Stock Exchange: 3,811 US Stocks, How Do You Pick Yours?

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 ideas, please join in!

Review

Our previous Stock Exchange compared the difference between patience and complacency. They can appear the same, but the results can be very different. If you missed it, a glance at your news will show that the key points remain relevant.

This Week: Thousands of US Stocks, How Do You Pick Yours?

There are 3,811 stocks included in the S&P Total Market Index (including large-, mid-, small-, and micro-cap stocks). If you’re going to pick your favorites via detailed fundamental analysis, you’re going to need a lot of time.

Alternatively, you may choose to follow Eugene Fama’s efficient market hypothesis thereby owning the entire market (or perhaps some well-diversified, low-cost, passive ETFs like those offered by Jack Bogle’s Vanguard).

However, most active investors and traders have some disciplined process in place to help systematically sift through the universe thereby focusing their efforts on a much smaller subset. For example, the good folks over at Bespoke have a knack for sifting through the universe and presenting subsets of data in very interesting ways such as this table showing the most volatile stocks on earnings announcements (apparently, Netflix (NFLX) has been the most volatile large cap stock—they announce on October 16th).

Or another interesting table from Quantifiableedges shows what has happened historically when the S&P 500 (SPY) closes the month at its highest closing price of the month.

Further still, Charlie Bilello from Pension Partners offers an interesting Twitter feed chock-full of interesting data points and metrics, such as the recent highly unusual statistic that micro-cap stocks have only been down 3 times in the last 33 trading days, which he calls a “ramp for the ages.”

 

But as an investor and/or trader, how do you use this data to pick stocks? Our strategies use a variety of models that we have developed over the years to sift through the data and select highly attractive trading opportunities. We’ve named our models to help differentiate their styles as described in the following table.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger. Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Holmes: This week I bought Molson Coors Brewing Co (TAP). Are you familiar with this company?

Blue Harbinger: Yes. They brew beer, Holmes. Why did you purchase the stock?

Holmes: Well the stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see it is below its 50-day and 200-day moving averages. And it has attractive upside over the next six weeks.

BH: I appreciate that you’re able to sift through an entire universe of stocks to quickly identify the ones that are most attractive to you. However, I would never buy a stock simply based on its recent price performance alone without first understanding the fundamental situation of the company. For example, here is a look at Chuck Carnevale’s FastGraphs data for TAP. You might want to consider it—it’s very highly regarded.

Holmes: Thanks for the information, but as you know, my style is based on dip buying and mean reversion. I’m also really into protecting assets, as well. My process drastically reduces vulnerability to drawdowns while attempting to stay invested for the longest possible period of time. I use a mix of advanced trading techniques (including profit taking, stops, and trailing stops) and technical analysis to help protect if the stock price starts to fall.

BH: That’s interesting, Holmes. However, I am a long-term investor. How long do you usually hold your positions?

Holmes: I usually hold my picks for about six weeks at a time. And I have a growing track record of very profitable success.

BH: I really do appreciate your track record of success, but our investment time frames are very different. Nonetheless, I can relate to your mean reversion and dip buying style. In fact, as you can see in the following table from my recent article titled “Tectonic Market Shift Coming” the entire Consumer Staples sector to which TAP belongs has performed relatively poorly over the last 1- and 3-months. Like you, I pay attention to mean reversion and dip-buying opportunities.

Holmes: Thanks for the data, but I’ll stick to my process. It’s been working quite well. Anyway, how about you, RoadRunner, what have you got this week?

RoadRunner: This week I like ABIOMED, Inc (ABMD). It’s a $7.7 billion market cap medical device company. It provides mechanical circulatory support devices to aid heart recovery for heart failure patients.

BH: You literally picked that stock two weeks ago, RoadRunner. Granted, you’ve had a lot of success with it considering the price has gone from $157.34 to $172.37, for a 9.6% gain in two weeks. However, you always say you like to pick stocks that are at the lower end of a rising channel. How can it be in the lower end of a rising channel after a nearly 10% gain?

RR: Have a look at the following chart. It’s at the lower end of a rising channel.

