Stock Exchange: Disciplined Entry and Exit Points

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods, including current ideas;
  • Feature advice from top traders and writers; an d,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some earnings season ideas, please join in!

Review

Our previous Stock Exchange considered whether the bull market was slowing. If you missed it, a glance at your news will show that the key points remain relevant.

This Week – Using Discipline When Entering and Exiting Trades

To frame this week’s discussion, here is quote about using stops to exit your trades from a recent edition of Charles Kirk’s, The Kirk Report:

“I do not adjust my stops after they are set, especially not on the fly based on some outside risk event… I don’t like that kind of approach because it introduces a discretionary element into your risk management… At the end of the day, it isn’t up to me to decide whether the market is wrong or right. After all, the market is always right. The stop is there to protect my capital when the position is wrong.”

For some additional perspective on trading strategies, Valeriy Zakamulin adds a little order to the chaos in the field of market timing with moving averages in this article from Alpha Architect:

Trend-Following with Valeriy Zakamulin: Anatomy of Trading Rules

Further still, Alpha Architect provides more insightful information in this article:

Volatility Premium, Covered Call Selling, and Knowing What You Own

Specifically, the article defines the concept of “volatility premium” and then goes on to describe several ways to capture that premium when you enter your trades.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Homes: This week I like Franklin Resources (BEN). This stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see BEN is below its 50-day moving average, and just above its 200-day moving average. It’s also received support at $42 twice now, and the price has moved up this week. With limited downside and plenty of upside potential, I hope I’ve brought the humans a solid pick.

Blue Harbinger: BEN is an interesting business Holmes. It’s largely an active asset manager targeting mainly retail investors, as well as some institutions. Asset managers make money based on the amount of assets under management (“AUM”) they have (i.e. their fees are often a percent of AUM). So when the market goes up, BEN’s revenues go up. The trouble with Franklin Resources is that there is this huge and continuing wave of assets moving away from active funds and into passive funds, this is NOT good for BEN.

Holmes: That a nice story about Franklin Resources, Blue Harbinger. But my style is dip-buying mean reversion, my average holding period is six weeks, I exit when my price target is achieved, and I control risks based on macro factors and stops.

BH: Well Franklin Resources delivered slightly disappointing earnings on July 28th, and that’s why the shares have sold off. The company’s AUM was up $2.8 billion during the quarter. Specifically, AUM was up $10.1 billion due to net market change, but then lost $7.3 billion in net outflows—you know, investors moving their money elsewhere. Holmes, have you considered a nice passive manager, like BlackRock (BLK)?… their assets under management will continue to benefit from investors moving to low-cost passive funds like the iShares they offer.

Holmes: I could counter your argument by pointing out active managers (including Franklin Resources) have been increasingly beating their benchmarks this year, and also that the retail mutual funds business has an enormous contingent of relationship-driven clients that will never go to the cold, bare bones, solutions offered by BlackRock. But instead, I’ll just remind you that my edge is based on quantifiable mean-reversion and dip-buying, and I’ll stick to that. How about you RoadRunner, what do you like this week?

RoadRunner: My most recent pick is RH (formerly Restoration Hardware) (RH). I look for stocks that are at the bottom of a rising trading channel, and if you look at the chart below you can see why I like RH. It’s been in a steady rising channel for months and may easily rise over $75 soon. I get in at opportune times, but only hold my position for so long—usually about four weeks.

Blue Harbinger: RoadRunner, might I remind you that you have picked RH in the past, on both July 28th and on May 19th. Is there any particular reason you keep bringing RH to our attention?

RR: Well aside from the reasons I just told you (it’s at the bottom of a rising channel, and it looks good for the next four weeks) my quantitative system has a profitable track record of getting in and out of these names at the right time.

BH: Ok RoadRunner, then I’m just going to remind you of some of the things I pointed out last time you recommended. First, I don’t like RH. It’s a luxury home furnishings company that just completed an extraordinarily aggressive share buyback program. Specifically, they bought back nearly 50% of the shares outstanding in less than six months, and that drove the price to more than double, and it caused the price-to-earnings ratio to also increase dramatically.

