Not Every Stock Is Crashing, However . . .

During a market correction, your number one priority is to protect capital.  So most investors should limit their exposer to this downward trend.

Some, cash out and wait.  This is perfectly acceptable.  Cash is king and it takes money to make money.

Some, play the inverse trend to “balance” their portfolio or “hedge” the market.

Some rely on stop loses to limit their losses to help “keep” their strongest stocks.  These, in theory are the stocks in their portfolio which hold up better than the rest and are worth keeping.

Some, also look for new stocks to watch.  These new stocks are ones most likely not in their current portfolio but are holding up well in this terrible market.  Often, according to IBD, stocks holding up well in a market in correction are first to break out once the market rebounds.

Going back more than three years and not including the current correction, the Nasdaq has had corrections of about 19%, 18%, 10% (rounded up) and 11%.

The deeper corrections lasted six to 10 weeks, while the shallower corrections ran four to six weeks.  Traditionally a correction is defined as a pullback of 10% or more, and a bear market 20% or more.  The current correction has burned through a lot of capital in just two weeks. The quick decline might suggest that the battle between the bears and the bulls has further to go. Volatility is likely to remain for a while.

Yet, the individual investor should not get locked into a prediction. Stay flexible and be ready to buy a stock if a follow-through day develops.

A follow-through day involves a big index gain in rising volume on the fourth day or later of an attempted rally.

Friday’s action constituted Day 1 of an attempted rally. The indexes have to stay above their intraday lows in order for the count to continue.

So I ran a screen looking for stocks which have fallen less than the three major indexes, have positive EPS and Sales ratios, and are finding support and or above the common trend lines (20, 50, 200 MDA).

And came up with this list of stocks.

Ticker Company Sector Industry Market Cap P/E Price
COLM Columbia Sportswear Company Consumer Goods Textile – Apparel Clothing 5.42B 27.5 76.7
CUDA Barracuda Networks, Inc. Technology Communication Equipment 1.48B 98.71 27.54
EL The Estee Lauder Companies Inc. Consumer Goods Personal Products 49.68B 36.43 134.75
EZPW EZCORP, Inc. Financial Credit Services 742.84M 18.87 13.15
FTNT Fortinet, Inc. Technology Application Software 8.26B 97.16 46.54
GFN General Finance Corporation Services Rental & Leasing Services 194.18M 7.4
INST Instructure, Inc. Technology Application Software 1.10B 36.75
INVA Innoviva, Inc. Technology Application Software 1.72B 19.51 15.43
KTEC Key Technology, Inc. Industrial Goods Diversified Machinery 172.63M 42.83 26.64
MBUU Malibu Boats, Inc. Consumer Goods Recreational Goods, Other 703.07M 20 33.4
MC Moelis & Company Financial Asset Management 2.83B 24.9 52.05
NEWR New Relic, Inc. Technology Business Software & Services 3.58B 64.38
PERY Perry Ellis International, Inc. Consumer Goods Textile – Apparel Clothing 417.00M 15.48 26.21
SKX Skechers U.S.A., Inc. Consumer Goods Textile – Apparel Footwear & Accessories 6.57B 25.41 41.06
TSG The Stars Group Inc. Services Gaming Activities 3.75B 19.9 25.45
WING Wingstop Inc. Services Restaurants 1.32B 62.62 45.15

These are not necessarily stocks to buy right now.  After all, the market is still in correction.  However, this correction will not last forever (watch for a confirmation follow-thru signal or for price trends to close above moving averages signaling a potential return to a bull market).  When the market does reverse back up, there will be bargains out there to purchase.  So it is prudent to build and maintain your watch lists to be ready for a recovery.


Investing With Style

A few months ago I posted about whether or not to move my previous employer 401K to an individual IRA.  I opted to move it all, roll-over, to an individual IRA.

For me, the advantages definitely outweighed the disadvantages.  Here are the biggest advantages as I see it.

  1. A one stop shop to view and manage all my investments.
  2. Greater selection of investments.  I now have over 2,000 ETFs, 12,000 mutual funds to choose from and that is not including individual stocks.

