Back into the Fray!

Although I haven't posted for a while, I have been busy. After exiting my earlier positions, I took off for New Haven to enjoy Parents' weekend with my God-daughter, Mindy. Great experience!

Upon returning, I identified another list of good candidates, and when they tripped their buy number, I moved in on eight of them with about $90K:

ICE - Intercontinental Exchange
BMC - Business software
JCP - J C Penney stores
GRMN - Garmin GPS devices
MS - Morgan Stanley
ORCL - Oracle database software
PCAR - Paccar truck manufacturer
TPX - Tempr-pedic mattresses

Most were selected because they were (1) members of the IBD 100, and (2) rising out of an established, consolidating base. The exception was TPX, which showed a long and strong upward trend. After five trading days, none had triggered stop-loss orders, but none had shown particularly good upward movement, either. The one exception: GRMN, which jumped more than $2 per share in the first four days, but then retraced sharply back $1.50.

Today was a little scary; after 30 minutes the portfolio was down nearly $3K. But the market stabilized by lunchtime. At close of market, I was still holding everything and only down about $800. Good Purchasing Managers data, along with a reasonably good consumer confidence number tomorrow should let the market take a nice run toward 12,100 again, and I should be back in the black.

The Picks Pay Off!

We're coming up on two weeks since we made our intial foray into the market(Wednesday, September 27). It's time to take stock (pun intended).

As expected, we took a number of casualties. GOL, AEOS, ASFI, and GILD all were stopped out. In addition, I cut my position in BWNG in half because of continued weakness. Only DRIV, TWGP, AAPL, and ICE survived. AAPL just barely made it, down 5% in two weeks and limping along on life support. Since TWGP and ICE showed continuing strength, I doubled up on my positions in those two, which paid off handsomely.

The three strong survivors did quite well, with ICE leading the way, up 21% in seven trading days! Overall, the invested portion of the portfolio (55%) has risen approximately $6300, or 5.3% in less than two weeks. We will now concentrate on taking profits while exiting these positions and finding new winners for the balance of the month.

The Rules: Rule Number Two

Rule One (September 20) is to determine overall market direction before trading. Ignore that Rule and you can get killed right off the bat. But assuming you observe Rule One, and you are putting money into the market, the next most important Rule is Number Two: Protect Your Capital by minimizing losses!

There are three keys to observing this Rule, which is the Rule most commonly ignored by novices. First, I establish a stop-loss for each stock when I buy it. Under some circumstances, this can be as little as 50 cents below the purchase price. But it is never less than 7-8% below the purchase price, given that I have observed Rule One and am buying into a rising market.

Second, I look for market tops in my stock and in the market indices overall. I watch for volume increases on down days, and I tighten up stop losses if there are gaps down even if my position is profitable.

Third, I sell all positions if the Dow, Nasdaq, or S&P 500 experience 4 distribution days in a 4-5 week period. That signals at least the end of a rally if not an overall change in direction. A distribution day is a day in which the market closes more than .7 % lower than the previous day on significantly greater than average volume. Don't worry, you'll know one when you see it.

Holding Our Position

It's becoming clear that the 3Q recovery in stocks was very thin, concentrated primarily in mega-cap Blue Chips, where the fund managers ran and hid after the big downturn in May and June. Unfortunately, these giant stocks rarely make significant up moves, so they can't help a trader like myself. I look among the mid-caps and tech stocks for fast movers. However, the growing uneasiness in the market about November's election results is starting to suggest more treading water for the next few weeks. All politics aside, the Democratic surge scares the market, and the media's eagerness to play up the Congressman Foley e-mail scandal doesn't help.

Another soldier died today: ASFI tripped its 7% stop loss. We only hold six stocks now, but I did double up my position on ICE, which has run up 10% in a week and still looks good, especially because of rising volume during the past three days. Overall, I'm still in the red. Which brings us to Rule Number Two (see the next post).

Counterattack pushes us back

A fresh assault on the DOW Thursday and Friday fell short of the all time high of 11,750. This was not good news, since the run-up during the week was conducted on relatively unimpressive volume. In addition, the Jewish holidays undoubtedly thinned the ranks of active money managers in New York. Today the sellers came back in a rush, tearing up the market in mid-day and routing several of my picks from last week. GOL and GILD tripped 7% stop-losses, so they're out of the fight. AAPL (on a analyst downgrade), BWNG, ASFI, DRIV, and TWGP all moved down sharply today, putting the portfolio in the red. ICE and AEOS are the only ones holding their own. Volume is still below average, however, and the overall market indices give strong indications of consolidation in front of a sharp move upward. But the NASDAQ retreat today has set off warning signals everywhere. By Wednesday I may have only four or five of the original stocks still in hand. If we see another distribution day (or even two) this week, the rally will be considered over, and I will tread water waiting for a new market direction to be set.