The company’s actions just seem very aggressive to me, especially considering they used some expensive debt to buy back the shares. And the market also believes there’s something odd going on here considering short interest is still over 50%! I just feel like this company could tank under even the slightest recession.

RR: Feelings are important, but not when it comes to my disciplined and repeatable process. RH is attractive. Anyway, how about you Felix—what have you got?

Felix: I like Yelp (YELP). This stock has some powerful momentum on its side.

BH: Interesting pick, Felix. It’s nice to see you finally bring an idea to the table after you had nothing for us last week.

Felix: Unlike you humans, I don’t get frustrated and try to force things when the opportunities simply aren’t there. On average, I hold my positions for 66 weeks. I’ll exit when my price target is achieved, and I use stops to manage risks.

BH: Yelp is interesting because revenues are growing rapidly, but so too are SG&A expenses. Your 66 week average holding period seems a little long compared to the rest of the gang, but I suppose that will give Yelp time to keep growing its business.

Yelp is basically an online platform to help people find highly regarded local businesses. It’s got a huge addressable market, so if it keeps growing revenues, and it finds a way to control costs (eventually it won’t have to spend so heavily on SG&A expenses), Yelp could turn into a highly profitable cash cow.

Felix: That’s an interesting story. However, I’m just here to pick winners.

BH: That’s why we like you Felix. Do you have an updated rankings list for us?

Felix: Yep. Here you go…

Conclusion

The trading process can often appear chaotic, especially if you are a newcomer to the field. However, there are methods behind the madness in determining when to enter and exit positions. For example, there are disciplined quantitative processes behind the selections of Felix, RoadRunner and Holmes (as well as Athena and Oscar). Further still, there are disciplined risk controls and exit methodologies in place. And having a disciplined process for entry and exit points is often what separates the most successful traders from the rest of the pack.

Stock Exchange Character Guide

Background on the Stock Exchange

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out http://dashofinsight.com/background-stock-exchange/  for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Stock Exchange: Is The Bull Market Slowing?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods, including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some earnings season ideas, please join in!

Review

Our last Stock Exchange: “Buy the Dip or Abandon Ship?” took a closer look at market volatility and maintaining an opportunity-based mindset. If you missed it, a glance at your news will show that the key points remain relevant.

This Week – Is the 8+ Year Bull Market Rally Finally Slowing?

To frame this week’s discussion, here is a look at the percent gain and loss for the stock market volatility index (The VIX, also known as the “fear index”) and the S&P 500 (SPY) over the last two weeks.

Market volatility, as measured by the VIX, has gained over 63% during this period, an indication that fear has increased. However, for perspective, here is a look at the same chart since the depths of the financial crisis in March of 2009.

Market volatility has declined (-68.7%) and the S&P 500 has increased (+256.6%) during this impressive bull market rally. However, many investors are questioning how much longer the rally can continue considering the US Fed is less dovish (they’re expected to continue increasing interest rates) and market valuations are high. For example, the Shiller PE ratio sits at almost 30, far above the 1987 Black Monday level, and nearly as high as the 1929 Black Tuesday (but still far below the “Tech Bubble” level in 2000).

source

For some added perspective, Ben Carlson offers several interesting ideas about what could trigger an end to the ongoing bull market rally in this article: Prepare Now For The End of The Bull Market.

Also worth the read, Dr. Brett Steenbarger shares how he has learned to think in market cycles (both short, medium and longer term) in this article: What I’ve Learned From My Trading Setbacks. For example, Dr. Steenbarger writes:

“Think in Cycles – This has been one of the two greatest changes I’ve made in my trading.  I stopped thinking about trends and ranges entirely, I don’t focus on chart patterns, and I don’t pretend to know what the “big players” are doing apart from noting volume patterns.  Instead, I am identifying dominant cycles in the market at short, medium, and longer time frame and focusing on how those cycles interact with one another.  I am focusing on cycles of volatility in the market, as well as cyclical price action.  This has been a much more effective way to participate in directional market behavior, especially when implemented in event time.”