BH: You just redrew the lines to fit your narrative. Do you really expect me to believe you?

RR: I’m a computer model, not a human. My picks are based on objective data. After sifting through my entire universe of stocks, ABMD ranks highly again this week.

BH: Well, as we discussed two weeks ago, the CFO recently resigned, and the FDA approved their Impella heart pump after five years of research. Plus, analysts at SunTrust initiated coverage of ABMD last week with a BUY rating and a price target of $195. Also, here is a look at Chuck Carnevale’s FastGraphs data—again, you might want to consider it.

RR: Thanks for the info, but as you mentioned, I have my own data-driven process to sift through the universe in order to identify the opportunities that are most attractive to me. How about you Athena, what have you got this week?

Athena: I don’t have any trades this week, and I’m not going to force anything.

Felix: Same here. No trades stood out for me this week, and I’m not going to force anything either.

BH: Thanks Athena and Felix. How about you, Oscar, what have you got?

Oscar: I like the China Consumer ETF (CHIQ). Emerging markets have been performing very well this year, China in particular. Plus, the consumer segment of China is increasingly strong.

BH: You’ve also picked this ETF a couple times recently (once on September 1st and again on September 22nd), and you’ve been doing well. I know you are a momentum trader, so it makes sense you’d like this ETF.

Oscar: That is correct, despite the strong gains so far this year, and the increasing volume of fearful investors, I’ve been happy to hold shares as this ETF climbs higher.

BH: This particular ETF includes some individual stocks with amazing momentum. For example, it holds some JD.com (JD) (the online direct sales company) and Alibaba (BABA) (the online mobile commerce company). If you think US names like Amazon (AMZN) have been hot this year (+30.8%), it is boring compared to JD.com (+53.9%) and Alibaba (+103.6%).

Oscar: I invest in momentum, my holding period is only six weeks on average, I rotate to something better when I’m ready to exit, and I use stops to control risks. And CHIQ is attractive right now.

BH: I respect your approach and your track record of success, but have you considered the potential volatility? When these types of stocks fall, they can fall hard.

Oscar: That’s why I’m invested in a basket of stocks through this ETF instead of individual names. CHIQ holds 39 stocks. Plus, as I mentioned, I use stops to manage risk, and I’ll rotate to something else when it’s time to exit.

BH: Well – I like the idea of having some exposure to emerging markets, and this is certainly one way to do that.

Conclusion

There are literally thousands of stocks to choose from. And unless you have an army of researchers, it’s not realistic to do a deep dive analysis of every single one. Further, mistakes are often made depending on the varying levels of objectivity versus subjectivity of the individual researchers within your army. That’s why many traders use computer programs and screening models to objectively sift the universe and narrow their focus. We’ve developed our models to focus on the opportunities that are most attractive to us, and we’ve been having a lot of success with them. Nonetheless, we acknowledge there are a wide variety of attractive methodologies to sift the universe depending on your individual style and preference.

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!

Weighing the Week Ahead: Does Economic Strength Equal Stock Market Strength?

It is a big week for economic data. The punditry will be analyzing the Trump tax proposal. Everyone will be drawing conclusions about how these factors may be linked with stock prices. Expect people to be asking:

Does economic strength equal stock market strength?

Last Week Recap

My expectation for last week was right on target. Attention rapidly turned to the Trump tax proposal. More on that in today’s Final Thoughts.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the weekly gain of 0.68%. While the range was slightly higher than last week, it was still less than 1.5% on an intra-day basis.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The Silver Bullet

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. I hope that readers and past winners, listed here, will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news remained quite positive.

The Good

  • Q2 GDP registered a revised gain of 3.1%. This is backward looking, but an improved base for the rest of the year. The third quarter does not look as promising. Jill Mislinski’s “inside the GDP” story is a great look at the impact of individual GDP components.

  • North Korea and the US are in direct contact (BBC). The back-channel discussions will probably be more fruitful than the contact via tweets.
  • Serious mortgage delinquencies declined again. Fannie Mae (via Calculated Risk) notes that the level is at its lowest since November, 2007.
  • Jobless claims “defy nature” reports Bespoke. Their well-designed chart illustrates the point. New Deal Democrat’s “weather adjusted” calculation puts initial claims at 237K.

