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Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

Summary:
The Stock Exchange is all about trading. Each week, we do the following: discuss an important issue for traders;highlight several technical trading methods, including current ideas;feature advice from top traders and writers; andprovide a few (minority) reactions from fundamental analysts.We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in! Review: Technical Warning, Lookout Below? Our previous Stock Exchange noted that Technicals Could Be Warning, Lookout Below. And the market has experienced a significant volatility increase since then–first a sharp market sell-off followed by some gains so far this week. A look at least week’s Stock Exchange show some of the indicators we were (and

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The Stock Exchange is all about trading. Each week, we do the following:

  • discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Technical Warning, Lookout Below?

Our previous Stock Exchange noted that Technicals Could Be Warning, Lookout Below. And the market has experienced a significant volatility increase since then–first a sharp market sell-off followed by some gains so far this week. A look at least week’s Stock Exchange show some of the indicators we were (and were not) looking at.

This Week: Lemons, Lemonade or Rip Van Winkle?

As a result of the market volatility, investors and traders have reacted in a variety of ways. Broadly speaking, we might categorize them as lemons, lemonade and and “Rip Van Winkle.”

For example, the market has given lemons to a lot of market participants over the last week. After the market turned sour, some traders got nervous, exited all their positions, and then missed out of the rebound so far this week. And of course, many of them are sour about it.

Still others are able to find attractive opportunities in the volatility. In fact, some traders need volatility to find any trades at all. These are the gleeful market participants who took the sour lemons and turned them into lemonade with a few sweet profitable volatility driven trades. For example, according to Andrew Hetch, volatility can be “Paradise For Traders, A Nightmare For Investors.”

And then there is Rip Van Winkle. Rip Van Winkle is “a short story by the American author Washington Irving, first published in 1819. It follows a Dutch-American villager in colonial America named Rip Van Winkle who falls asleep in the Catskill Mountains and wakes up 20 years later, having missed the American Revolution.” If you are a Rip Van Winkle, perhaps you’ve slept through this latest batch of volatility, made no trades, and you plan on sleeping through, or basically holding your investments for the next 20 years based on the assumption that the market will be higher then anyway.

Model Performance:

Our trading programs have moved back to normal trading and cash levels, after having been holding higher levels of cash in challenging market conditions around the turn of the year. And, we are sharing the performance of our proprietary trading models, as our readers have requested.

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

For more information about our models (and their specific trading processes), click through at the bottom of this post for more information (readers are additionally invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models).

Expert Picks From The Models:

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Holmes: This week I bought shares of WMware (WMW) on 6/3. What do you think about that, Blue Harbinger?

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

Blue Harbinger: Being the dip-buyer that you are, I’d expect nothing less from you, Holmes. VMware sold off hard, and you appear to have wisely purchased the dip.

Holmes: Yep–that’s correct. I use a mean-reversion approach to identify stocks that have moved “abnormally” far from their recent price history. WMware seems to have done that and I also identified the additional conditions necessary for me to purchase, which occurred this week. As always, market conditions may impact this trade, but since these mean-reversion stocks are often at a low recent price point, they are generally less impacted by negative market conditions.

BH: So in plain English, you bought the dip Holmes. Nice work. And by the way, the company does hybrid cloud software applications, often in the network security space. Not a bad place to be from a secular trend standpoint. Here is a look at the Fast Graph which includes some useful financial data.

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

Road Runner: This week I bought Workday (WDAY). As you know, I like to buy stocks in the lower end of a rising channel.

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

BH: I do know that because you tell me that almost every week. And I actually like Workday’s business model, generally speaking. They provide enterprise cloud applications for HR, payroll and various financial functions. The “cloud” part is attractive because it’s a great solution compared to many old-school non-cloud providers. And business has been growing. Here is a look at the Fast Graph.

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

RR: The Fast Graph and fundamental data are nice, but as we’ve discussed previously, I look for a certain type of situation (some call it a pattern, others may call it a setup, etc.) where the probability of a particular action is not a matter of chance (50/50) but has been historically noted to result in a greater tendency towards a particular outcome. “Trending in a channel” is one such situation. An equity will often “cycle” between the upper and lower bounds of that channel for substantial periods of time. My model design attempts to take advantage of this property by identifying stocks trending in an upwards channel and waiting until the stock price drifts to the lower bound, making it a candidate for purchase. These types of situations have a relatively high probability of positive outcome with a reasonable profit potential. WDAY can be seen to be in this type of a situation. This is a short-term trade that has traditional shown profitability when the right conditions have been met. One way or another, I’ll be out of it shortly–usually after about 4 weeks.

BH: Thanks for that explanation. And how about you, Athena–do you have any trades to share this week?

Athena: I sold my share of Tandem Diabetes Care (TNDM) This week. I bought the shares at $65.59 and sold them at $69.46.

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

BH: A profit is a profit. Remind us of your trading style? Probably still not fundamentally driven?

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

Athena: I look for stocks having strong positive trends and then select only those with the very strongest trends (“king of the hill”), constantly replacing the ones with weaker trends. It should not surprise anyone that I’m holding bought and sold TNDM. A quick look at the chart makes the strength of the trend for obvious. And I generally continue to hold my positions until either the strength of the trend abates or if a stock with an even higher trend strength comes along. I don’t have a set “holding period” for a position. I will exit only when either a stronger stock comes along or if market conditions dictate a strong potential for loss – capital preservation remains the key driver in all situations.

BH: Thanks Athena–that is interesting stuff, and a nice trade. And how about you, Felix–anything to share this week?

Felix: No trades, but I do have a ranking to share. This week, I ran the stocks of the S&P 500 through my technical trading model, and my top 20 are ranked in the following list.

Stock Exchange: Lemons, Lemonade Or Rip Van Winkle?

BH: Interesting stuff, Felix. I know you are a momentum-based technical model. Thank you for sharing.

Conclusion:

Despite the recent market volatility (and in some cases, because of it) our trading models continue find attractive opportunities. Have you gotten tripped up by the recent volatility, or have you had the chance to make some sweet volatility-driven lemonade? Or perhaps you’ve taken the Rip Van Winkle approach whereby you’ve just got it all on autopilot?

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. You can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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