Stock Exchange: Do You Know When to Fold Your Trades?

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!


Our previous Stock Exchange asked if the current momentum trend is really your friend, and then pointed out the benefits of blending multiple trading approaches. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Do You Know When To Fold Your Trades?

One of the worst mistakes you can make as a trader is to be stubborn. For example, a common mistake among new traders is refusing to cut your losses when the market is moving significantly against you. Convincing yourself that the market will eventually move in your direction if you just hold on to your position a little longer can often lead to disaster. According to professional trader, Nial Fuller, “one of the most challenging decisions that [traders] are faced with on a day to day basis is…knowing when to hold on to a trade and when to close it.” In his recent article “Know When to Hold ‘em…” Nial explains how to manage your trades in various market conditions. His advice includes using stop loses, and also trailing those stop loses in a rising market.

Another interesting read appeared in the Wall Street Journal this week regarding the large amount of short interest (i.e. people betting against) on RH (RH) (formerly Restoration Hardware) this year. Of course RH is a stock we’ve written about often in this weekly Stock Exchange series (for example, here, here and here) and it’s also a trade that our trading models have had a lot of success with by being long. The Wall Street Journal article suggests as much as $1 billion dollars may have recently been lost by short sellers betting against this stock (which is a lot considering the market cap of RH is still less than $2 billion even after the shares have risen more than 195% this year). Despite the big gains (which have been fueled in part by massive share buybacks), plenty of short sellers remain unconvinced considering about 35% of the company’s shares are still currently sold short. Several of our models are on the other side of that trade, however our models have stop loss orders in place to prevent us from giving back our big gains.

Model Performance:

Per reader feedback, we’re continuing to share the performance of our trading models, as shown in the following table.

The sharp-eyed may have noticed some small changes in the performance table. We want it to be a reflection of actual client accounts. Sometimes there are some new accounts or changes that were not originally included.

Importantly, we find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

And for these reasons, I am changing the “Trade with Jeff” offer at Seeking Alpha to include a 50-50 split between Holmes and Athena. Current participants have already agreed to this. Since our costs on Athena are lower, we have also lowered the fees for the combination.

If you have been thinking about giving it a try, click through to this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (Blue Harbinger is a source for independent investment ideas).

Holmes: I have no new purchases this week, however I did exit my position in Sally Beauty (SBH) on 12/22 after entering the trade back on 10/24.

Blue Harbinger: Interesting, Holmes. I do recall discussing your purchase of Sally Beauty during the week of 10/24 in this Stock Exchange. And I think it’s nice to review sells once in a while. Why exactly did you finally decide to “fold” this trade?

Holmes: I typically only hold for around six weeks, so this was a longer hold for me. I had a stop loss in place and macro conditions were changing. It was finally time to exit this trade, and I did so at a profit.

BH: Glad you made a little money on this one. I realize your dip buying strategy has been good, but it hasn’t been as “hot” as some of the momentum models lately. How about you RoadRunner—what have you got for us this week?

Road Runner: This week I like Take Two Interactive (TTWO). Are you familiar with this stock, Blue Harbinger?

BH: Yes, Road Runner. This is your fourth Take Two trade since May. The company makes interactive entertainment (i.e. “video games”).

RR: Well then as you also know, 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: Yes, Road Runner—I can see why you bought it, and I can also see this stock has been in a rising channel for most of this year, which helps explain your success on your earlier Take Two trades. Remind us, how long do you typically hold your positions, and how do you know when it’s time to exit?

RR: My typical holding period is about 4-weeks. I give my trades time to work, and if they aren’t working in my time period then I exit my position.

BH: Well—you have a decent track-record over the last six-months. Thanks for sharing this idea. How about you, Felix—do you have any trades this week?

Felix: No new trades this week, but I did exit my position in Freeport-McMoRan on Wednesday 12/27.

BH: Interesting Felix. Based on the above price chart, I think I know why you sold (i.e. the shares are up big this month), but why don’t you tell us—why did you sell this copper and gold mining company, Felix?

Felix: I typically hold my positions for about 66 weeks—which is much longer than the other models. I exit when my price target is hit, and I use stops and macro considerations to control risks.

BH: That makes sense.

Felix: Also, this week I ran the entire Russell 1000 index (large cap stocks) through my model, and you can see the top 20 rankings in the following list.