BTW, did you know there are more mutual funds and ETF’s than there are stocks?  True.

I now had much more power over how to invest my retirement funds.  But with such great power, comes even greater responsibility.

The first question I had to answer was; how to go about choosing my investments?  To do this I started with my first rule of investing; protect capital.  I translated that into keeping costs to a minimum.  When trading ETFs and Mutual Funds there are basically two costs involved;

  1. The commission
  2. The expense ratio

The commission is what you pay your broker for the transaction.

The expense ratio is how much the fund or ETF charges as a service fee to investors.

Obviously the lower these two are the more money you have available to work with.

Looking over the screens my online broker offers, the first thing that jumped out at me was commission free ETF’s.  So that was my first selection criteria.

  • That narrowed my choices down to 296 from 2105.

My next criteria was funds with below average expense ratios, as compared to the industry .70% average.

  • That narrowed my choices even further, down to 130.

That was the easy part.  Now what do I do?

Ultimately I am looking for a wide diversity throughout my retirement investment funds.  For this I turned to a framework or investment model which helps categorize investment strategies.

The Morningstar Style Box is a nine-square grid that provides a graphical representation of the “investment style” of stocks, ETFs’ and mutual funds.

The grid classifies securities according to market capitalization (the vertical axis) and growth and value factors (the horizontal axis).

Understanding how different types of stocks behave is crucial for building a diversified, style-controlled portfolio of stocks, ETF’s or mutual funds. The Morningstar Style Box helps investors construct portfolios based on the characteristics and style factors of all the stocks and funds a portfolio includes.

Since my first two search criteria limited my choices to ETF’s, I am going to limit my description of the style box to how it relates to ETF’s.  The Morningstar style box classification of an ETF is based on the asset-weighted market caps (for the vertical axis) and value-growth scores (for the horizontal axis) of all the stocks in the portfolio.  This is important to remember because I want to keep my overall investments as diversified as possible.  It could be possible to select different ETF’s, in different style boxes and have quite a bit of overlap not only in sectors but also in individual stocks.  This is because each ETF is comprised of many stocks.  It is possible to have duplication between ETF’s.  Fortunately many online trading platforms and fund prospectus make it fairly easy to track concentrations and overlap.

Here is a perfect example of one such ETF.

Even though the ETF is firmly classified as a Large Cap Growth ETF, it does have a small amount stocks classified as Mid Cap Growth.  One can also see the sector concentrations and even the top 10 stocks.  (partially hidden in this screen shot).

On a very simplistic level, I was shooting for at least one ETF in each box.  I did have some personal investing ideas that I wanted to incorporate into my over-all portfolio.  Namely at least one of the following,

  • Growth and or Momentum trends
  • Dividends
  • Value
  • Blend
  • International and Emerging Markets
  • And some sector specific ETF’s such as Financial, Health (pharmacological, Biotech) and Energy.

In the end, I do have at least one ETF in each style box and since I already knew I was going to have overlap in sectors, I concentrated on eliminating, as much as possible, duplicate stocks based on each ETF’s top ten holdings.

The result?

13 no commission ETF’s with an average .326% expense ratio.

Out of 130 “top 10” holdings, I have 8 duplicate stocks.

Now that is Investing with Style.

Anatomy Of A Trade

I’ve been asked by my investment group to present an anatomy of a trade I made last month.  It was a trade based on a company with a good business model but trading on what I can only say is a lot of hype.  A dangerous combination but the plan and the rules I followed can apply to any trade or investment.

The key to any successful trade is having a plan and following your rules.

For this example, depending on how one looks at it, I broke at least one rule and followed many others.

Wednesday November 8th:

ROKU closed at $18.84 per share.  They were due to report their first quarterly report since going public and most everybody was pessimistic.  The company had yet to make money and were set to continue their losing streak.