  • New home prices have moved higher because builders’ need to compete with distressed sales has declined. (Calculated Risk).

 

The Bad

  • Aid to Puerto Rico

    delayed and inadequate, adding to a “humanitarian crisis”. House Speaker Paul Ryan, but see above).
  • Pending home sales decreased 2.6%, significantly missing expectations of a 0.5% decline. Calculated Risk discusses, including the hurricane effects.
  • Rail traffic remains weak via Steven Hansen’s (GEI) focused approach on the important components. He also notes the Harvey and Irma effects.
  • Consumer confidence declined slightly, missing expectations. Both the Conference Board and Michigan measures remain at very high historical levels. Jill Mislinski’s Doug Short chart (GEI) pulls all of the information together in a single look. Read the entire post for more charts, including the Michigan version.

  • New home sales declined to a 560K annual rate (Calculated Risk). This missed expectations of 583K. New Deal Democrat sees a disappointment, even after a hurricane adjustment.
  • Personal income grew by only 0.2% and spending by 0.1%. These results were in line with expectations, but the decline is still a disappointment. (Calculated Risk).

The Ugly

Puerto Rico after-effects. The needed infrastructure rebuild is massive. And do you know the largest element of the Puerto Rican economy? If you said “pharmaceuticals” you beat me. Plenty of drug production is affected.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have plenty of economic releases on the schedule, including the most important. The ISM indexes and auto sales are noteworthy, but the data on employment will take center stage. Fed participants will be in abundance. And of course, there might be an important tweet.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

The avalanche of economic data, right before earnings season, could refocus attention from politics to economic fundamentals. The two are related, of course. The state of the economy and employment is the backdrop for the debate on tax policy changes – not to mention political credit-claiming!

Expect the punditry to be asking:

Does economic strength imply stock market strength?

It is popular to note that the economy does not equal the stock market, that stock trading is not the same as GDP futures, etc. That said, the reasons for market strength or weakness are a continuing topic of interest. Here are some common claims about the extended market rally.

  • It is crazy! Valuations are sky high according to CAPE and other measures.
  • Asset prices are higher only because of the Fed – maybe with an assist from other central banks.
  • A recession is imminent. (Some debunking from HORAN).
  • It seems OK for the moment, but expect a major correction in the near future.
  • Complacent investors are ill-prepared for a decline. Suzanne Woolley (Bloomberg) offers an alternative viewpoint. See also the sentiment chart above.
  • Stock gains depend upon expectations of policy changes – Trump-designed or otherwise.
  • Stock prices have followed the increase in earnings expectations. (Eddy Elfenbein sees a good earnings season ahead).
  • Stock prices do not track the economy on a short-term basis, but long-term expectations are crucial. (Brian Gilmartin).

As usual, I’ll have more in the Final Thought, where I always emphasize my own conclusions.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


 

The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. It is a good time to show the chart with the business cycle indicator.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Featured Guest Sources

New Deal Democrat explains his method for hurricane adjustments, focusing on industrial production. It is interesting, and worth a good look for those interested in the data!

…reasonable temporary workaround for industrial production unaffected by the recent hurricanes is to average the 4 regional Fed surveys, minus Dallas, plus the Chicago PMI.

Calculated Risk provides an interesting take on the home price to rent ratio. Bill shows how much lower current values are than before the Great Recession.


“Davidson” (via Todd Sullivan) has a nice analysis of rate spreads and the prognosis for equities.

From current T-Bill/10yr Treasury rate spread levels, historicaly it has taken 2yrs-3yrs before the 0.20% level has been reached. I suspect it will take a similar time frame before we see 0.20% again. Till then, it is reasonable to expect we are likely to experience an expanding economy and higher equity prices. 

Be bullish! The rate spread tells you to be so.

 

Insight for Traders

We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post analyzed the difference between patience and complacency. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be the unusual, helpful, and honest post from “BeatlesRockerTom.” Since no one has a perfect record, his recap of a trade gone wrong includes lessons for everyone. He explains the behavioral finance reasons why people choose inaction—anchoring, sunk costs, and failing to see opportunity costs. He then analyzes his reasons for selling his own loser and moving on. You will learn and enjoy reading this refreshingly honest story.