BH: Thanks Felix. I know you are a momentum trader, so that list is interesting. How about you Oscar—what have you got for us this week?

Oscar: This week I’m sharing my top ranked global ETFs. The following list includes my top 20.

BH: Thanks Oscar. That is a very diverse group of ETFs on your list. I recall from our previous conversations that you are a momentum trader, you hold for about 6-weeks, and you control risks with stops and by rotating into a new sector. I suppose I am not surprised to see the Bitcoin Investment Trust (GBTC) at the top of a momentum list. We discussed Bitcoin in more detail a few weeks ago in this article: Do Not Invest In Bitcoin, Trade It! Bitcoin’s price has pulled back in the last week, but it has been on a wild ride over the last month, as shown in the following chart.


Trading is not only about buying—that’s only half the story. Knowing when to sell your trades can be just as important. We use a combination of stops, macro factors and timeframes to determine when to exit our positions and to control risks across our varying model-based trading approaches. As Kenny Rogers says in the following video: “you’ve got to know when to hold ’em, know when to fold ’em.”

Overall, we find that a blended approach, between momentum and dip-buying, works well to deliver strong returns while also providing more diversity, lower risk, and a smoother string of returns.

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 out Background on the 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.

Stock Exchange Character Guide:

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Stock Exchange – Four Thumbs Up for Nvidia!

Readers have often asked why there is so much disagreement among our models. The essential reason is simple. Each has a different method, and they rarely align.

This week provides a rare opportunity to illustrate this, while also showing the process for each model.

That would already make it one of our most interesting posts in the series, but we also have another great guest expert. Cody Willard, a famous TV anchor and commentator, writer for many top-line sites, former hedge fund manager, and entrepreneur provides our guest commentary. You can follow my friend Cody at If you mention that you were referred from the Stock Exchange, you can get a valuable free month to look at his ideas. I have followed him for many years, partly because his style challenges my own. It is provocative, interesting, and loaded with ideas that you do not find if sticking strictly to a value approach. His themes highlight a vision of the future.


Our last Stock Exchange took up the difficult question of back-testing and how you can use it. There were more comments on the Seeking Alpha publication of the post, and they were very good. If you missed the original article, please take a look, including the comments.

Let’s turn to this week’s ideas.

This Week— Four Different Takes on Nvidia (NVDA)

It is not quite as rare as an eclipse, but it is certainly unusual to get consensus among our models on a single choice. In addition, we have agreement from Cody. Here are the differing perspectives:

Felix: As the long-term investor, I look for a strong uptrend. This must have persistence over time – more than just a short-term momentum play. Here is what I see.

Athena: I love relative strength, but my time frame is much shorter than Felix’s. I also have less tolerance for losses. Here is what I see.

The stock easily meets my criteria.

RoadRunner: The short-term uptrend is just a start for me. I need both an upward channel and an attractive entry point within the channel. Here is what I see.

Jeff: The agreement from three of you is fascinating. This is a stock that value investors would not care for. I typically use a ten-year history from F.A.S.T. Graphs to capture an entire business cycle. Here is what that shows.

The over-valuation looks scary! Sometimes a different time frame will provide a more useful picture. Let’s shorten it up a bit.

It still seems a bit high, but the strong growth in earnings and typical P/E make it more reasonable.

Cody: I am a long-time holder of NVDA, so I am not surprised that your models have joined in. Neither the technical nor the fundamental charts can tell the real story. This is a platform play on both self-driving cars and deep learning. These are the fastest-growing and most revolutionary applications. Both are chip-intensive. If either of these markets hits, NVDA will have a market cap of in the hundreds of billions.

The intermediate-term weakness reflects the company’s decision to commit to long-term opportunities. The pull back in the short-term has cleared out some of the very short-term momentum players, so it is an interesting entry point. A near-term catalyst could be next week’s earnings report. I see downside risk of about 5%, and the potential to break the upside of the channel.

Athena: Thanks for the encouragement, Cody. Jeff is always so fussy about those value charts.

RR: Beep beep!!

Felix: I want to ask Cody about one of my longer-term holdings, Wynn Resorts (WYNN). It has been one of my holdings since the end of March. So far, so good. While the month started off slow, a significant pop in the last two weeks has already made this a worthwhile investment. As always, I’m looking for a long-term holding here. I don’t plan to cash out immediately, like Holmes or Road Runner might do.