I considered them a popular, trendy streaming, cord cutting alternative product that had a good business model.  I have been exploring cutting the cable cord and have purchased a long range HD antennae as well as one of ROKU’s streaming sticks.  The tech is not what impresses me.  In fact, they are practically giving it away.  That is not where they plan on making their money.  Roku intends to make their money on programming and selling advertising.  In order to do that successfully, you need market penetration.  Roku is making their hardware cheap to get it into people’s homes and build up market share.  But Roku is also teaming with HDTV makers and having their streaming service imbedded in today’s popular smart TV’s.

If you think about Microsoft in the early years of the PC, they basically gave away the OS so that they could gain market share and sell software and ultimately services.  ROKU is attempting to gain market share with the adoption of HD 4K smart TV and imbedding their platform (the OS) in each TV sold.  From there, they focus on selling content and advertising.

So I was really torn.  On the one hand I really liked the company.  On the other, they were still young and had yet to prove that they could succeed in this highly competitive online content streaming world.  So I held off on buying until I saw which direction the stock moved based on their report and outlook.

Well, it turns out that ROKU is still not profitable but they lost a lot less than expected and absolutely killed it on user activations and loyalty.  So much so that ROKU even tossed out the possibility of becoming profitable as soon as next year.

What happened next was Simply Amazing.

Thursday November 9th:

ROKU opened at $24.75.  A 31% increase over the previous day’s close.

I bought 100 shares.

Here are the rules I broke.

  1. Chased the money
  2. Bought after the stock had already passed profit taking zone. (see notes below)

Here are the rules I followed or (at least) did not break.

  1. I bought on volume.  Institutional confirmation
  2. I bought at an early entry point below the buy point.  IBD had the buy point at $30 per share based on previous highpoint shortly after initial IPO.  But this early entry is OK based on institutional buying.

Yes, these rules are a little fuzzy and subject to interpretation.  Here is my point of view.

Depending on how one looks at this, from an IBD perspective, I may have broken 3 rules…. or not.  Technically the profit taking zone (20% – 25%) is after a breakout past a buy point.  Sometimes it is OK to buy a small position before a buy point if institutional buying is there.

As soon as I bought my shares and saw that they did not stage a reversal, I placed a trailing stop.

Rules I followed:

  1. Protect capital and gains.  At this point I was protected from taking a loss.  –  Unless the stock happened to gap down at the next open….

Friday November 10th:

I canceled my trailing stop and sold 50 shares shortly before close at $35.16 for a 41% profit.

Note: The stock closed at 33.21 which would have been below my trailing stop, but because I had cancelled it to sell half my gains, I still had 50 shares invested.

Rules that I broke:

  1. Changed my rule of setting and keeping my trailing stop to protect profits.

Rules that I followed:

  1. But this was done to protect my profit from the downside risk of a gap down.

I reset my trailing stop right before close.  I fully realized this would not protect my remaining shares from a gap down on Monday’s open but I truly believed that the “hype” was not over.  After all, we still had all the weekend traders (those who only follow the market and their stocks on the weekend).  Sure enough, there were many articles hyping the breakout stock.  Even IBD got in on the action and published a “hype” article.

Monday November 13th:

No gap down at open!  Hype and irrational exuberance was still in full force!

But even hype has it’s limits and …

Sometime during the lunch hour my trailing stop got activated for $45 a share.

And… I was out with a 81% profit on those remaining 50 shares.

And an overall profit of 61%.


Lessons Learned:

Rule #1 to investing is not to lose money.  Or at least minimize your losses.

  • I utilize trailing stops on almost all my trades.

Rule #2, see #1  😉

  • But seriously, I also use trailing stops to protect my profits.
  • Yes, I sometimes get stopped out of a stock on a sudden drop or as those who think of conspiracy theory, on a sudden drop by MM to flush out weak hands.  But, hey I usually make a profit and if I still like the stock, I can always get back in.

Rule #3 I base a lot of my buy and sell points on percentages and not dollar values.

  • For me this is a pure psychological rule.  I learned early on that I could get hung up on “making money”.  Sometimes people start seeing all the $$$ signs and let their emotions rule their investment and trading decisions.  I am no different.  So I try and base all my buy and sell decisions on percentages.
  • Do I ever sell too early and miss out on future gains?  Yes, but if my goal is 20% profit, then I am happy.  Would you be happy with a 20% gain on your investments?  The percentages are there to manage risk and avoid letting my emotions (such as greed) take over.
  • Do I ever sell too early and get stopped out of a loss before the stock recovers?  Yes, but not all stocks immediately recover and the stop loss is there to minimize my losses and protect my capital.