Further still, here is an interesting chart from Charlie Bilello that puts the recent VIX spikes into perspective.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Road Runner: My most recent pick is Align Technology (ALGN), and this is not the first time I have recommended it. I also found ALGN to be attractive during the weeks of 5/25 and 6/29. I look for stocks that are at the bottom of a rising trading channel and if you look at the chart below you can see why I like Align (again). It’s been in a steady rising channel for months and may easily rise over $180 soon. I get in at opportune times, but only hold my position for so long.

Blue Harbinger: I see what you’re doing here, Roadrunner, with these Align Technology trades, and I think you’re pretty clever. This is a company with a lot of upward momentum, and you keep recommending it every time the price pulls back within its upward channel. I imagine you really like it now after its big 5.1% decline yesterday.

RR: My system is disciplined and repeatable, and yes—it’s attractive.

BH: Both revenues and earnings are growing significantly for Algin, and the company posted even stronger numbers than expected last quarter. The numbers were driven by the company’s Invisalign case shipments in North America that were up almost 28%, and shipments in the teenage segment that were up almost 38%. Plus the company raised guidance for next quarter.

RR: I really don’t care about fundamentals like revenues and earnings, but it’s nice to know you appreciate my pick. How about you, Holmes, what have you got?

Homes: This week I like Boston Scientific (BSX). This stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see BSX is below its 50-day moving average, and reasonably priced relative to its 200-day moving average. It’s also received support just below $27 in the past. The price moving above the 50-day average at $27.43 would be encouraging. With limited downside and plenty of upside potential, I hope I’ve brought the humans a solid pick.

BH: To be completely honest with you Holmes, I don’t have a strong opinion on Boston Scientific either way. I suppose it’s nice the company finally returned to profitability last year (and it has remained profitable for the first two quarters of this year) after posting negative net income in 2012 – 2015 and 2007 – 2010.

Another positive for BSX is its diversified and differentiated product portfolio. And further still, if you believe demographics will continue to drive healthcare needs higher, BSX is in a decent position to benefit.

Holmes: It’s nice you pay attention to historical earnings numbers and product portfolios, but my style is dip-buying mean reversion, my average holding period is six weeks, I exit when my price target is achieved, and I control risks based on macro factors and stops.

BH: Well have you also considered that BSX is sensitive to the medical device tax of the Affordable Care Act? It’s probably helpful for BSX management to have some clarity from Congress (for now anyway) that the tax won’t be eliminated considering the “Repeal and Replace” efforts seemed to have stalled out.

Holmes: That’s all great, but my edge is based on quantifiable mean-reversion and dip-buying, and I’ll stick to that. How about you Oscar, what do you like this week?

 Oscar: This week’s pick is the Video Game Tech ETF (GAMR). The pick feels appropriate considering the growing popularity of these games.

BH: That pick is a little concerning to me. It’s a small ETF with less than $30 million in assets. Such a small ETF size can create challenges. For example, there are days when the trading volume is only around 3,000 shares. You’re going to end up moving the market against yourself if you try to place any big trades.

O: That’s interesting, but I trade based on momentum, and my holding period is usually only about 6 weeks.

BH: Have you also considered the impact of the bid-ask spread on such a low volume ETF? Plus, I have to believe it’ll trade at a significant discount or premium to its NAV on a lot of days that may work against you too.

O: That doesn’t bother me. I’ve been able to successfully rotate in and out of sectors, and I control risk with stops. How about you Athena and Felix, any trades this week?

Athena: Felix and I have no new trades this week. We’ve learned not to reach when opportunities are not in our wheelhouse. Sometimes the wisest thing to do is nothing at all. We’ll certainly let you know when we’ve got something new and attractive.

Conclusion

Trading volatility spikes has special risks, but also special rewards. We continue to monitor the market for changing market cycle trends, and our models continue to indicate bullish market health in all time frames. Despite this being the second week in a row with a volatility spike (and another pullback in stock prices) we’re still finding attractive opportunities.

