Stockbullz.com Weekly Stock Newsletter #14
Stockbullz.com Weekly Stock Newsletter #14
June 16, 2006
Dear Canadian Stock Investor,
I think you are going to see many changes occurring with the StockBullz website and the way I run it.
The main reason is the identification of a real trading strategy called Trend Following. I don’t like to admit this but beforehand I feel we were buying and hoping. Yes, I did do my due diligence on most of the stocks I talked about but timing is much more important than which stocks you buy and sell.
To add to that, I never put forward any logical exit strategy which was a big mistake. I did sometimes sell half my position at a double or 120% but it wasn’t a consistent and disciplined system.
So the question to ask then is was my very good performance skill or was the market just that good? We’ll never know but with the recent tough times on the market, I feel that buying and hoping will only lead to losses in our portfolios.
There are several reasons why Trend Following appeals so much to me:
1. You have a predefined buy/sell strategy
2. You mainly follow price movements and moving average movements
When comparing Trend Following to fundamental analysis or even technical analysis, it seems ridiculously simple.
The whole premise is to follow the Trend. In other words if a stock is above its 30 day moving average (you can use 50 as well) it’s a buy. And you should continue to add to your position as long as it continues to go up. However, when the stock’s price falls below the moving average, you have to sell your entire position in it.
If shorting stocks interests you, then you should short sell a stock when it is below its moving average and then cover your entire position when the share price moves above the moving average.
Trend Following should not be considered a passive strategy. It is a trading strategy that needs constant chart watching to see whether the trend is still intact or if it is broken.
It needs complete discipline and sticking to your system.
And please don’t think that this is a perfect system that always prevents losses. It is not.
Professionals who use this system aim for 30-40% of their trades becoming profitable. That’s right, less than half!
How do they expect to make money then? Quite simply, they keep their losses small and let their winners rise until the trend breaks. If that is 6 days, fine. If that is 6 weeks, fine. If that is 6 months, fine.
No one can ever know how long a trend can last but we have to assume the trend is intact until it ends (by a crossing a moving average).
Because of this piece of information, there is one annoying aspect of Trend Following. It is called Whipsawing. This is the definition for very short movements above and then below moving averages. For example, you purchase a stock because it has just crossed its 30 day moving average and it rises 5% in 5 days. Everything seems to be going well but the market is weak and it drops 6% to a price below its 30 day moving average. You must sell your entire position now at a small loss because the market is telling you there may be further losses ahead.
It continues to drop another 10% the following month but then rebounds and crosses its 30 day moving average so you buy in again. This time it rises 50% and then drops below its 30 day moving average. This time you pocket something in the range of a 20-30% gain.
Whipsaws are not pleasant but as long as they do not waste too much of your capital you should do well.
I am still early in my Trend Following system but I think it will be a great system to maximize profits and minimize losses in my junior resource companies research.
As you may already know, I have risked a small amount of my capital by shorting CUX and YRI this week. These could turn out to be whipsaw trades and I shorted at the bottom but who knows where the bottom will be? The trend is currently down for those stocks so I am shorting them. If the trend reverses, no problem, I cover with small losses and then plot my next moves.
To prove that the trend is more important than the company/fundamentals, I want to show you these two charts. The first one is Silvercorp, a brilliantly managed Silver company that has just recently begun production in China.
If you bought SVM shares around the $18 mark where it says sell point, you would be down more than 30% if you would be still holding those same shares. Of course the stock may rebound and go to $50 but how do you know? You don't and the current trend is down so further losses should be expected until the trend reverses.
On the other hand, can you believe that Trend Following would have enabled you to make money on Bombardier? Yes one of the worst companies you could ever buy if you are only looking at the fundamentals and one with a huge short position. But if you followed the trend, you could have made about 35% on this trade.
I hope these two little examples and this entire letter clarifies some things about Trend Following.
By the way, I have removed the regular stock table that used to be at the end of the newsletter usually because it is no longer appropriate for me to list the stocks and entry points as they were. Plus I think all the stocks are trading below their 30 day M.A.'s so that would mean they are all sells.
Once again, they are great companies with great prospects but please wait until the trend reverses before you buy/buy more.
Currently I am mostly cash, a little SST and a little short CUX and YRI.
I am still not sure how to handle SST because there is no 30 day M.A. to compare the price to. I will have to do more head scratching over the weekend to decide what to do.
That’s about it for this week. Thank you for taking the time to read this and I wish you luck in your investing decisions,
Mike
Disclaimer: This letter is merely someone’s opinion. It should not be taken as investment advice. Through viewing this publication or accessing our site, you agree to hold Stockbullz.com, its operators, owners and employees harmless and to completely release them from any and all liability due to any and all loss (monetary or otherwise), damage (monetary or otherwise), or injury (monetary or otherwise) that you may incur. It’s your money, so you are ultimately responsible for any gains/losses you may incur. Do your own due diligence! Writer may own positions in some of the mentioned stocks.