Rule #4 is you need money to make money.

  • Don’t lose all your hard earned money to the stock market, irrational exuberance, or emotional trading decisions.
  • Follow rules # 1 and # 2.


Looking For Bargains

First of all, I hope everyone had a safe and happy Thanksgiving, or Friendsgiving, or if you don’t happen to celebrate either one of these events, a good week.

This is the time of year that we, as Americans, give thanks for what we have;  and then promptly go out and buy things we don’t have;  or things we feel that our friends and families simply must have.

Retailers love this and have created their own celebration events for which they are thankful.

Black Friday and Cyber Monday.

And nobody does it better than Amazon. Look at this heat chart from Friday.

Investors seem to know who is winning the online battle.
And, based on internet traffic, it appears that Amazon has captured over 50% of the Black Friday shopping traffic.

Out of curiosity, I took a look at what the top 5 Black Friday items sold on Amazon.

  • Amazon Echo Dot
  • Fire TV Stick with Alexa voice remote
  • TP-Link smart plug
  • Instant Pot DUO80 8-quart 7-in-1 programmable pressure cooker
  • 23andMe DNA test

The two which caught my interest of course were the ones that were not Amazon related. (Anything Echo/Dot or FireTV related was a lock to be on the list) – The pressure cooker and the DNA test by 23 and me.

I mentioned these to my wife and, thinking I was looking for gift ideas, promptly said she did not want the DNA test kit. After being married to her for nearly 30 years, I knew the last thing she wants to do is send PII to some company on the internet.

So maybe I’ll buy the pressure cooker….

But really, I was more interested to see if there might be some potential investment opportunities.

The Instant Pot pressure cookers appears to be a privately held Canadian company and 23 and me is a venture capital company funded by some publicly traded companies such as Johnson & Johnson (JNJ), Roche (RO.SW), Google (Googl) and Illumina (ILMN).

From purely a sales perspective, Amazon (AMZN), and these other companies might be an interesting place to start your investment research. However, one would be hard pressed to classify AMZN (with a P/E of 300 and a PEG of 5) as a traditional value investment stock.

Of course, as investors, there are many more ways to look for bargain investments. A month from now, one of the more talked about strategies will be looking at the Dogs of the Dow. This is generally a list of the highest dividend companies of the DOW30.
The current list has some very interesting names on it.

Ticker Company Yield
GE General Electric 5.28%
VZ Verizon 5.02%
IBM International Business Machines 3.95%
XOM ExxonMobil 3.78%
CVX Chevron 3.71%
PFE Pfizer 3.61%
MRK Merck 3.46%
KO Coca-Cola 3.23%
CSCO Cisco Systems 3.18%
PG Procter & Gamble 3.12%

Some, such as Cisco, I already have positions in. Others, such as GE have been so beat down this past year they may be compelling to invest in but GE is a mess right now and is not without risk. Long term, however, it may present an opportunity.

I also ran my own version of a “value” screen on Finviz and came up with stocks. Some, like the Dogs, pay dividends, some don’t.

Ticker Company Country P/E
HMC Honda Motor Co., Ltd. Japan 10.45
LM Legg Mason, Inc. USA 15.22
NUE Nucor Corporation USA 15.57
RIO Rio Tinto plc United Kingdom 14.41
SBS SABESP Brazil 8.13
STX Seagate Technology plc Ireland 15.24
TKC Turkcell Iletisim Hizmetleri A.S. Turkey 14.51
TS Tenaris S.A. Luxembourg 61.1
VLO Valero Energy Corporation USA 17.85
WDC Western Digital Corporation USA 19.37
WOR Worthington Industries, Inc. USA 14.38
CFG Citizens Financial Group, Inc. USA 15.3
COHR Coherent, Inc. USA 37.85
ESNT Essent Group Ltd. Bermuda 14.97
GGAL Grupo Financiero Galicia S.A. Argentina 17.41
HCCI Heritage-Crystal Clean, Inc USA 21.95
INVA Innoviva, Inc. USA 16.76
MDC M.D.C. Holdings, Inc. USA 11.62
MTZ MasTec, Inc. USA 14.45
OCLR Oclaro, Inc. USA 7.93
PNFP Pinnacle Financial Partners, Inc. USA 20.11
PZN Pzena Investment Management, Inc USA 15.9
RICK RCI Hospitality Holdings, Inc. USA 27.88
SUPV Grupo Supervielle S.A. Argentina 17.66
WPPGY WPP plc United Kingdom 9.33

