added the stock to the weekly screens and the MSW Index on 9/27/05 at 24.00 (64% higher than our debut coverage). Today the stock gained another 6.13% on volume 188% larger than the 50-d m.a. GMXR has been on a tear and I have started to give the signal to lock in partial gains or at least protect your gains from a quick pullback. I want you all to understand the lesson of buying stocks that are making new highs. Time and time again I explain that stocks making new highs typically continue to make new highs. If anyone was scared to buy into GMXR at our $24 pivot point after the $10 run-up from $14, you have missed the additional 72% gain. This is what I wrote about GMXR on the 9/27/05 weekly screen:

“I see a breakout area near $23 to $24.” This week the stock hit $24.00 intraday but closed off of that price and stayed in the currently forming flat base. The official buy point is now a move above $24 on above average volume”

The stock (GMXR) closed at $41.35 today (12/28/05), exactly three months later. The gain from our first daily screen on June 28, 2005 is an impressive 184%. The stock has made a total of 17 weekly screens (including several weeks on the watch list) in 2005.”

Now you can see that a strong stock (a market leader) making new highs can go on to make additional highs but most novice investors would not buy at $24 after looking at the chart and seeing a 700% increase in the previous two years to $24. GMXR ran up from $2.50 to $24 in eighteen months and has since moved above $40 in the past three months. What looks high to one investor may still be low to another. GMXR wasn’t extended when we established the $24 pivot point so this helped us make a sound decision after the gains of the previous year. GMXR is now up over 1,500% in the past few years but I am extremely happy with my 72% gain locked-in (a gain that has happened in a few short months).

I can write forever about stocks that I buy at new 52-week highs and then sell much higher at a later date. It happens every year but most individual investors continue to bottom feed and buy beaten down stocks that aren’t going anywhere fast. Too often investors average down and continue to throw good money after bad instead of throwing good money after good. They get scared that stocks making new 52-week highs will start to reverse and crash the minute they enter. If you employ sell rules, you can protect yourself from this scenario (because it does happen from time to time). Not every stock you buy will continue to move higher.
Piranha

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

…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