Bullish Jim's Trading Blog

The Resurrection of Technical Trading?

2008-04-06T09:21:00.006-05:00

During the bull slaughter of recent months I heard more than one CNBC pundit describe what happened as "the death of technical trading". As a rehabilitating chart head I can attest that a lot of filters and patterns that worked well for me in recent years didn't work very well during November and December of 2007 and then didn't work at all during the first couple of months of 2008. The scary truth was that stocks were falling through support level after support level without a clue as to when it would end.

The bounce in the market we've seen the past few weeks could simply be a false alarm. It could be a soon-to-end, dead cat bounce of a bear market rally that we're witnessing. That said, I am currently witnessing a bit of a return to normalcy in a lot of charts. It's not about the fact that stocks have been rising since mid-March. Rather, it is about the return of a little bit of predictability in charts. Moving averages and support/resistance levels seem like they are starting to matter somewhat once again.

Although I am not a full time swing trader any longer, a review of the IBD 100 has me considering a swing trade or two. A staple of my swing trading for years was to trade IBD 100 stocks on pullbacks to their 50 day moving averages. As I scan the charts of the 100 today I am seeing some opportunities to once again employ this strategy. Please note that a tight stop loss is a must when I use this approach. Heck, I might even employ a call spread to limit my downside at this point.

My current policy is that I do not share my trades out of fear of anyone foolishly following my lead and losing money. In the interest of sharing the approach rather than the specific trade I have annotated the chart of a stock I will NOT be buying. The chart illustrates my point but is not among my favorite IBD 100 charts at the moment.

Click below for a low budget graphic of LKQX's chart. (The text has an unintentionally Christmassy color scheme!):

The long and short of it is that moving averages as well as support and resistance levels can be very useful in trading. Such chart goodies can often predict a good swing trade or tell you a good time to enter or exit a longer term trade. However, the painful lesson a lot of us chart heads re-learned in recent months was to treat the chart as just a piece of the puzzle rather than as the whole story. You should absolutely study the chart of any stock you buy. Just as important, however, is putting the chart into perspective by studying the quality of the underlying company, the strength of the overall market, and the strength of the specific sector in which the stock lives.

Yes, every semi-experienced trader is well aware of the truth of my previous sentence. That said, as a bruised and bloody technical trader with a formerly stubborn bullish streak I can tell you that when a market trends in one direction for a long period of time it can make a trader very lazy. I'm personally committed to not letting that happen again. In the long run, I am confident that living through the past few months will make all of us better traders for having been there.

I'm Still Alive

2008-03-25T20:25:00.004-05:00

It has been nearly a month since my last post here and I can't say that I've missed blogging a whole lot. While it's true that my job has kept me very busy lately and that I have a new hobby (playing guitar) which takes up a lot of the time I used to spend blogging, the truth of matter is that 2008 has been an extremely difficult year for me as an investor and I just haven't felt like I have had anything of value to add lately.

I guess the silver lining in the dark cloud of 2008 for me is that I have been forced to really learn about risk management. The bear market we've been enduring since November has at last toned down my long-standing bullish bias a bit and I've finally become more direction-neutral. I still go long more often than short but the idea of short selling a stock is no longer foreign to me. And when I'm long a stock now, I am much more likely to make it a buy/write. In short, I am determined to apply the painful lessons of 2008 to my trading from now on and I'm confident that over the long term my returns will be better because of the pain I've suffered.

Looking back on my New Year's resolution post, I am extremely grateful that I made the decision to no longer share my specific trades. The thought that anyone might have followed the idiotic trades I made in January and lost money themselves makes me sick to my stomach. The problem with that decision is that it wiped out a good chunk of the posts I would have otherwise written this year. I'm left in a place where I'm constantly having to think of topics to write about and that is by far my least favorite part of blogging. What I am now mapping out going forward are some regular features that will provide me material about which to write and lighten up the idea generation duties. We'll see how that goes.

I can't promise that I will ever blog daily again. That said, I feel like my hiatus might finally be wrapping up. Maybe this is a bullish signal! Or is it a bearish signal? I guess time will tell.

When Wasn't It A Mess?

2008-02-28T20:46:00.002-05:00

In a wonderful example of stating the obvious, US Airways CEO Doug Parker had the following to say today:

"Our industry is a mess, if you haven't noticed."

Mr. Parker was referring to the current situation where we've entered an economic downturn and the airlines are being hammered particularly hard by sky high oil prices. At almost any time in recent memory, however, he could have made the same statement and I would have agreed wholeheartedly. When was the airline industry ever more than a modest economic downturn away from disaster? Was there ever a time that at least one of the major players in the industry wasn't at risk of going belly up? Do you know anyone who flies frequently who believes the airline industry is well run?

I'm probably more critical than most coming off yet another year of poor air travel experiences. That said, I am of the belief that if you had an employee who performed as consistently badly as the airline industry, you would fire him.

The Death Pool: Wall Street Edition

2008-02-25T20:11:00.002-05:00

A friend of mine at my day job is game for just about any office pool you put in front of him. From the standard stuff like football parlays and March Madness pools to more exotic pools such as a Tommy John pool where you predict which baseball pitcher will be the first to succumb to the famous reconstructive elbow surgery, my buddy is enthusiastically in on the action. We were talking the other day about a really morbid pool he takes part in each year known as a Hollywood Death Pool. In this type of pool you pick 10 famous people you think might die this year. If any of the people you choose die during the year, you get points based on the formula of 100 points minus the age of the person at the time of death. I know, it's a little sick. You have to admit that it's also fascinating in a really perverse way.

This Hollywood death pool discussion got me thinking about how one would construct a Wall Street edition of a death pool. Although not completely analogous to death for a company, I decided that for the purposes of my pool I will consider a company entering Chapter 11 Bankruptcy protection as "death". Although a company often (maybe even usually) emerges from Chapter 11 as a going concern, the common equity holders generally end up with nothing after the restructuring. This is obviously due to the fact that a company only enters Chapter 11 because their liabilities exceed the value of their assets and we all know that debt gets paid before equity sees a penny.

Given that we're in a period of recession or at least in a time where the economy is slowing, 2008 may well end up being a lively period for a Wall Street Death Pool. One could easily see a handful of home builders buckling under as the housing bubble continues to deflate. One could envision a number of retailers seeking bankruptcy protection (like Sharper Image did recently) as consumer spending slows. It's also not too hard to envision a bank or two with a smidgen too much sub-prime exposure going belly up.