I think I will keep these stocks on a special thanksgiving value watch list to see how they perform and conduct some further research..

What “value” stocks do you like or follow?

Is The Stock Market Setting Up For A Fall?

One thing every investor should do is look at current market conditions.  Our investment club starts off each meeting doing just that.  We look at a lot of different charts which track trends and patterns.

Some are in confirmed uptrends.

–          The momentum players see this as strength in the market.

Some are indicating possible over bought conditions

And others are close to inflection points with percentage of stocks hitting new highs, or above their 20, 50, 200 moving averages, etc.

–          The contrarians look at the last two groups as signals for a correction.

I’m going to mention one more indicator group which is not usually mentioned.

The IBD50 list of stocks contains a list of growth oriented stocks with good fundamentals and positive chart patterns and setups.

In the latest weekly issue of the IBD paper, half of the stocks, 25 of them, have one or more of the following comments associated with them.

  • Extended from last breakout.
  • Late stage base.
  • Take profits.



Late Stage

Profit Taking

























































Four of these stocks I am either currently invested in or have been within the last couple weeks.  Five others I have on watch lists and or have been invested in within the past year.

Interestingly enough, AMAT, which is listed as in a risky late stage base and in profit taking zone is also listed in an article, in the same paper, as a possible upcoming earnings call option play.   I wonder if these IBD analysts spend much time talking to each other or reading each other’s work…

Are we due for a correction?

–          The contrarians would say that the risk is higher with so many IBD stocks over extended and in profit taking zones.

Are stocks and the market in full acceleration mode?

–          The momentum traders would say that hitting new highs and either continuing momentum or hitting new buy points is a strong growth indicator.

Regardless of the market direction, it pays to do your homework and look at risk reward ratios.

One possible strategy would be looking at the IBD50 again but this time at the other 25 stocks.  The ones not over extended, in a risky late stage base, or in profit taking zone.  Do any of these show signs of weakness and failing?

Yes, there are a couple which are showing sell signals.  So this is a definite sign of weakness.

Others are testing support which can be a sign of showing possible strength (if it bounces off of support) or weakness (sell signal, if it fails).

Here is the breakdown as I see it.

Testing 10 week line: 

IBD views this inflection point as a test of support and confirmation of upward trend of a growth stock.  Often viewed as a possible secondary entry point if it bounces off of this supporting trend line or a possible sell signal if it falls below the trend line.  I would put these into a watch list:


Failed Breakout but still testing 10 week line:

This is a subset of the previous 10 week support line indicator.  These stocks pulled back after passing a buy point and are now testing the trend line.


Flat Base: 

An IBD consolidation pattern which can signal strength if the lower support range holds and or the stock bounces off of a trend line or passes top level resistance (a buy point).


Base on Base:

Another upward trend IBD pattern which investors can view as another secondary buy point.


In Buy Zone: 

IBD defines this as within 5% of a breakout buy point.


Double Bottom:

IBD version of a potential reversal pattern and or test of support before a breakout.


So of the remaining 25 within the IBD50: 14 are in noteworthy patterns

–          5 stocks are is possible strong buy point patterns:

–          2 are showing weakness but still showing support

–          5 are testing support and at a possible inflection point.

–          2 have flashed sell signals.

So, do you see the market at an inflection point?

Setting up for a correction?


Confirming strength and momentum?

Regardless, it is good to do your homework and be ready to action no matter what happens.