By contrast, I often see investors holding on to losing positions, hoping they will just get back to even. If the stock does in fact rebound to their purchase point, that is probably the wrong time to sell!

 

Stock Ideas

Chuck Carnevale does a thoughtful and objective analysis of Apple, Inc. (AAPL). You will learn from the analysis. He concludes:

The company has become enormously large, which is always an impediment to fast growth.

Consequently, in 2012, Apple initiated its first dividend as the company had morphed from a pure growth stock into a high-quality dividend growth stock. Therefore, I believe investors should recognize how Apple has changed as an investment and think of investing in the company accordingly. An important part of achieving investment success is managing realistic expectations. Apple still has investment merit, but I believe the stock today is more about quality, income, and perhaps, moderate growth.

What to expect from the “new” General Electric (GE). Here is what to watch for after the change in leadership.

Blue Harbinger takes profits on Caterpillar and highlights five “better” income options. I own two of them and trade in and out of a third, so I like the approach.

What about Charles Schwab (SCHW). Here are six reasons to buy.

David Fish updates the dividend champions for October.

Solar cell tariffs can shake up the industry. Barron’s cover story analyzes the possible effects of Trump Administration policy. Read the entire post to evaluate the logic behind the winners and losers.

Personal Finance

 

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. His own commentary adds insight and ties together key current articles. As usual this week he had several good posts, but I especially liked his objective and thoughtful discussion about managing your personal balance sheet. As always, he includes good links throughout the week, including today’s choice as best investment advice (above).

Abnormal Returns continues the Wednesday series on Personal Finance. My favorite this week discusses the Investor Policy Statement and how the process of preparing one can help your investing. Tadas now includes a wide range of links on various topics. There is something interesting every day. Readers who have enjoyed the personal finance section should explore some of the other topics as well.

 

Watch out for….

 

The fourteen mistakes that can wreck your retirement plans. (24/7 WallSt). Hints: Maximize employer matching and consider allocation decisions.

Poorly designed and biased analyses from those on a mission. Victor Niederhoffer questions the TBills beat stocks argument.

 

Final Thoughts

 

This week I want to cover two topics: a follow up on tax reform and more perspective on the stock/economy relationship. But first, a small commercial moment. My principal motivation in writing is helping my growing audience, small by comparison with those selling fear. Many will find this to be enough. Others might benefit from some personal consultation. If you are not completely happy with your current investment plan, I have some free resources that might help. Send an email to main at newarc dot com and we will send information on Understanding Risk, The Top Investor Pitfalls (a good test of whether you can/should fly solo), and How to Get Back into the Market (gradually and carefully).

I personally speak with each potential client, matching needs with programs. It is not buy and hold. Not one size fits all. Not an attempt at all weather, ignoring the biggest risks. It is best to be personal, flexible, and adaptive. That is our approach.

Trump Tax Reform Proposals

Everyone is taking this plan seriously. Every firm has a research team that will instantly tell you the effect of the proposals on you, the general public, income inequality, and anything else. Each media source has a story ready to run, just as they do for obituaries on old folks. This is not analysis; it is jumping the gun. Since the election the major Trump discussion has focused on the effects of his policies. People rushed to buy “Trump Stocks” and attributed stock moves to the “Trump Rally.” Few noted the low probability for adopting these policies.

The current proposal is more of the same – dead on arrival. Even trying to squeeze it in via the convoluted “reconciliation” method instead of the “regular order” there is no winning coalition. (If this sentence did not make sense to you, that is exactly my point. The top sources are discussing the wrong topic).

I am an expert at translating political events into stock ideas, but this administration has provided little so far. I have been looking for “Trump Stocks,” those that will benefit from changes he can actually control. I have found one – a company that works on pipelines. It is a nice winner, but there will eventually be more.

The Economy and Stocks

The most hated rally has its foundation in a misconception about stock valuation – that it is absolute and accurately reflected by history. Actually the intrinsic value of stocks is relative to other available assets and is dramatically affected by inflation.

