So here we are at last - four days into the real test of Operation Certain Poverty. Before I begin with the analysis in this here new home for the project, I would like to update everyone on the positions I'm testing, explain where/how I'm testing them, and then piece-by-piece we will examine what's going on and where the plan is to go from here. Consequently, let us being with the foundation - the position list:
Currently held positions -
- EGAN, Eagain Communications Corp - currently down .12
- BYD, Boyd Gaming Corp - currently up .11
- NM, Navios Maritime Holdings Inc - currently down .03
- WAG, Walgreen Co. - currently up .33
- DSS, Document Security Systems Inc - currently up .17
- ACY, Aerocentury Corp - currently up .42
- CWCO, Consolidated Water Company Inc - currently down .02
- SVVC, Firsthand Tech Shs - currently down .83
- GNCMA, General Communications Inc - currently down .10
- CEDC, Central European Distribution Corp - currently down .10
- CHMT, Chemtura Corp - currently down .27
- BECN, Beacon Roofing Supply Inc. - currently down .80
- CLH, Clean Harbors Inc. - currently down .67
- ANAC, Anacor Pharmaceuticals Inc. - currently down .06
- LBY, Libbey Inc. - currently down .13
- BIOC, BioClinica Inc. - currently down .13
- STLD, Steel Dynamics Inc. - currently down .53
- MNTX, Manitex International Inc. - currently down .15
- ADAT, Authentidate Holding Corp - currently down .05
- ARSD, Arabian-American Development Co. - currently down .43
Hoy - that's a mighty list of stocks to write out, lemme tell ya. Anyway, onto the list of technical details so those who wish to follow allow with their own experiments, may do so. Presently, all trades are being run with Wall Street Survivor's stock market simulator. Point & Figure Charts provided by StockCharts.com and the images which will henceforth be posted on this created by Microsoft Paint and hosted by a combination of Blogger itself as well as Photobucket for my Facebook updates. When I begin exploring options, I will be doing so using the OptionsOracle program.
With that outta the way we move to the above listed stocks. You'll notice they are not all the same color. With any trade you or I may engage in - there are only three outcomes to the trade. You make money, you lose money, or the stock loses value but not enough to cost you money (yet.) In the above list, stocks in green I made money in, stocks in yellow lost value but not enough to erase my gains, and the stocks in red lost money. As you can see, I barely had more green/yellow stocks than I did red ones. Consequently my goal for day three trading (protecting my portfolio from the losses I was taking on my Libbey position) was accomplished.
Lingo translation for those who know nothing about the market:
When you invest, your money is organized into what is known as a Portfolio. This portfolio is an ongoing record of your trades (known as positions) and how they're performing. The portfolio, being your money, should be protected at all times. If you lose money you lose funds from your portfolio. Lose it all, and it's game over. Henceforth people use a great number of ways to protect their portfolios so that they'll never risk losing their money.
To the left is the graph that shows the performance of my Portfolio right now. This is the path I was headed towards if I didn't diversify. And by diversify I mean spread my positions across multiple companies in VERY DIFFERENT industries so that if one has a bad day the others might not necessarily have one. My current investment strategy has cut my loss rate almost 70% - not bad for a first step.
The question is what to do about Greece. Some, once more, view Greece as the harbinger of doom. Mere sensationalism. This is no different than what happened last year. If Greece is thrown out of the EU the market's will recover since it's not a shock. The world's really hoping Greece turns out okay... but if they don't want our help on our terms then it's their choice. Lets us save our cash for our own problems. Works for everyone either way. I am tempted to buy more stocks now to prepare additional hedging... that's what my mind tells me to do. But my intuition tells me it's too late and my experience tells me if Greece does cause markets to fall my existing Plan B will be sufficient.
Lingo translation:
It may sound harsh to say the poor, huddled masses in Greece aren't important in the grand scheme of things... but only lies are told softly. They aren't and never will be as important as the EU to global recovery. But investors want Greece to succeed because if it does it gives us hope everyone else will solve their problems too. The recovery is not put in danger by Greek stupidity - but investor confidence is. In the short-term, investor confidence means everything.
Greece aside - a downturn in the market should never, ever be a cause for you to withdraw your money from the market completely. There is a difference between protecting yourself and being a Goddamned coward. Gravity works - but knowing that a basketball has to come down to Earth never stopped anyone in the NBA from trying a three-pointer. Similarly - being an investor means that you must recognize that every stock which rises MUST fall. That is the natural cycle of things and the only time you should be worried is when your stock hasn't fallen in years. The longer the growth, the greater the fall.