The purpose of this post is to gauge whether there might be an interest among readers to take part in a Wall Street Death Pool. If so, here's how I see it playing out. By the end of March you would submit up to ten companies you believe could enter Chapter 11 protection between April 1, 2008 and the end of the year. For any company you choose that enters Chapter 11 during this nine month period, you would be awarded 1 point for every cent of share price as of March 31. That is to say, if a company enters Chapter 11 during that nine month period and their share price was $4.50 as of March 31, the participant would receive 450 points.

Please let me know in the comments section below whether you might be interested. I'm happy to keep score and if there are enough people interested we might even be able to scare up a modest prize or two.

For the record, I'm posting this blurb simultaneously on the Trading Goddess site and my own lightly trafficked blog and would hope to solicit entries from both sites.

"Better Than Its Peers" Filter

2008-02-24T00:06:00.001-05:00

In precarious times like these in the markets, it becomes doubly important to focus on companies with strong underlying fundamentals. If you feel compelled to make a bet on the long side at the moment you are best served by choosing companies that are not only growing, but ones that also have better balance sheets and earnings track records than their peers.

To identify such companies I came up with a simple filter that looks for companies exhibiting the following traits:

1) Better than industry average balance sheet in terms of
debt to equity ratio and current ratio;

2) Better than industry average net profit margins;

3) Projected EPS growth of 20% or more for next year and for
the next five years;

4) Market capitalization of $1 Billion or more;

5) A history of earnings reliability, having exceeded analyst
EPS estimates at least two quarters within the past year;

6) An increase in projected EPS within the past three
months;

7) P/E Ratio equal to or greater than industry average.

Why did I choose these particular criteria? Well, I chose #1 because I want to make sure the company still has a strong balance sheet even after the market as a whole pulled back a ton since late October. I chose #2 because higher than average net margins speak to a company's efficiency and pricing power. #3 and #4 are in the mix because I want growing companies that aren't too small or too speculative. I chose #5 and #6 because I believe that delivering results in line or better than the market expects will be especially important in the coming months. And lastly, I required #7, a P/E ratio greater than the industry average, because I'm not bottom feeding at the moment; I want the market to already recognize that the company is of high quality and deserves a greater than average multiple.

Alright, let's get to the results spit out by this filter:

Atwood Oceanics (ATW)
Mindray Medical (MR)
New Oriental Education (EDU)
Research In Motion (RIMM)
Celgene Corp (CELG)
Apple Inc (AAPL)
BE Aerospace (BEAV)
Under Armour (UA)
Bucyrus International (BUCY)
Greif (GEF)

Anyone who subscribes to a publication such as Investor's Business Daily or a service such as VectorVest won't be particularly surprised by many of the names that made the cut in my filter. Companies such as ATW, EDU, BUCY, and EDU regularly rank high on such lists of fundamentally and technically sound stocks. The specific criteria used by VectorVest and IBD may be more complex than what I've used but the basic premise is the same; These are growing companies that are simply better than their peers in numerous ways.

Even if you are a short term or intermediate term trader, this is a very risky time to chase bounces in fundamentally weak companies. There's no guarantee any of the stocks I identified above will make you money any time soon if you were to buy them. That said, you could at least take comfort in knowing that you're buying stock in a company that is- at least on paper- of a high quality in terms of its underlying fundamentals. Please note that as a person who is still a bit of a chart chomper, I would look for a technical pattern I like before buying any of them. Furthermore, as a person who is still very cautious at the moment, I would do quite a bit more homework before buying any of these stocks.

If you're interested in the data and complete criteria I used, click on the low budget graphic below.

Disclaimer and Disclosure: This is not investment advice. It is merely what one risk tolerant know nothing is irresponsibly doing with his own money. Do your own homework before investing in anything. I am currently long Apple, by the way.

Unfocused Weekend Ramblings

2008-02-02T18:00:00.000-05:00

What follows is a hodge podge of opinions and links to stuff I found interesting in the news and in blogs in recent days:

I will happily admit that as a lifelong Mets fan all other news took a backseat this week to the story of the Mets landing the biggest of big fish, Johan Santana. I haven't been this pleased by a Mets acquisition since Mike Piazza came aboard via trade back in 1998. After a painful and historic collapse ended my team's season abruptly a few months ago, it is suddenly cool to be a Mets fan once again.

Afraid to Trade has a great post on "fading the gap" in the Dow. It was a pretty successful strategy in January to say the least. For what it's worth, fading a gap remains my favorite day trading technique and I often use QID or QLD as my equity of choice.

Dr Brett has a new post about Tracking Cumulative Demand and Supply. Keep his insights in mind if you're thinking all is well again after this week's market rally. Caution is still the theme of the day to say the least.

Adam interviews one of my favorite options traders (himself!) about the current state of options trading. He offers some great insight and even sticks his neck way out by picking the Giants to upset the Pats. Talk about a contrarian pick..

What do I think of Microsoft trying once again to snag Yahoo!? I'm admittedly not a fan of either company but the price MSFT is offering seems absurdly high to me. $31 per share translates to a forward P/E of around 58 as compared to MSFT's current forward P/E of around 14 1/2. From a forward P/E perspective, YHOO's earnings at MSFT's current multiple would translate to a valuation of approximately a quarter of the $42 billion Yahoo! price tag. I'm sure Microsoft is banking on economies of scale leading to higher earnings. And perhaps they might even see a bit of multiple expansion. That said my gut instinct is that a combined Microsoft-Yahoo! won't be any better at beating Google than Microsoft and Yahoo! have been as separate companies. I'm refraining from making AOL-Time Warner comparisons for the time being but you can color me skeptical to say the least...

Carl Icahn has amassed a big stake in JC Penney. Yes, the stock is beaten up. ALL retail stocks are beaten up right now. Why focus on a middling player in a sluggish, no growth sector like department store retail? Mr. Icahn undoubtedly knows something I don't but this one is a total mystery to me.

Zachstocks likes OptionsXpress (OXPS)... and so do I for what it's worth.