If you start with a wrong-headed idea that stocks have only been fairly valued (briefly) at one point in the last thirty years, you must continually find new reasons to explain why your theory is not working. The imaginative candidates have included fake data, the Fed, earnings manipulation, and many others.

Alternatively, there is a simple explanation:

Economic strength –à better corporate earnings à higher stock prices. Stocks may not reflect the economy in the short run, but they certainly do in the long run!

 

What worries me…

  • Aggressive and unilateral moves on trade restrictions. The average person does not understand how much this has benefited the world economy, and that of the U.S.
  • Strident positions that might waste the chance for some meaningful compromise on tax reform.

…and what doesn’t

  • North Korea is declining as an item for worry. There is some distinction between posturing and policy. It still deserves careful monitoring.
  • The length of the rally. A strange debate has emerged. Some believe that the rally must be ready to expire because the length is greater than average. Others want to “re-date” the starting point, reducing the overall length. This debate is irrelevant if you realize that business cycles and stock rallies have no specified length. The gradual recovery from a deep decline (in both) should help us understand why there is no “expiration date” on this bull market.

 

 

 

Stock Exchange: Are You Patient or Complacent?

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 ideas, please join in!

Review

Our previous Stock Exchange reviewed the “less than smooth” ride during the multi-year bull-run, and how the bumps in the road create opportunity. If you missed it, a glance at your news will show that the key points remain relevant.

This Week: Are You a Patient or Complacent Trader?

It seems counterintuitive to make changes when things are going well, but that’s often the right course of action whether you are an investor or a trader. As an investor, you may be enjoying the sun that continues to shine brightly as the market regularly makes new highs with very little volatility. But let’s not forget the old saying “the best time to fix the roof is when it is sunny.” And from a trading perspective, it often makes sense to sell on the way up (before your profits are gone), and conversely enter your positions on a cloudy pullback.

Trading in and out of positions is not for everyone. It requires doing a lot of work and watching the market closely. Before you even think about entering a trade, make sure you have the patience to see it through and not the complacency to let it fail.

According to Brian Portnoy, a contributor at Forbes:

“there is a fine but important line that divides patience from complacency. The rub is that the two are outwardly indistinguishable. They both appear to involve doing nothing.”

His article from last week, describes “The Good and Bad of Doing Nothing,” and it’s worth a read if you’re starting to feel perhaps a little too confident about this market.

In the same vein, Wayne Thorp offers some sage advice in this article on when to nail down your trading profits (hint: “while you still have them”). And conversely, Aleksey Tatsitov describes his favorite tactic for identifying trading entry points in this article about “pullback trading.” Aleksey runs through specific examples of pullback trades describing the strengths and weaknesses of the strategy.

And The While Coat Investor (Jim Dahle, board-certified emergency physician) reminds us all (in this article) that trading is a job that requires watching the market closely. It’s certainly not for everyone, especially if there are other things you’d rather be doing.

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.

Holmes: This week I bought Alliance Data Systems (ADS). Are you familiar with this company?

Blue Harbinger: Yes. It’s basically private label credit cards. They take shopper data and create marketing and loyalty programs. For example, the company’s Canadian Air Miles program is a popular one.

Holmes: Well the stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see it is below its 50-day and 200-day moving averages. And it has attractive upside over the next six weeks.

BH: From a fundamentals standpoint, this stock looks like it has some upside too, but that is assuming the company’s strong credit performance won’t slide. For example, I saw some recent data that says deliquencies have ticked up at ADS. However the steadily climbing EPS and the share price pullback is interesting. Here is a look at the FastGraph.

Holmes: As you know, my style is based on dip buying and mean reversion. However, you may not be aware that I’m really into protecting assets too. My process drastically reduces vulnerability to drawdowns while attempting to stay invested for the longest possible period of time. I use a mix of advanced trading techniques (including profit taking, stops, and trailing stops) and technical analysis to help protect if the stock price starts to fall from, for example, an uptick in delinquencies, as you described.