Stock Exchange Character Guide

Background on the Stock Exchange

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out http://dashofinsight.com/background-stock-exchange/  for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Stock Exchange: Buy This Dip, Or Abandon Ship?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods, including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some earnings season ideas, please join in!

Review

Our last Stock Exchange took a closer look at how understanding the franchise value of a business can help frame your trades, as well as the create opportunities in changing market conditions. If you missed it, a glance at your news will show that the key points remain relevant.

This Week – Should You Buy This Dip, Or Should You Abandon Ship?

To frame this week’s discussion, here is a look at the percent gain for the stock market volatility index (The VIX, also known as the “fear index”) and the S&P 500 (SPY) over the last week.

 

The VIX shot up more than 53%, and the S&P 500 gave up around 1.3%. Interestingly, some traders view these moves with frustration and despair, while others see it as an opportunity. According to Dr. Brett Steenbarger:

“One of the most striking differences among traders I have encountered is their grounding in a problem-based mindset versus an opportunity-based mindset. The problem-focused trader is chronically frustrated, battling one challenge after another. The opportunity-focused trader is inspired, finding meaning and direction in setbacks.”

In this edition of The Stock Exchange, we review four examples of how we view stock market moves as opportunities. However, not all of our opportunities have formed over the last week. In particularly some of them have been forming over many weeks. Further still, our time frame for getting in and out of these opportunities varies depending on the different positions and depending on which of our models generated the idea. Specifically, it depends on where we get our “edge” for each trade.

According to David Bergstom at See It Market…

“Everyone talks about edge and every successful trader I know has one (most have a few trading edges or more). However, what does “edge” actually look like?”

David goes on to explain four popular ways to quantify edge, and his write-up is worth a read.

Also, another interesting write-up comes from Georg Vrba in his article: Profiting From Market Volatility With The ‘Anti-VIX’ ETF SVXY. Considering the spike in volatility this week as measured by the VIX, SVXY could be an increasingly valuable tool for traders.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark Hines). Blue Harbinger is a source for independent investment ideas focused on value and high-income opportunities (for example, today’s Blue Harbinger article: 100 Stocks Down Big This Week: These 3 Are Worth Considering). And this week’s diverse group of model picks have been selected based on each model’s distinct “edge” in identifying attractive trading opportunities.

Road Runner: My most recent pick is Take Two Interactive (TTWO). I look for attractively priced stocks within a rising trading channel and if you look at the chart below you can see why I like Take Two. It’s been in a steady rising channel for over 1-year and may easily rise over $100 soon. I get in at opportune times, but only hold my position for so long.

Blue Harbinger: Take Two seems fairly risky to me. I agree the price has been rising steadily, but the company is barely profitable (in fact, net income was negative in 2015 and 2016), and the entire franchise is heavily dependent on the success of one video game, Grand Theft Auto. Any missteps with the next release of that game could spell disaster for Take Two. Plus its price-to-sales and price-to-(forward)-earnings ratios are already very rich.

RR: I really don’t care about fundamentals like P/E ratios and net income, but I can appreciate that Take Two isn’t the pick for everyone right now.

BH: Further still, Take Two is a consumer discretionary, and considering the recent spike in the VIX, that sector could feel more pain than a lot of others if the recent selloff continues.

RR: That’s interesting that you’re considering something you like to refer to as the “fear index,” and our readers might care about that too, but I simply look at the chart and like what I see! How about you, Holmes, what have you got?

Homes: This week I like Medtronic (MDT). This stock’s dip over the last month is the sort of set up I like to see when sniffing out a good deal. From the chart below you can see MDT is below its 50-day moving average, and reasonably priced relative to its 200-day moving average. It’s also received support in the low-$80’s level in the past. The price moving above the 50-day average at $86.62 would be encouraging. With limited downside and plenty of upside potential, I hope I’ve brought the humans a solid pick.