BXCAPRICORN has a helpful post on the art of explaining to the newly employed all those pesky deductions that chip away at one's paycheck. This is a discussion for another day but BX's post gets me thinking of one of my biggest pet peeves, namely that our schools should require much more in terms of financial education than they do. A person can live a pretty decent life without knowing rudimental spanish or the difference between igneous and sedimentary rocks but a lack of knowlege in budgeting, credit cards, and general personal finance can haunt you for life.

Vix and More shares some analysis of which sectors are performing well and which are performing badly at the moment. Good stuff...

Stockbee all chimes in on the subject with the best performing sectors for the month of January. The top five all are perceived to benefit from the Fed's desperate finagling of recent weeks. Number one of the list? Residential Construction! In my humble opinion this is nothing but a dead cat bounce for the homebuilders and I will be looking for signs of topping to short the sector once again. A housing bubble simply doesn't correct itself in a matter of months and can't be fixed by a few rate cuts.

Shrinking P/E Ratio Screen for February

2008-02-02T08:14:00.000-05:00

As I promised back in January I'm going to revisit my Shrinking P/E Ratio Screen at the beginning of each month in 2008. That being the case, the purpose of this post is to share the results of the screen as of the beginning of February.

For more information on this screen, you can check out my previous posts on the subject here. In short, this screen pulls companies with nicely growing earnings and revenues but with steadily declining P/E ratios over the previous year. My theory which I've yet to prove is that the stocks that are spit out of this screen may be attractive on average as "value plays". By running this screen each month of 2008 I'm hoping to amass some anecdotal evidence of whether my theory is correct or not. My ultimate goal with this study and with any screening or technical filtering I do is to figure out if I can trade based on my theory.

Click on the image below for the results as of the beginning of February. The screening parameters are shown at the top.

Having run this screen semi-regularly for over a year, the first thing that pops out at me is that Genentech (DNA) is absent from the list for the first time since I created the filter. A tiny bit of research revealed that DNA's P/E ratio actually increased in the past month from 26 to 27, thus knocking it off the list. DNA's rise in P/E ratio was due to an increase in stock price as opposed to a decrease in earnings, by the way. This observation makes me wonder if a stock disappearing from the Shrinking P/E Ratio screen might actually be a sign of a stock bottoming. I'll have to keep an eye on that as well in the coming months.

Three stocks that showed up on the screen in January also appear on the list for February (INFY, TDW, and ZUMZ). The four stocks that fell off the list from January to February- DNA, MSNT, QSII, and AAI- each saw a bounce in its share price which resulted in a higher P/E ratio. I'll have to revisit each of these next month to see if their respective bounces continued.

Another thing I found interesting about the results for February is that the seven stocks on the list represent seven different industries. Often during 2007 when I ran the screen I would see a clump of stocks from the same industry, generally oil-related. This always made sense to me since you often see the stocks of an entire industry rise together or fall together.

For the record, I bought a bit of PSYS on Friday after doing some homework on it. The fundamentals look solid to me and the low $30s looks to be a decent support level for the stock. We'll see how it goes. I'm using a relatively tight stop to limit my losses.

As always, I welcome observations and opinions about what this screen might be telling us. Feel free to comment below.

Buying Support at the 200 day Moving Average

2008-01-20T09:10:00.001-05:00

I'm sitting on a bunch of cash right now due to having been stopped out of several positions in recent days. Given that I believe the market is short term oversold, I want to dip my toe in the water a bit on Tuesday with a few long plays. Since we're having a heck of time finding a bottom in this market I want to buy some stocks where I'm seeing support at the 200 day moving average. This will allow me to have a simple plan for each trade where I can set a relatively tight stop loss. In the event the 200 day moving average is breached, the plan has obviously failed for the trade and I will know to get out.

The following are some charts I like at the moment that fit the bill. Keep in mind that I haven't done any fundamental analysis of any of them yet. Given that my target hold period is now weeks to months rather than days, I will definitely dig into each quite a bit before I buy.

WFR has pulled back to the 200 day after being really extended for a couple months. It's now at a level where a bunch of shares have traded over the past ten months.

Given the recent slaughter in stocks tied to global growth, I'm going to have to think pretty hard before I buy steel. The chart is at least interesting.

SDA is probably my favorite one here from a chart perspective. The $50ish level was resistance last May, July and August. It's been a support level ever since.

I like QDEL because it's a bit further into a bounce than the others.

I always have soft spot for energy stocks after they've been beaten up and Devon is definitely a bit bloody at the moment.

ADRE gets a ditto for my comment about steel above.

Every one of these stocks could resume getting clobbered come Tuesday. That said, each looks promising to me for a trade with a plan that includes a tight stop loss. Do your own homework before investing in anything.

A REALLY Bad Time to Chase Momentum

2008-01-19T08:47:00.000-05:00

The best illustration I can find to show how bad it's been of late for momentum-chasers is the IBD 100. The highest rated stocks in the 100 are supposed to be the best of the best when it comes to a combination of fundamental and technical strength. When a stock gets completely clobbered- like BIDU has lately- it slides down the list. Or, as in BIDU's case where the stock is already down 30% year to date, poor relative performance can take a stock from #1 on the list a few weeks ago to completely off the list as of now.

I bring up BIDU simply to point out that the top of the IBD list is generally skewed toward stocks that have performed extremely well in the very recent past. With that in mind, you will find below the year to date returns for six of the top ten IBD 100 stocks as of now. Again, these aren't from the top ten as of the beginning of the year. Rather, these are from the top ten as of right now, with laggards such as BIDU already having been purged from the list.

#1 ISRG -18.9% YTD
#2 CMG -17.1% YTD
#4 VIP -18.4% YTD
#6 CF -15.2% YTD
#8 SID -11.1% YTD
#10 ATW -16.4% YTD

It is important to remind the reader that the above losses have occurred in just 13 trading days. The recent performance of these IBD 100 stocks demonstrates, among other things, the importance of religiously using some sort of stop loss system, particularly if you're trading momentum stocks. To me, it also illustrates the importance of keeping an eye on the longer term chart when you're trading momentum stocks. Yes, these stocks have been slaughtered over the past few weeks but they are far from being cheap. Each of these stocks has gained a huge percentage over the past year. Furthermore, each one of these stocks had become extremely extended relative to its 200 day moving average by the end of 2007.

