Last week’s Stock Exchange was about the need for focus and discipline in your trading. Even with the help of systems and models, the human trader needs to maintain confidence. The inevitable rough patches present a challenge.
This week I turn to a very common trading problem – finding fresh ideas. Sometimes the muse does not appear. In a recent WTWA I used the trading section to highlight a great exchange between Brett Steenbarger and Adam H. Grimes. Both are worth checking out for ideas about getting ideas.
Another effective approach is a screen based upon important fundamental criteria. Marc Gerstein is a leader in developing and using these tools. A recent column about a screen on for “Trump stocks” provides an interesting example.
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
The discussion led me back to the rule-based approach of the Turtles, a famously successful group of rookie traders trained by Richard Dennis. Most of the rules still make great sense. While secret for many years, they are now in the public domain. This method had very specific rules for entering new positions. The trader did not “reach,” but instead waited for the market to provide opportunities.
Sometimes there are not any attractive trades. Does this have meaning for our models? Let’s start with a look at their current ideas, and wrap up with a conclusion on today’s theme.
I have offered a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We will report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. 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!
This Week – Finding Fresh Trading Ideas
By now you probably know that I love great stocks that have broken down and look to be bottoming. This week my pick is Palo Alto Networks (PANW). I love big down moves, followed by directionless ups and downs…this represents (to me) distribution from weaker hands to stronger hands. These types of moves have nicely defined risk/reward ratios. In this case, 120 is my sell stop, while I’m look for a short term rebound to 140, with possible more room to move back towards the 160 level.
J: Do you think this stock is more attractive because of the Russian cyberattacks?
H: I understand cyberattacks, but who is Russia?
J: I know, I know. You do not read news; you just look at charts. But you might be onto something here. The company is an aggressive choice and reasonable based earnings growth. You must be willing to ignore the short history and lack of a dividend. Chuck Carnevale’s F.A.S.T. Graph provides this information.
H: My choices do fine whether or not they have earnings growth. As for dividends, I will not own it long enough to worry about that.
J: It is another interesting example of how different methods can arrive at the same conclusion. Do you have a shortage of new ideas?
H: Yes, mostly because of the strong market. My strategy requires some dips to buy. I am a patient watchdog.
Zion Bancorp (ZION) caught my eye this week. I admit we’re starting to see some leveling off of the price after a big jump the last few months. At the same time, the sustained nature of the rally here is encouraging. There may still be room to jump on the bandwagon – but not for more than a few weeks.
J: I am a big fan of regional banks, but this one seems to have gone too far, too fast. The FAST graph shows the earnings growth and the underlying value.
A: I know you look at P/E ratios and such, but that is not necessary to find a great trade.
J: This was a reasonable buy before the election. Once again you seem late in getting on board.
A: What is this “election” you keep talking about? The part of the chart that you call too far and too fast, is the part I like best!
J: It seems like over-valuation.
A: I call it a breakout!
J: Any problems finding new ideas?
A: My wisdom and knowledge help me to see many opportunities.
I will begin with my responses to reader votes for the favorites list.
My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.
J: I see that you have cut down the number of stocks, but left out the prior week’s ranking.
F: The list is quite dynamic. Some of those included did not get a rating last week.
J: Maybe we’ll get some good suggestions about what to include. What is your featured stock for this week?
F: PayPal (PYPL) is almost exactly what I look for in a longer-term investment. We’ve got a mellow trending-upwards moving average, with a price very like what you might have found around the beginning of the year. Despite some ups and downs, the potential definitely exists here.
J: I like the PayPal business, but the company is too new to have a good basis for estimating earnings. I require at least one full business cycle.
F: You miss a lot of good picks with that requirement. Recognizing a strong business early is a great way to build value. Unlike the rest of the models, I think long-term.
J: Do you have a shortage of new opportunities?
F: No, but I do not require ten years of data to find a strong investment.
We’re off to the races this week. I’m taking a close look at the diversified media sector, best illustrated here by PBS. It’s nearing yearly highs after falling sharply at the beginning of the year, but I don’t plan on chasing the price like a greyhound at a dog track. I like the idea of buying at the current level, then looking for an exit after one or two weeks. There are enough fluctuations around the $26.50 mark to make me think there’s room for profit here.
J: How often do your ratings change? Are these listed in any particular order?
O: Any changes are strictly the result of the stock chart. If the markets change, my ratings will as well. I report the list in order of my strength ratings.
J: Why are media stocks so strong when NFL ratings are falling?
O: Everyone I know watches all of the NFL games, sometimes several at once. We all have players on each team.
J: You mean “fantasy” players? And why are you going to the dog track during football season?
O: We all have fantasy teams as well as daily and weekly leagues. You can do it from the track. It is called multi-tasking. If you would buy us a CPU upgrade, I could find even more picks.
J: Have you been adding new sectors? Any problems finding ideas?
O: My current picks are working fine. If it ain’t broke…
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 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. Each week features a different expert or stock.
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).
In any trading method, there will periods when fresh ideas are hard to find. Or you will try things, but nothing is working and you get stopped out. This is no different for our Stock Exchange models. A strength comes in how they handle these periods. Like the Turtles, they wait for the market to present opportunities, sticking with strict entry criteria.
Article by Dash Of Insight