BH: From what I’ve been reading, ADS continues to sign new deals with additional retailers, and that’s a good sign. The forward P/E is near the lower end of its range this year which is also a good sign, but I know part of the reason is because of the risks (e.g. rising delinquencies, the potential for more competition).

Holmes: I’m only looking to hold this position for about six weeks. And during that time period I suspect ADS will rise despite your concerns.

BH: Thanks. I’ll watch this one closely. And honestly, I think this is a decent pick, however I prefer to hold my positions for longer than six weeks. How about you RoadRunner—what have you got this week?

RoadRunner: I like Take Two Interactive (TTWO) again. As you know, I’ve been having success with this one in recent months. I like to buy stocks that are at the bottom of a rising channel, and if you look at the chart below you can see why I like TTWO again this week.

BH: Well our theme this week is to know the difference between patience and complacency. You don’t seem to be complacent considering this is your third TTWO trade since May. And you’ve been very successful with these trades, I might add. But have you considered using a little more patience such as simply buying and holding TTWO? Considering this rising channel you keep bragging about, you’d have don’t pretty well with a buy and hold strategy, don’t you think?

RR: Buy and hold is not my style. I typically hold my positions for about four weeks. Besides, I have a track record of doing a lot better by buying low and selling high within the rising channel, even after taxes and trading costs.

BH: Well I’ve said it before, and I’ll say it again, Take Two seems fairly risky to me. I agree the price has been rising steadily, but the company’s earnings are volatile, 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-(forward)-earnings ratio is already rich, and it has an earnings announcement expected on approximately October 31st that could add to volatility. Here is a look at the Fast Graph.

RR: I am aware of all the things you mentioned, but I mainly like this stock over the next 4 weeks based on its location within its rising channel. I’ll be in and out before that earnings announcement you mention. Plus, I have certain risk management procedures in place if anything goes wrong (e.g. I limit my position size, and I only trade highly liquid stocks).

BH: I prefer to have a little more patience with my picks, but your strategy seems to be working well for you, RoadRunner. How about you Athena, what have you got this week?

Athena: I don’t have any trades this week, and I’m not going to force anything.

Felix: Same here. No trades stood out for me this week, and I’m not going to force anything either. However, for your reference, here is a look at my rankings this week.

BH: Thanks Athena and Felix. How about you, Oscar, what have you got?

Oscar: I still like the iShares Semiconductor ETF (SOXX)

BH: You also picked this ETF a couple times already this year, first in March and then again in early September. I know you like to hold these for only about six weeks at a time, and 6 weeks after your March 24th pick the shares were up big. And so far you’re doing great on your September 8th pick, as well.

Oscar: My style is momentum, and I like to rotate to another sector after about six-weeks. And of course I use stops to control for the risks.

BH: Well I like your pick, but I don’t like your style. How can you possibly know where this stock’s price is going to be in six weeks? I have a pretty good idea that the semiconductor industry will be much higher in six years considering the growing uses and complexity of semiconductors in everything from cell phones, to data centers, to self-driving vehicles, and eventually the arrival of 5G networks. But six weeks from now? Come on Oscar, don’t you think you need a little more patience?

Oscar: You‘ve already acknowledged I’ve done very well with my two previous SOXX recommendations, and I have a track record of success across all of my picks, for that matter. I don’t get them all right, but my winners are bigger than my misses. Plus, buying and holding something for six years like you suggest seems a little complacent, in my view.

BH: Interesting, Oscar. I wouldn’t buy the entire semiconductor industry anyway. There will be clear winners and losers in this space. Some of the smaller semiconductors included in this ETF don’t have the sophistication to keep up with evolving technologies, and their shrinking margins are already showing that.

Oscar: If you’re curious, here’s a snapshot of my rankings for this week:

Conclusion

Holmes and RoadRunner both use an element of “dip buying” to enter their trades, and they don’t get complacent considering they generally hold their positions for no more than four to six weeks before they take their profits. Oscar tends to be more purely momentum-driven, but he also knows not to get complacent and looks to take his profits after about six weeks. No matter what your style, there is an element of patience involved with participating in the market. However, too much patience can become complacency, and that can become detrimental to your financial health.

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!