As the old cliche goes, "the bigger they are, the harder they fall." For the year 2007, CF more than quadrupled in value. ISRG, SID and CMG each saw their share price triple for the year ended 12/31/07. ATW and VIP each saw its share price more than double in 2007. When one considers these gains over the past year, it sort of puts the sell-off of recent weeks into perspective. You can make money with these stocks, but you can also lose your shirt if you're not diligent about minimizing your losses and, whenever possible, protecting your gains. There's a big difference between a stock being "cheap" as opposed to just "cheaper than it was". Often, your success as an investor depends on knowing the difference.

Nasdaq Still Seeking Bottom

2008-01-11T20:04:00.000-05:00

Just when you think the Nasdaq has printed a bottom, you get a day like today with fairly relentless selling all day long. Yesterday: The Fed to the Rescue! Today: So what!

Even though I am gratefully a bit more direction-neutral these days, my innate bullish sense still prefers when the market is rising. It's just more fun to me that way. That being the case, I look at charts of the major indices every day, particularly the Nasdaq, looking for a clue that a sustained bounce is beginning in earnest. As has been typical since the index posted its high on Halloween 2007, our mid-week bounce was, alas, short-lived. Speaking of that Halloween high, if you'd gone to cash right before you left the office to take your kids trick-or-treating and stayed that way, you would have out-performed the Nasdaq by 14.7% as of today. An investment in QID on 10/31 would have netted you a tidy 31% gain as of today's close. In short, it's obviously been a very good time to be a bear.

The question now is whether the bears are just about done swatting at the bloody carcases of us bulls and ready to disappear back into the woods where they belong. The short answer is "who knows". The wall of fear is obviously very tall at the moment with everybody and his brother whispering about an impending recession, about lackluster retail sales, about a crummy jobs report, about the necessity for Bernanke to come riding in on a white horse. Even a formerly incurable bull like myself is having second thoughts about going long on any stock right now.

From a technical perspective, we've dropped back down to that significant 2350-2400 level. This level, as you'll recall, put up some pretty fierce resistance back in April of 2006 before the market began a three month swoon that saw the Nasdaq drop to just a smidgen over 2000. That pullback coincidentally was 14.7% in three months, or almost precisely how far we've fallen since our Halloween 2007 high. Is this significant? Only in the sense that a drop of almost 15% in such a period of time leaves us in both cases with some pretty over-sold stocks and (hopefully) some very satiated bears.

Is this time different or will 2350-2400 once again serve as a springboard for a nice sustained bull run? I won't be surprised. That said, our current trip back to this support level just feels different. When we returned to this level in March of 2007 and August of 2007, there wasn't the air of an impending and seemingly inevitable recession like there is now. And, I'm having trouble envisioning a catalyst to push stocks higher in the coming weeks that could help us avoid crashing through this 2350 support level and dropping a bit further before we find a bottom.

I have to ask: Is a perma-bull fretting for five paragraphs a bullish or bearish sign?

Click below for a simple chart showing the support and resistance level to which I referred above:

A Simple Option Strategy Reference

2008-01-06T10:03:00.000-05:00

If you're interested in having at your fingertips a simple reference which explains all the basic options trading strategies, I recommend you go here and save the "Options Strategies Quick Guide" to your computer. It's in pdf format.

This guide is produced by The Options Industry Council and contains simple explanations of the profit curve of 25 or 30 different options strategies and lays out the basic impact of increases in volatility and time decay for each. For a novice options trader like me, this guide is pure gold, Jerry.

Shrinking P/E Ratio Screen for January

2008-01-05T14:28:00.000-05:00

I've written several times now about an interesting stock screen I like to run which looks for stocks that have shown a steadily declining P/E ratio over the past year despite rapidly growing revenues and earnings. (For my past posts on the subject click on this link.) I have some ideas about what a steadily declining P/E ratio might be telling us in general but I've lacked sufficient data up until now to scientifically test my theories. In the interest of starting to compile the necessary data to backtest this filter, I intend to run the screen at the beginning of every month during 2008 and to track each stock generated by the filter from that point on.

To that end, the purpose of this post is to share the results of the Shrinking P/E Ratio screen as of now. Please note that I have modified the revenue growth and EPS growth parameters from previous posts on the subject in the interest of generating more stocks to track. I will be consistent with the parameters used in coming months. Click below to see the results and for the screening parameters used:

At the top of January's list of seven stocks is Genentech (DNA). This stock has now appeared on this screen every single time since I began running the screen a year ago. This fact means that DNA's P/E ratio has been declining continuously for at least the past two years. If there were a picture in the stock investing dictionary next to the term "hated stock", it would undoubtedly be the Genentech logo. Given that DNA's P/E ratio is still north of 20, it can still fall a great deal further. That said, one could certainly argue that DNA is due for a bounce, especially now that its projected growth rate is so much higher than its P/E ratio.

Because I like to stick my neck out, I will share here my semi-educated guess as to what we will discover over time about the stocks generated by this filter. My theory can be summed up in two parts:

Stocks with a declining P/E ratio that have posted a low relative strength, that is to say they've performed poorly relative to the universe of stocks, will likely perform poorly going forward. In general, I believe that these low relative strength stocks are disliked by people smarter than me who do not believe that earnings estimates are going to be met. If this is the case, it's actually the E of P/E that's declining as opposed to the P.

On the other hand, stocks with a declining P/E ratio that have posted a high relative strength are much more likely to perform well going forward. My reasoning here is that these are more likely to be stocks that are just being discovered or whose earnings are growing very rapidly and are accelerating or perhaps that the stock is just in a sector whose prospects are improving.

Again, the above bullet points are simply my guess as to what we can expect from stocks that come out of this filter. Time will tell whether relative strength has anything whatsoever to do with how well the stocks perform after they pop out of this filter. I would love to hear other theories as to what a declining P/E ratio is telling us and what we can expect from these stocks after the screener identifies them. Feel free to share your thoughts in the comments section below.

I look forward to sharing the results to this filter every month. Hopefully we can learn something from how these stocks perform.

Totally Meaningless Analysis of the Day

2008-01-02T21:42:00.000-05:00

As regular readers of my blog may recall I often cope with losing money by crunching numbers. For instance, a cruddy day in the markets like today left me with an acute need to analyze some data. To that therapeutic end, here's the question I wanted to answer after the markets closed today:

Does the result of the first trading day of the year hold any predictive value for how the market will perform for the year as a whole?

In order to answer this question I looked at the first trading day of the year for the Nasdaq for each year since its 1971 inception until today and compared the performance of that first day of the year to the full year performance that followed.

