Best performing stocks YTD – part 1

ddrx

vnda

dtg

car

smrt

What conclusions can we make about some of the best performing stocks:

1. Pay attention to enormous one day price expansion. Something like 20%+ one day gain. Don’t be scared by stocks that rise 50% or 100% or even more in a day. This might be the beginning of a big trend. Look between the lines. What stays behind that move.

2. The stock was neglected for a long time. It was tiny traded in tight range. Nobody cared about and as a consequence its graph looked like the EKG of a dead man.

3. There was a gigantic volume behind the sudden price growh. An all time high volume, which is 10-20 times bigger than the average daily volume for the last 100 days.

4. The initial move raises to the stock to a 6 month high. It is either neglected or it has high % of float sold short.

5. There is a clear catalyst behind the move. It is always earnings’ related. When it is not about monstrous current earnings’ growth, it is about expectations of such growth in the future.

6. Stocks move in groups. If there are other stocks from the same industry group that are also showing impressive momentum, concentrate your attention to that group. Look at all stocks in the Autoparts and coffee related industries. Such moves in whole industry groups are not caused by few grandmothers, trading their 401k. It is funds’ money behind them. And when they start buying, they do so for months. The nature of their size prevent them to acquire all stocks they want for several days or several weeks. This is why they patiently wait for slight pullbacks to rising 20 day MA to add or just start building positions in similar stocks from the same industry.

7. Momentum works – screen for the top 30 best performing stocks for the last 3 months. When you notice in your list, several members from the same industry, concentrate your efforts there.

8. Market always provides plenty of opportunities to make money on the long side. Even in one of the worst year in the recent financial history of the world – 2008, there were opportunities. During the first 6 months of 2008, while everyone complained about the high price of milk and gas, smart investors made fortunes riding stocks from the basic materials and energy sectors. I remember how in April and May of 08, some small cap, highly speculative oil stocks doubled every two weeks or so. The experienced investors know that every trend ends some day and this is why they always have an exit plan in mind.  They didn’t hesitate to exit their positions in July, when market action told them to do so and to go on a long vacation until the market told them that it’s time to come back. I know that it sounds much easier that it actually is. Let it be no confusion – trading/investing is the hardest way to make a buck in life and it offers everyone what he/she deserves. The purpose of this last paragraph is not ot motivate or scare, but to point out that most of us overtrade  and don’t concentrate efforts on a single market approach that has proven its validity and that suits our skills.

Does momentum work?

McclarenF1At the beginning of the year I posted the 10 best performing stocks for 2008. The list included the following stocks:

Best performing stocks in 2008

EBS +413% / Biotechnology
STSI +345%/ Cigarettes
CRD – B +258% / Business services
GAI +245% / Appliances
AIPC +224% / Processed and Packaged goods
MXC +210% / Independent Oil and Gas
DARA +194$ / Biotechnology
KIRK +173% / Home Furnishing Store
FINL +151% / Apparel Stores
GBR +147% / Oil & Gas exploration

Let see what happened 6 and half months later:
EBS = -50%
STSI =-73%
CRD-B =-69%
GAI = -17%
AIPC = +30%
MXC = -17%
DARA = -22%
KIRK = +308%
FINL = +32%
GBR = +40%

An equal weighted percentage portfolio of all the 10 members and without using any stops would deliver 16.2% YTD. Another example of the real investing world, which confirms that 10% of our trades usually account for 80-90% of all the profits.

Huge moves, but no real  edge in either direction. You might try to create a portfolio with the top 10 best performing stocks of the last year and put a stop just below the last higher low on the weekly chart. Such an approach will guarantee you that you will ride the move as long as it continues and you will jump when there is a clear sign that the major trend is in trouble.

Biotech stocks proved again that they are rarely suitable for an investment. They are trades. Many double, tripple and quadruple and then go back to where they started. Using stop losses with them doesn’t really work, since in the majority of the cases they just gap down. One way to hedge your biotech bets is to costantly protect them by 90-day OTM puts. This will protect you from disasters on the downside and give you plenty of room to ride the upside. Another possibility is to sell every month OTM calls, that are about 15-20% away from the current price. Such an approach will allow you to gradually decrease your cost basis. It will limit your upside potential and it won’t provide too big of a cushion on the downside, but it is still better than not having an exit plan. If you get exercised, your profit will be more than 20% for the month. If trend is still looking healthy, you can always jump right back in. Keep in mind that many of those stocks don’t climb gradually. The bulk of their move is often congested within a week or a month.

Catching a trend and riding it is what all investors should aim at. The ones that make money consistently know that no trend last forever and they always have an exit plan.

Fasten your seatbelts

flight_attendantThere are not many industries, which stocks experience as much turbulence as the airlines. Airlines stocks are highly cyclical and their price moves are highly dependend on the price of oil. The past year was a roller coaster for many members of the Major & Regional Airlines groups. Many experineced moves from -80% to +300%, several times.

I know what most of you think. Why do I even bother spending time on these industries. Their business must be dead in times of risk-averse consumer and relatively high fuel prices. Well I don’t know if it is for good or bad, but  there is sizable difference between the business and the actions of the underlying stock.

I have the habit to follow earnings surprises and growth in the context of different industry groups. If only one or two stocks in a group reports big earnings surprise and growth, it usually doesn’t mean much for the industry. Those stocks might present good short-term trading opportunities, but nothing more. If I notice good portion of stocks within a industry to surprisingly start beating earnings estimates and to reveal impressive growth, I pay attention to that industry. A new powerful trend might be in its beginning stages.

Today I am looking at the Airlines’ industries. Nothing fastinating is happenning there, but the recent weakness in oil and comming earnings’ reports might fuel some gigantic moves. Certainly, this is only speculation and price action will dictate my moves.

airlines' earnings