The reason is because every stock you bought was one somebody else didn't want for some reason. That sale dropped the stock's value - your purchase brought it back up. When more people are buying than selling - price goes up. But once the price goes up far enough people want to cash in their winnings and they can only do that by selling. Henceforth, former buyers become sellers - each sale decreasing the value of the stock. This is why buyers are called Bulls, and sellers are known as Bears. Bulls relentlessly push a stock towards its potentials, while Bears are trying to protect themselves by always cashing in when it is opportune to do so.
Lingo translation:
Remember earlier when I said investor sentiment is everything in the short-term only? If a stock is being sold, investors assume there is a reason why. If it's going up, people also assume there is a reason why. And usually - such a reason does exist. If you invest money your profits only come from the sale of stocks whose value has gone up. Hence the phrase "nobody ever went broke taking profits." But eventually these sales will have dropped the price so much that the price becomes a bargain. A new group of investors will buy in again, repeating the cycle that every stock goes through.
Okay, at this point you may think I've lost my original point and I'm rambling, right? Oh-ho; not so my friends. In fact, this is all building up to my aforementioned Plan B. God has an annoying way of denying me an easy life, so I've developed a habit of always assuming something is going to go wrong. In this case it was Greece. Last year I let myself become Bearish with Libbey because I had gone all-in and had no assets left to try and position myself with. I sold a stock I no longer wanted. But somebody else bought it - thinking that Libbey had been sold enough and would soon rise. Exactly 24 hours (to the minute) of my sale Libbey's stock entered a Bull rally and continued into the New Year.
I learned then that running away from bad positions isn't my style. And so this time I kept cash in reserve to spend later when the market shows sign of recovery. What good would this do, you may ask? Well - it's simple really: if I buy 100 shares of a stock at $1.50 a share I spend about $150 on those shares (meaning I hold $150 worth of stocks.) But what if the price of that stock fell to just $1? My 100 shares are now only worth $100. Obviously this is bad... but what if I, brazenly enough, bought another 100 shares of that stock at $100? I've spent another $100 dollars, so now I hold 200 shares total, at a combined value of $200, but I spent $250 so far to get them.
However, I bought those additional shares on the expectation that soon the price would rise up. Let's say I was right and the stock did rise... but only to $1.25. My first 100 shares are only worth $125, however, the second is worth $125 too. I have now spent $250 and achieved $250 dollars in value - erasing my losses even though I'm still losing money on the first set of shares. Even better - let's say another modest increase occurs to $1.30 a share. Again, I'm losing money on the $1.50 shares (now worth $130 versus their original $150) but the $30 profit on the second lot (100 shares of any stock = a lot) nets me a total profit of $260. I have now, finally, made money - spending $250 to make $260.
Lingo translation:
The above paragraph is attempting to explain the concept of leverage as a means of protecting your portfolio. The logic to it is undeniable. You use it every day. Consider gas prices. You could buy more gas at $1.00 per gallon than at $5 or $10. Investing expands on this idea by inflation. In the above example you're losing money because the stock is worth less. But that also means that you can buy MORE VALUABLE shares for LESS money. If timed for a rebound in the stock - those cheaper shares will rise in value and cover your losses.
All forms of portfolio protection make use of some form of leverage. But all forms of leverage imply risk and should not be used without a plan for using them at the proper time.
Thus we come to Plan B. How much I lose initially doesn't matter if I have enough cash on hand to cover it with cheaper, leveraged shares later. But I'll never have a chance to use my cash reserves if Libbey drains my portfolio of all its value. You have thus far learned that protecting your portfolio is everything, investor confidence is everything, that all stocks which go down will eventually go up again, and that if timed correctly leveraged stocks can make up for nearly any loss. What's true for you is no less true for me. But I have no idea WHEN Libbey will turn around, only that it can be anywhere within 1-4 months from now.
In the interim, Plan B calls for hedging to protect me from further losses.
Lingo translation:
Hedging is used in the same way as leveraging but for the specific goal of covering for expected losses. Remember all markets go up and down every single day. Therefore even if 50% of your positions lose, the other 50% have won - balancing your losses and keeping you in the game. In my portfolio yesterday 55% of stocks won - covering for the 45% who lost, in part. Proper hedging can absorb major losses and prevent otherwise bad decisions from taking everything away from you.