Here's some of what I gleaned from this analysis:

There have been 37 first trading days of the year since the inception of the Nasdaq. 19 of those 37 days (or 51.4% of the time) saw the index post a gain. Interestingly, 26 out of 36 of the completed years (or 72.2% of the time) the index posted a gain.

Of the 9,311 trading days since 1971, the Nasdaq has posted a gain 55.9% of the time. The first day of the year is therefore below average on average.

Today's -1.61% return ranks as the third worst first trading day of the year in Nasdaq's history. The only two worse first days of the year occurred in 1980 at -1.965% and 2001 at an astonishing -7.232%.

Interestingly, of the 16 times where the Nasdaq posted a loss on the first trading of the year only three times or 18% of the time has the index proceeded to post a loss for that trading year.

Looking at full year returns since 1971, it is interesting to note that the so-called bull market of recent years (2004-2007) has seen the Nasdaq post returns ranking 24th, 27th, 23rd, and 22nd of the 36 completed years. Bull market or actually below average for the Nasdaq?

So what does this analysis really tell us? Not a whole heck of a lot to be honest with you. The data seems to indicate that the first day of the year doesn't really predict with any accuracy how the market is going to perform for the year. That said, the sample size is still pretty small and a bad opening day does have a bit of a history of leading to a profitable year. I guess time will tell if 2007 is another such year.

There. Despite losing money today I now feel a lot better.

A Couple Stock Picking Contests

2008-01-01T22:04:00.000-05:00

I entered Rajin' Cajun's stock of the year contest for 2008 over at Madstocks. I decided to take a flyer on CYNO because of a number of reasons. From a technical prospective I like that it has pulled back big time but appears to have found a bottom at a previous support level. From a fundamental perspective I like that the company is growing revenues and earnings rapidly, has solid institutional support, and now sports a very modest P/E ratio relative to its growth. I also like that the stock has an extremely high short ratio with 28% of shares sold short. I own CYNO in real life, by the way, having initiated a position during the last couple of days of 2007.

I was also asked to participate in a "Financial Blogger Face-Off" over at SINLetter.com. This contest required me to pick three stocks over $1 as either longs or short sales with the goal of having the highest return as of March 31, 2008. I went with CYNO and ANAD long and ITB as a short sale. I own ANAD in real ife as well for what it's worth. It'll be fun to see how this contest unfolds.

A New Year, A New Approach

2008-01-01T11:24:00.000-05:00

Turning the page of the calendar to a new year often causes people to reflect on their lives and to assess what's working and what's not. Being a fairly introspective person, that type of review process is pretty much an annual tradition for me. To that end, the primary purpose of this post is:

1) to share my somewhat modified investing approach for 2008, and;

2) to better define the purpose of this blog going forward.

A Swing Trader No More: For the entire 15 months that I've been blogging about stocks, the description below "Bullish Jim's Trading Blog" at the top of this page has stated that this blog "focuses mainly on swing trading". Scratch that. After 15 months of trying to trade with hold times of five days or less I've come to the conclusion that I can't do it. I have a day job that I very much like which provides the bulk of the income that houses, feeds, and clothes my family. Frankly, the responsibilities of my day job usually prevent me from being an effective swing trader anyway. Not to mention the fact that my day job deserves my focus without the distraction of watching the stock ticker out of the corner of my eye all day long. The realization that I can't be a swing trader is extremely liberating, I must say.

Full Disclosure No More: Although it was never an official policy of my blog, it was my practice up until a few months ago to share every trade I made and the details of every position I held with the readers of this blog. Forget that as well. It's frankly a time consuming pain in the arse to write about every trade. I'm not trying to sell anybody anything with this blog, therefore I'm officially unburdening myself henceforth of the duty to write about every trade. Likewise, I may or may not share my monthly returns going forward. I may share a good trade or a bad trade after the fact if I think there is a lesson to be learned from it. Even though I won't be sharing every trade, you can rest assured that I will continue to privately over-analyze the crap out of every trade I make during my free time.

My 2008 Investing Approach, In a Nutshell: I may not be a day trader or a swing trader, but I will never be a buy and hold guy either. This means that I will be focusing primarily on intermediate term trading with hold times of weeks to months rather than days. In short, I will continue to be a dabbler and will utilize the following as my primary sources of trading ideas:

1) Stockfetcher screens. I will continue to utilize those screens I find to be reliable in making me money. My favorites are generally related to identifying tops and bottoms.

2) Fundamental screening. My personal favorite free fundamental screener online is the deluxe screener over at MSN.com. I generally use this approach to find stocks that meet a particular requirement related to industry or growth or market cap. I buy these stocks only if and when the technicals are attractive to me.

3) Options Trading. I have dabbled in options trading for years but I plan to make it a bigger part of my portfolio in 2008. My personal bet is that 2008 will once again be a volatile year for traders and, as a result, will provide a very good environment for trading options. Please note that I try not to hold naked option positions, preferring instead to employ spreads where I can protect my downside while cashing in on some premium here and there. Again, I'm not an expert in options trading so I probably won't share my trades in this blog all that often. For good examples of the type of options trading I prefer, I would recommend subscribing to Steve Smith's Options Alerts over at thestreet.com. I use a lot of his specific trade ideas and have learned a bunch about option trading in general from this subscription. I will make a point with my options trading to be direction neutral in 2008 as a means of protecting myself a bit from the huge sell offs that ravaged my returns in 2007.

4) Momentum trading using IBD 100. I continue to subscribe to the web version of the IBD 100 and will continue to review all 100 charts every weekend. My favorite approach is to buy these high flying stocks on pullbacks to their 50 day moving averages. With these stocks I religiously employ stop loss orders and I am not shy about taking profits when they fall in my lap. I try to enter every one of these trades with a very specific plan. (Note: the best thing to me about the web version of the IBD 100 is that I can utilize IBD's research without subjecting myself to the right wing nut-jobbery and general idiocy of their paper edition editorial page. Why would anyone care about IBD's political opinions anyway?)

In short, I will be well diversified and more direction neutral than at any time in the past. I will continue to be biased in favor of fundamentally strong stocks that are in well-defined uptrends. And, I will no longer try to be in and out of trades in five days or less. Sound like a plan?

