Category: Commentary

On July 15th TRGT gained 137% as 7.5 mill shares changed hands, representing 45 times the average traded volume during the previous 100 days. The stock broke out at new 6 month high from a long and relatively tight range. A new trend was born. Another biotech that doubled in 60 seconds. The news:

Targacept’s treatment for major depressive disorder was shown effective and safe in mid-stage clinical trials, paving the way for late-stage trials and discussions with the Food & Drug Administration approval. The company is also in discussions with a number of pharmaceutical companies to find a strategic partner for the development and commercialization of TC-5214, designed as a supplemental treatment in combination with other medications.

For trading purposes the nature of the news is not that important. The market reaction is. And it was a powerful reaction characterized by vast liquidity expansion (dollar volume expansion = price*volume). Since that day the stock never looked back and almost doubled after the initial explosive move.

I know it is too easy to point out recent big winners, but past is the only source to learn from it. I noticed that stock the very day it broke out, put it in my watch list, but didn’t take any action. It was just one of multiple opportunities that the market offered. I expected it to give back a little of its gain or at least to consolidate sideways, before it continued higher. I waited for a proper base of support to form and to enter the break-out from that base. It never happened. The stock just continued climb slowly every day, disregarding of the general market’s health.

What were the possible entry points after that:

1) the break-out above the high of the gap day or above $8.00. You enter early, but the potential support is too far away, therefore the size of your position should be very small (6.75 was one alternative ).

2) The break-out from the bullish flag in the $8.30-9.00 area with a stop at 8.00.

3) The bounce at 10.90 from the 10 DMA, which was also a break-out from bullish wedge. Stop at $10.00.

4) A potential break-out above flag at 13.40 with a stop at 12.40. The stock looks extended, but it looked the same way about 100% ago.

Nevertheless stops are there for a reason. Use them.

Watch for sudden, big liquidity expansions. Keep an eye on stocks that are up more than 50% in a month.

At 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.

There 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.