The twenty stocks I picked above cover a sampling of every major industrial field traded in America. They offer me the protection of hedging while I wait for risky bets like Libbey to bear fruit. Greece complicates this, as stocks like EGAN, NM, and CEDC were ones I counted on to rise and instead, failed. Putting my backup plan in jeopardy. But, they still rose above the price I bought them at and so, helped save my ass from the fire. My story is the perfect illustration of successful hedging. Even if not at its full potential - it worked. This is exactly the reason for my Plan B to begin with, and now that you understand the factors that led to my present situation now would be the opportune time to finish explaining what Plan B is:
Plan B is a simple leveraged play on depressed stocks. By holding cash in a large reserve (roughly half my portfolio) I intend to aggressively counter-attack my losses at such a time as the stocks show signs of a rally. I can afford this because no individual investment exceeds 5% of the total value of my portfolio - making the math fairly simple to process. 50% cash reserves covering for a maximum 5% loss at a nearly 10-to-1 ratio. I don't need anywhere near my full cash reserves to protect me from losses in Libbey - or Hell, any stock of mine. In fact, at a 50% reserve, with an average 50/50 split on winning/losing stocks and with each stock representing only 5% of my total value - my reserves should ALWAYS be able to cover my positions in an average market.
It's remarkably like hot potato, only this game is played with stocks. Let's say Libbey loses a third of its value and trades at $10.00 a share. I bought in at around $15.00 for 100 shares. $1,500 investment now reduced to $1000 value. Let's say it continued on an unchecked plummet all the way to $1. Do I sell? No. If I deployed my entire reserve (about $15,000) at that point, I'd WELL exceed my losses.
You control how much you spend, always. If you dump 50% of your portfolio into a single stock, though, this doesn't work. Your portfolio doesn't have a money tree in it that just keeps on generating free cash. Therefore, if you've put all your eggs in one basket and it turns against you the other 50% won't grow fast enough to cover the growing losses. But if you hedge the positions correctly - you can dangle your money into some pretty steep losses without losing your protective buffer in case things go wrong. Percentages control mobility - the less your exposed to risk the greater mobility you have in responding to a bad situation.
Lingo translation:
It's common sense that a huge task divided up between multiple people gets done easier and with less risk. Stocks are the same thing. You know there's a very good chance you're going to bet on the wrong stocks 50% of the time and that's a pretty big risk to take. However, it is easier to recover from 10 stocks losing $10 than it is to deal with one stock losing $100. The reason is leverage - it is quicker to position yourself to earn $10 as opposed to $100. And in most cases if a stock is really crashing you need to get out as soon as you can. You can't do that if you're praying for a $90 windfall that, BTW, will never come from a crashing stock.
For now I've taken to calling it the 5-5-5 (Five-Fifty-Five) Plan in honor of the terrific failure of a Presidential Candidate Hermain Cain's 9-9-9 Plan. Simply because that is a simple, functional name for it. Half of your portfolio should be invested into 20 or so five percent investments, leaving the other half in reserve for damage control and investments of opportunity as part of my 5-5-5 Plan. As part of this, each of my chosen stocks above has a specific role to play in that plan.
So without further ado, let's get started:
The first stock is EAGN - chosen because it is currently trending in a Bullish direction. Take a look first at Wall Street Survivor's (hereafter known as WSS') charts for it.
Not much to look at - I know. But remember you can't expect to win every trade, a little bit of loss on odd days is an eternal possibility. Here I acted on two recommendations from both my own investigations and WSS' data. WSS' technical analysis partners, recognia, declared this chart as forming what is known as a Bullish Continuation Diamond. Admittedly, at first I doubted the formation until I realized it was a nearly six month (and thus VERY elongated) diamond pattern. I've highlighted the pattern for you below.
As you can see - it is a diamond. Those black bars underneath show the volume (number) of shares traded during the six-month period of this chart. Each spike in their height means more people were trading the stock at these times. But beyond that what's more important is that at each point the Volume spiked we had a corresponding rally in the stock followed by a retraction. That confirms the validity of the pattern. But that is but one part of the story of why I selected EAGN for this trial. I also did my own analysis which sealed the deal for me as shown below.
Side-by-side this P&F chart shows a much different view of EAGN's stock. The lighter, thin red lines are bollinger bands, indicating average movements of the stock's price over time. The dark red line is a previous downtrend line while the blue one is the current uptrend. Though no technical pattern exists in this chart - the convergence of the bands demonstrates a price consolidation. If that's true, then it is supporting evidence that EAGN is about to break out of its diamond pattern into a further bull run. And if it does, I have a price target:
Granted, expecting it to more than double its price soon is unrealistic - but even at just half of that price we're talking a dollar increase or more. That's a handsome profit to be made.
Lingo translation:
Two different charting styles each provided supporting evidence of each others' claims. Those claims further go on to predict a stock whose value will nearly double all the while supported by strong fundamental ratings and analyst reviews (including mine.) Even if the rally goes only half as far as predicted - I still make money. Such strong support makes its inclusion a no-brainer.