The Focus of This Blog for 2008: I reserve the right to dabble. I will sometimes write about fundamental screening. I will sometimes write about technical screening. I will write about anything relevant to the four trading approaches I describe above. I will not obligate myself to share all trades I make nor will I feel obligated to disclose my returns.

In short, I hope that my blog continues to serve as a means to interact with other traders. That's been the main objective since the beginning.

I'd like to wish everyone an extremely profitable 2008.

Amazing Shrinking P/E Ratio Redux

2007-12-18T22:10:00.000-05:00

Twice in the past (Feb 2007 and May 2007) I have written about a fundamental screen which identifies stocks that have experienced a constant decrease in P/E ratio over the previous year. Being a bargain hunting bottom feeder at heart, I originally created this screen in an attempt to identify high quality, yet beaten up stocks. The more I think about it, however, the less confident I am that "high quality" has anything to do with it.

Given that I have limited data at this point I can't really draw any conclusions about the effectiveness of the screen. That said I intend to revisit the previous results of this screen in an attempt to learn a thing or two. To that end the purpose of this post is to check in on the stocks that were identified by the screen in February. At some point I hope to add a little science and track every stock that is spit out of this filter for a substantial period of time.

This particular screen places a big premium on growth and steadily falling P/E ratios. In this screen I require volume over 250K per day and the following:

Year over year revenue growth of at least 40%;
Year over year EPS growth of at least 60%;
Trailing P/E ratio higher 1 year ago than it was 6 months ago; Trailing P/E higher 6 months ago than it was a month ago;
P/E higher a month ago than it is today;
And, in order to weed out companies whose declining P/E ratio was due to declining forward EPS, the forward P/E ratio had to be lower than the current P/E ratio.

Let's take a look at how the stocks that popped out of this screen back in February have performed since then. Click below to see a bunch of data:

In my February post I argued that Google, one of the nine stocks that showed up on this screen, looked like it was extremely undervalued. The fact that GOOG has risen 43% since then indicates that it was in fact undervalued at that time.

I also argued back in February that Genentech (DNA) looked like a buy as well. In hindsight, it wasn't. The stock looked cheap to me in February but alas, it's gotten even cheaper, dropping 21% more of its value since then.

I also pointed out that three of the nine stocks were from the then beaten up Oil Drilling & Exploration sector. Interestingly, two of the three (DO and HP) have rocketed higher since then to the tune of 58% and 33%, respectively. The third driller, BRNC has dropped 5% since then. Go figure.

Running the screen once obviously doesn't give us enough information to draw any real conclusions. That said these nine stocks seem to indicate that this screen produces not only high quality stocks like Google but also stocks that are cheap for a reason and getting cheaper. The nine stocks as a whole outperformed the major indices by a wide margin but the huge range in returns- from +58% to -53%- makes the average return of 10.6% almost meaningless.

In my next post on this subject- probably within the next few days- I will check in on the performance of the 17 stocks that came out of this same screen back in May. In addition, I'll share the list of stocks that meet the criteria as of now. I'm still not sure what there is to learn from this screen but I expect that I will learn something.

Flirting with the 50 Day...

2007-12-06T16:36:00.000-05:00

Rarely during 2007 have the major indices sliced through their respective 50 day moving averages from either above or below without at least pausing for a bit. I make note of this fact because the rally of the past two days has left all three major indices either straddling their 50 day moving averages (SP500 and DJIA) or sitting just beneath this moving average (Nasdaq).

Here's the S&P 500 over the past nine months. Note how many times the 50 day moving average has acted as either support (a green arrow) or resistance (a red arrow):

Will the indices once again find the 50 day moving average a good place to take a breather? Or, will we slice right through it this time around? Personally, I'm betting on a brief pause in the next few days before a continuance of our mini year end rally. We shall see I guess...

Santa Claus Rally?

2007-12-04T21:44:00.000-05:00

If we are to have the cliche Santa Claus rally this year we really need to get started already. The only reason I bring this up is because a bunch of retailer stocks showed up on the EMA, 4, 8, 21 crossover screen this evening. This fact may be meaningful on what was a soft day in the market overall.

Of those retailers that popped out of this filter tonight, I like the Macy's chart quite bit. M looks like it might be bouncing after trading at a new two year low recently. Here's the chart:

I don't really think of it as a big Christmas shopping store, but JOSB showed up on the crossover filter as well today and I do like this chart quite a bit. It's another bottom feeder special. Check it out:

TJX and GYMB also popped out of the crossover filter but these two charts don't excite me a whole lot.

Disclaimer: This is not investment advice. It is merely what one risk tolerant know nothing is irresponsibly doing with his own money. Do your own homework before investing in anything.

"Close Below 50 Day Moving Average" Filter

2007-12-03T22:13:00.001-05:00

If I am ever to attain my goal of being more direction neutral in my trading, I need to find some additional reliable short filters. To that end, I have been spending some time of late backtesting a simple Stockfetcher filter I wrote that pulls stocks which close below their 50 day moving average after having spent at least a bit of time above that average. In addition to this requirement, I also demand that the moving average has fallen dramatically- 10% or more- in the past 50 days. The simple logic here is that a stock that has been weak is more likely to make for a successful short sale. And, a close below a significant moving average which is declining rapidly would certainly indicate weakness.

This bit of backtesting fun also allowed me to do one of my favorite things, namely to question conventional wisdom. I did this by comparing the backtesting results of my "close below a declining moving average" filter to a filter that is identical except that the moving average has risen by 10% or more in the past 50 days. Before the backtests, my intuition obviously told me that the declining moving average filter would yield much better results for short sales.

The goal here is to find a short sale filter that performs well even when the market is rising. How did it go? Check out the results by clicking on the graphic below:

Not too bad. Given the particular backtesting parameters I used, the "close below a declining 50 day moving average" filter has beaten the S&P 500 by a wide margin in four of the past six years and trailed by just 0.8% percentage points in another year. Considering that the S&P 500 has gained in five of the past six years, a short filter that returns ROIs in excess of 37% in four of six years is nothing sneeze at.

Interestingly, the "close below a rising 50 day moving average" filter also performed pretty well, eclipsing the S%P 500 in four of six years and trailing by a small margin in a fifth year. This filter is generally inferior to the declining moving average filter, but it isn't too shabby in its own right.