Cody: I really don’t like Wynn. There are many ways to trade and invest profitably. There is no need to profit from something that is an addiction for so many. My second objection is that investors are at the mercy of regulators, especially the Chinese. If they crack down on gambling in Macau, Wynn will suffer.

F: The chart has looked good, but I am wondering whether to hold ’em or ‘fold em.

C: Did you learn that from Oscar?

Oscar: Felix makes his own poker decisions, and he is more likely to listen to Chopin than Willie Nelson. My sector choices include some interesting ideas. My top ranking is with consumer cyclicals. This includes retail, like the Gap (GPS).

What does Cody think about my choice here – a profitable one so far?

C: Every bricks-and-mortar retailer is feeling the Amazon effect. I don’t care for any of them on a long-term basis.

O: What about for a few weeks?

C: That is anyone’s guess, but beware of overstaying your welcome. BTW, Jeff told me that both you and Felix have regular stock and sector ratings. Any updates?

F and O: Yes, and we welcome more reader requests. Jeff gives us an incentive payment when we get more followers.

Holmes: Just a minute! Can I get a bark in edgewise? I have some interesting new choices. Look at W.W. Grainger (GWW). This could be a real steal for us dip-buyers.

C: I can see why the rest of your group does not like this chart!

Jeff: Thanks for joining in with some great comments and ideas, Cody. Readers should try Trading with Cody (using our referral) to learn more of your ideas. I hope you will return soon.

C: It was fun. You have some colorful characters here, and I like the range of styles.


This post added something new to our series: Multiple ideas about the same stock. This is a rare opportunity, since the model approaches are so different. Agreement is unusual. The time frame is so important regardless of your analytic approach.

Great trading ideas are not always great investments — and vice versa!

Cody Willard’s ideas added a valuable perspective. We frequently contrast fundamentals based upon value with the message from the charts.

Cody is a visionary. He looks ahead to discover emerging trends. These ideas do not always show up in the charts, and certainly not in the earnings history. It is a valuable perspective.

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 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.


If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to 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: Can Employment Continue as the Engine of the Economy?

Market data has remained mixed.  The weak Q1 GDP is not consistent with some of the most important measures.  This week I expect pundits to be asking:

Will the jobs report signal continued strength?

Personal Note

In response to reader interest I am trying to do an abbreviated WTWA when I am away.  I will include the update of indicators and a few ideas about what I am watching.  Some noted that this would also provide a forum for some of our “regulars” to congregate.

Theme Recap

In my last WTWA I predicted a week of rebuilding the wall of worry.  Some problems have been avoided, even if not completely solved.  There are always new ones, and we did get some of that discussion last week.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance for the week.  Once again, there was little change for the week.

Whatever the news, the net market effect was (once again) very small.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “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 Good

The best news is the strength of the earnings rebound. This is true both for year-over-year results and forward expectations. (Brian Gilmartin).

While the government shutdown deadline was merely extended for a week, I am encouraged by the handling of this issue.  The market hated this uncertainty on the past.

The Bad

The soft GDP numbers and uptick in initial jobless claims (not the time reflected in Friday’s payroll report) were the worst news.

The Ugly

Still Korea.

What to Watch For

Everyone wants to evaluate the Trump agenda, especially reflecting on the first 100 days.  I do not expect movement on any of the big issues without some participation by Democrats.

The key economic reports are ISM, the ADP private employment, and the official employment report.  It is a big week for data.

While there is no change expected from the FOMC meeting (and no press conference), everyone will be watching for hints on the pace of rate hikes.


Quant Corner

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

Risk Analysis

Whether you are a trader or an investor, you need to understand risk.  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:  The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades).  His subscribers get  Monthly reports including both an economic overview of the economy and employment.

Holmes:  Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis.  While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation.  Try out his new public Twitter Feed.

Georg Vrba: The Business Cycle Indicator and much more.  Check out his site for an array of interesting methods.  Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal.  His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin:  Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The World Markets Weekend Update (and much more).  His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.  The latest update now includes the employment data.


Final Thoughts


Here is an update on my “Trump Matrix.”  Last week’s timber tariff decision shows why it is important to track what the administration can easily accomplish versus what requires cooperation with other governments or Congress.