 BH: I agree you have identified an interested opportunity, but my reasoning is based on fundamental factors (in addition to the recent price decline you have described). In particular, I think a lot of the Affordable Care Act “Repeal and Replace” efforts have been subdued recently, and this is a good thing for the healthcare industry, and for Medtronic. And even though the chance for repealing certain medical device taxes seems off the table for now, the long-term demographics of this sector are powerful. I too like Medtronic, so thanks for bringing it to my attention, Homes.

Holmes: Your healthcare law narrative might be interesting to some of our readers, but I like to stick to the more quantifiable data. And from a pure numbers standpoint, Medtronic looks good. Specifically, my style is dip-buying mean reversion, my average holding period is six weeks, I exit when my price target is achieved, and I control risks based on macro factors and stops.

BH: I also like Medtronic because its valuation multiples (e.g. price-to-earnings, and EV/EBITDA) are increasingly attractive, and its 2.2% dividend yield is respectable.

Holmes: That’s all great, but my edge is based on quantifiable mean-reversion and dip-buying, and I’ll stick to that.

Felix: NRG Energy (NRG) looks attractive. It appears to have some powerful momentum at its back, and the recent dip over the last several weeks is providing a compelling entry point. Have a look at this chart of the past 12 months.

I’ll admit this one has been choppy, but I can see a powerful trend in momentum. I could easily see some appreciation over my extended time frame.

BH:  NRG s an integrated power company, and I don’t like the stock. The big jump in price last month was due to its announced “transformation plan” to cuts cost and sell up to $4 billion in assets. NRG’s products and services are basically a commodity with essentially no switching costs for customers. And its upcoming asset sales will likely be at somewhat “firesale” prices as its just trying to get its debt under control.

Felix: Okay, that’s interesting.  However, I can tell you that I like the current price as an entry point and that I would be looking for a long-term holding. There are plenty of companies and stock prices that have successfully completed transition plans, and I’d much rather buy into the momentum at this price than try to time market bottoms and then wish for a lucky rebound.

BH: I can appreciate your strategy, and I agree that companies can and do successfully execute transformations. In fact, NRG is trying to use the transformation to improve its credit position, as well as generate more cash to return to investors. I just don’t think this is an attractive opportunity considering it’s leading this turnaround from behind, as in they’ve not been proactive enough, and they’re not likely to get great deals on their asset sales. It just seems like there are much better opportunities elsewhere.

Felix: Fair enough, we shall see.

Athena: This week I like Hertz (HTZ). Similar to Felix, I generally like to see attractive momentum, but my holding period is shorter, usually only about one month. This stock has been experiencing some upward momentum recently, and I like the current price entry point.

BH: This is an interesting pick, and there is a lot going on here. For starters, Hertz is a car rental company, and the shares have been an absolute disaster recently, down more than 60% over the last year, and current short interest is around 39%. The company recently reported a quarterly loss of $0.63 per share, and the company is working to reduce its fleet size.

However, Hertz is interesting because as much as this stock is hated, there has been a lot of recent talk about how car rental companies (like Hertz) could be transformed into potential vehicle fleets for the likes of Uber and Lyft. Further still, according to a recent article by Richard Pearson, “shares of Hertz could still go much higher from here” because:

“as Apple, Google, Uber, and Lyft seek to eventually eliminate drivers completely by using autonomous vehicles, their need for fleet management becomes even more critical (because there will be no more drivers to supply their own cars). Autonomous vehicles are still a few years away. But even as these programs develop in the test phase, they will need fleets of thousands of vehicles across the country.”

Hertz’s efforts to right-size its fleet, combined with potential new uses for the fleet altogether, could be a game-changer.

Athena: It sounds like we may be on the same side of this trade, but our time periods are not the same. I am not waiting a few years for this to play out, I’m interested in holding this position for only about a month.

Conclusion

This week’s spike in volatility creates opportunity for some traders and frustration for others. Whether you should buy this dip or abandon ship depends on your trading strategy and your timeframe, as well as your personal trading edge.

(image source)

Stock Exchange Character Guide

Background on the Stock Exchange

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out http://dashofinsight.com/background-stock-exchange/  for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!