There are obviously a million variables we could add to this short sale filter. I will continue to tinker with it to improve upon my odds of making money with it. If any reader is interested in tinkering with the filter to make it better I would be thrilled to collaborate. I will copy the Stockfetcher language into a comment for ease of copying and pasting if anyone is interested.

Have Financial Stocks Bottomed?

2007-12-01T09:30:00.000-05:00

You would have had to have been living under a rock this week to have missed Jim Cramer's "bottom call" for the much beaten down financial sector. Cramer sees the current situation- namely the Fed starting to cut rates and Abu Dhabi injecting massive cash into Citigroup (C)- as being the same playbook that led to a bottom and a subsequent long bull rally in financials beginning back in 1990.

As someone who likes to have lots of quantifiable data to back my decisions, I will admit that I get a little bit of heartburn over the fact that JC is calling a bottom based on an historical sample size of one. And, my personal opinion is that we still have a while to go before the banks are done writing down their sub-prime paper. Not to mention that I think the housing bear market has a long way to go and that the financial sector is exposed both to elevated default risk and by depressed demand for mortgages going forward. There's also the question of whether inflation risk will allow the Fed to lower rates at the pace that Wall Street is demanding; if not, financials will likely suffer more than most sectors. I won't even acknowledge at this point the danger of the elephant in the room, namely the risk associated with the massive amount of consumer debt sitting on the average American family's balance sheet. (I guess I did just acknowledge that risk, didn't I?)

All of the above fretting aside, the swing trading chart chomper in me very much likes the financials right now. As far as the eye can see, financial stocks crossed over their EMA 4, 8, and 21 over the past few days. While not a guarantee of a "bottom" per se, this crossover backtests very well and is a pretty solid measure of a stock that has begun rising after a fall. (I have to give a hat tip here to long lost blogger guru Marlyn Trades for teaching me this crossover.) In short, I've taken a flyer on charts not nearly as strong as those of the financials right now.

For examples of financial stocks that crossed over their EMA 4, 8, and 21 over the past few days see BAC, WB, HBAN, JPM, FITB, and UBS to name a few. Interestingly, HBC and the aforementioned Citigroup haven't yet crossed above their respective EMA 21s but should shortly if this rally in the financials is for real.

So, how do I play the financials now given my concern about company-specific risk in the near term going forward? With ETF's of course! Because I think we could be seeing more write-downs in the near term from individual banks, I'd rather avoid if possible the Russian Roulette of buying a specific financial stock right now. Instead, buying something like XLF gives me exposure in the sector while watering down the risk a little bit.

The XLF chart below shows the crossover of the EMA 4, 8, and 21 over the past few days that I referenced above. My personal upside target for this swing trade will be the 200 day moving average or approximately $34.50. My clue that the trade isn't working and that I need to sell will be either a cross-under of these same EMAs or a specific stop loss (6% or 8% in my case) being triggered.

I'll let Cramer prognosticate as to whether this is a long term bullish signal for the financials or not. As a short term trader, I see the financials as a good buy for the coming weeks but not necessarily as a long term buy. And, I will absolutely not stray from my strict position sizing rules with this buy and as such will be putting considerably less than 20% of my equity into this trade. Lastly, if for some reason we see a gap down at the open Monday that takes us below the EMA 21, I will not even initiate this position. We'll see how it all plays out.

Disclaimer: This is not investment advice. It is merely what one risk tolerant know nothing is irresponsibly doing with his own money. Do your own homework before investing in anything.

Two Big Up Days... and Then What?

2007-11-28T20:41:00.000-05:00

The 4.8% rise posted by the NASDAQ over the past two days felt significant to me so I thought I'd analyze some data. In digging through the numbers, I wanted to determine how significant this two day bounce is from an historical perspective and also to take a look at what has happened next after similar two day bounces in the past.

In order to perform this exercise I started by downloading daily NASDAQ pricing from 1971 through today from my beloved Yahoo! Finance. The historical pricing option on Yahoo! Finance, in case you're not aware, allows you to download reams of very cool data into an Excel spreadsheet. Once in a spreadsheet it's easy to add all sort of columns of your choice that calculate interesting tidbits such as how the index performed for specified periods of time before and after a particular event.

As my gut instinct had told me, the 4.8% rise of the past two days IS significant. Out of almost 9,300 trading days since 1971, there have only been 94 occasions when a two day gain of more than 4.8% has occurred. This puts the NASDAQ's performance over the past couple of days in the 99th percentile of two day gains. Interesting, but what typically happens next after such a rise? And what type of performance typically leads up to such a two day gain?

In order to put the bounce of the previous two days into perspective I looked at all two days gains of 4% or more since 1971. Here's what I found:

All two day gains of 4% or more since 1971:

Sample size = 155
Avg 20 day change before the 2 day period = -5.12%
Avg 10 day change before the 2 day period = -3.98%
Avg next day return after the 2 day period = -0.21%
Avg 2 day return after the 2 day period = -0.07%
Avg 10 day return after the 2 day period = -0.06%

The average daily gain of the NASDAQ is 0.04% since 1971 so these results for the 1, 2, and 10 day periods following the two day gains of 4% or more are quite meaningful. In short, the big two day gains in the sample are typically preceded by significant weakness in the market for both the 10 and 20 day periods. And, following the big two day gains, the index on average performs below par for the next day, the next two days, and the next 10 days following the big two day gains.

My findings from this little analysis didn't surprise me in the least. The market likes to move much like a pendulum. Extreme negative movements tend to be followed by big bounces. Big gains tend to precede big falls. What we experienced in the NASDAQ over the past month clearly was an extreme pullback. As is her habit, Mother market has a tendency to bounce fairly decisively after such pullbacks. And, having bounced a large amount in a short period of time, the market then tends to take back some of that gain shortly thereafter. It's all wonderfully predictable in a crazy, unpredictable sort of way.

A Port in a Storm?

2007-11-20T21:37:00.000-05:00

As anyone reading this post is acutely aware, the US stock market went completely in the crapper about nine trading days ago and has yet to recover. I've been stubbornly, stupidly bullish this entire time and have, as a result, lost a pretty sizable chunk of my hard-earned money. In addition to being blindly bullish, I have also managed to make some very bad choices in the specific stocks Ive chosen to buy during this pullback. In short, I am in the midst of a losing streak that I care not to relive any time soon.

In the interest of perhaps stopping the bleeding from my brokerage account, I'm spending this evening with an ice cold Stella or two whilst I look for some stocks that have actually performed well over the past ten days. My thinking is that stocks that have risen during a ten day period that saw the Nasdaq drop 8.1% must really want to rise. I may well swap into some of these stocks tomorrow.

Anyway, the simple stockfetcher filter I'm tinkering with this evening screens for stocks that have risen each of the past three days and where today's close was at least 3% higher than the close 3 days ago. In addition I required that today's close be at least 5% higher than its close 10 days ago. In short, these are stocks that have outperformed the Nasdaq by 13% in two weeks of trading. Hey, I'll give anything a try at this point.

Here are the nine stocks trading between $15 and $35 with average daily volumes of at least 100,000 shares:

EPAX (Strong for 10 days? Yes. The past month? Down 54%)
HE (Would need to pierce through 200 day MA before I'd buy)
TECUA ($20 has been resistance; needs to rise above before I'd buy)
VTAL (Looks to me like it has room to rise)
JAS (Retail scares the snot out of me right now, I must admit)
BRNC (Crossed above 200 day MA. Might be interesting)
JTX (Extended but traded above previous resistance today on BIG volume)
ENS (Jiminy crickets! This stock is flying!)
DM (Not as dramatic as some, but I like this chart)

Given my recent run of luck you might be wise to short sell each of these stocks in large quantities.

Disclaimer: This is not investment advice. It is merely what one risk tolerant know nothing is irresponsibly doing with his own money. Do your own homework before investing in anything.

The Pullback: A Bull's Perspective

2007-11-18T15:40:00.000-05:00

As much as I claim to aspire to be "direction neutral" when it comes to the stock market, the fact of the matter is that I am an incurable bull. For better or worse, I am wired to look for stocks to buy, not for stocks to sell. Sometimes this personality quirk, as has been the case during the market weakness of recent weeks, borders on being a personality fault. Simply put, being direction neutral during the past few weeks would have softened my losses substantially. That said, if I hadn't been bullish for the previous three years my gains would have been watered down dramatically overall.

The previous paragraph about my chronic pig-headed bullishness serves as full disclosure of my personal bias and is a "heads up" to any reader that mine are not the thoughts of an objective person. I suppose my nom de plume might have been a clue about my leanings as well. Hey, if you're looking for objectivity, go watch Fox News.

Alright, you've been properly warned that this post is all about how this particular bull views the current pullback. To get started, please click on the low budget graphic below for my top level thoughts about the current chart of the Dow Jones Industrial Average:

My notes on the chart are pretty self-explanatory but I'd like to expand on a few themes if I may:

First, the 200 day moving average is still in a well-defined uptrend and the index is still trading north of the very significant 12,800 support level.
Second, the current trip below the 200 day moving average is hardly unprecedented. Take July 2006 as an example: if you'd listened to the bears then and pulled all your money out of the market you'd have missed a 20% rise in the Dow over the ensuing 7 months.
Third, when the index gets too far extended from its 200 day moving average, it will eventually pull back. Small pullbacks generally follow small rallies. Big pullbacks generally follow big rallies. In either case, the index likes to return to its more reasonably sloped trend line from time to time.

In short, my view is that as long as 12,800 on the DJIA holds, this bull market is intact. And, if this bull market is still alive, then this is simply a fantastic time to buy stocks. There, I said it. Yes, the market is dealing with some serious concerns right now due to runaway oil prices, the bursting of the housing bubble, and the credit and liquidity crisis. That said, these areas of concern have been well known to everyone and his mother for much of 2007. The clouds that are hanging over our heads today are pretty much the same clouds (albeit a bit grayer and more ominous) that we chose to ignore from March to July as we pushed the Dow up nearly 2000 points.

Have the stories of the death of this bull market been exaggerated? I'm betting "yes". And I'm putting my money where my mouth is. Risky? Yes, but the best times to buy historically have always been gutsy times to buy.

Disclaimer: This is not investment advice. It is merely what one risk tolerant know nothing is irresponsibly doing with his own money. Do your own homework before investing in anything.

Homework

2007-11-14T21:44:00.000-05:00

I am having a miserable November in the market and it is taking its toll on my enthusiasm for trading and for blogging about trading. That said the stock trading game is all about having a process and sticking to it day after day through thick and thin. If you're a fundamental trader that means setting aside time to read analyst reports and financial statements. If you're a swing trading chart monkey like me, homework means running my screens and looking at charts every day in an effort to identify a list of stocks that appear buyable to me.

The following is my homework for this evening. The bold heading in each case is the screen I used to find the stocks mentioned below that particular heading. Some are stocks that I would buy now; others are ones I intend to watch for a potential entry. With the market down on the day my filters generate fewer results, and that's a good thing. Keep in mind that I haven't checked any of the following stocks to see when earnings are next released. I would absolutely do so before buying any of them.

Near 200 day Moving Avg:

AMP (reclaimed 200 day; may be good for a couple of bucks)

IR (may be bouncing off 200 day MA)

AXS ( I really like this chart)

BOB:

GTLS (down 20% in 6 days then a high volume bounce on a down market day. Like it.)

DWA (near previous support level and 200 day MA)

PWR (BOB at 200 day MA. Bought some at close today)

ZINC

And that's my whole list for tonight.

Disclaimer: This is not investment advice. It is merely what one risk tolerant know nothing is irresponsibly doing with his own money. Do your own homework before investing in anything.

Bullish Jim's Trading Blog

The Resurrection of Technical Trading?

I'm Still Alive

When Wasn't It A Mess?

The Death Pool: Wall Street Edition

"Better Than Its Peers" Filter

Unfocused Weekend Ramblings

Shrinking P/E Ratio Screen for February

Buying Support at the 200 day Moving Average

A REALLY Bad Time to Chase Momentum

Nasdaq Still Seeking Bottom

A Simple Option Strategy Reference

Shrinking P/E Ratio Screen for January

Totally Meaningless Analysis of the Day

A Couple Stock Picking Contests

A New Year, A New Approach

Amazing Shrinking P/E Ratio Redux

Flirting with the 50 Day...

Santa Claus Rally?

"Close Below 50 Day Moving Average" Filter

Have Financial Stocks Bottomed?

Two Big Up Days... and Then What?

Recommended Reading re Starbucks

A Port in a Storm?

The Pullback: A Bull's Perspective

Homework