Next up, is BYD:
Boyd Gaming Corporation was chosen for the happy convergence of patterns from both styles of charting. Even better - both patterns are Bullish!
Volume considerations once again take a primary importance here. However - so too does timing. recognia has named BYD as being in a Bullish Bottom Triangle pattern, which is a short-term and modestly beneficial pattern for it to take on. What concerned me, however, is that Triangles should be shortening as they near their apex - this is not. However, the pattern started three months ago so it's possible I'm witnessing the very start of the pattern. Either way, I'm relying on the P&F charting to support this data.
BYD's stock has mounted a double-top breakout in the P&F chart, signalling that a much more significant move towards a long-term pattern is beginning. If that is so it also may indicate that this rally will be very short-lived. But that's ok. BYD is a short-term opportunity to accrue quick cash, nothing more.
NM:
Navios Maritime Holdings Incorporated is a long-term play. For now, I'm scalping some cash off of a predicted move from $4 a share to $6 - but more importantly NM seems to be in the grip of a support line at $1 and a resistance line at $7. More importantly the stock is offering a 6% dividend to shareholders. This provides an interesting scalping opportunity in the intermediate-term while still offering significant long-term dividend growth. If NM avoids becoming a penny stock - I very much like its technical position, warranting significant amounts of further research.
This time the bottom graph uses the MACD indicator. The details are not important - what is important that as you can see from the chart above every time the MACD's blue line crosses on top of the red - there is a rally in the stock. Even better, MACD shows volume increasing as well - lending strength to its rally. In another exciting moment of Bullish double-chart pattern agreement, the P&F chart also shows a strong Bullish play in store for NM.
NM hasn't reversed its P&F downtrend, yet, however a move to $6 would reverse the downtrend and give me my cash. There is clear Bear presence in this stock - so it's likely it will continue to struggle to break a temporary resistance line at $4. If it does, we'll be in sweet positioning for a dividend growth play. Much is due to be watched for, here.
Lingo translation:
This is a perfect illustration of why even stocks with excellent potential may not break resistance and end up costing you money. Be wary of "hot tips." This is why. Even though I see NM has clear potential - the P&F chart makes it clear that a lot of people don't think NM is worth more than $4. It's challenged that line three times and failed to make it. I think it can, but that's only my opinion. I'm fighting some strong Bearish headwinds. Don't be afraid to make judgement calls like this; after all, technicals and fundamentals are good for NM. Just approach them carefully.
And we're trucking right along with (heh) Walgreens:
Walgreens is secondary long-term play if NM does not pan out. Offering a paltry 2.6% dividend it nonetheless is riding on strong technical signs of a consolidation and rally. If NM does pan out Walgreens is a safer alternative for some dividend cash.
WAG is showing a strong rallying sign, and the P&F Chart calls for a nearly $10 jump in price on this move. If it happens, it would be a wonderful intermediate-term play.
Another case of significant resistance - however also signs of a possible Triangle or Pennant action ongoing. Either way, WAG is clearly consolidating for a rally - the only question is if it'll be Bull or Bear.
Next, DSS:
Honestly - the charts tell the story here.
As if THAT wasn't convincing enough, let's go to the P&F where DSS ruthlessly bitchslapped its prior downtrend.
The widening Bollinger Bands here gives this rally plenty of space to move and the analysts on WSS seem to have completely missed this little gem. With a near doubling of DSS' price projected this is an aggressive short-term play for big benefits.
ACY's turn:
ACY is not a long-term play. This stock is low-cap and it is also facing Bearish headwinds like none I've seen before. Profit target is set right on a major downtrend line, and will not signal a breakout. Likely that this is just a relief rally, but still, I'm gonna ride it.
CWCO:
If up until now you've thought I place an unusual bias on trusting the P&F data - this here stock will shine some light on the reality. WSS charts have CWCO on the way up, P&F charting has it on a drift. CWCO clearly has significant support at $8 a share, and given it's fighting to hold that level I've entered it despite P&F's call for a drop in price to $4.50.
And onto the "Expected Hot Potato of the Week," SVVC:
SVVC is an extremely young company. I picked them because they're virtually unknown but the WSS charting suggested they were really underbought and an imposing P&F price target of, get this, $61 from its current $22! Nearly triple its present value for a newly traded company at such low volume? I couldn't pass this one up.
GNCMA:
GNCMA clearly showed a breakout from its downtrend. As it is clearly trending with a $7 price target off of its P&F charting I picked this one up as a possible intermediate play.
CEDC:
CEDC is weird - technical and fundamental analysis CLEARLY showed the trend is Bull on a ridiculously overpowered Bear run on CEDC. Yet, it fell. I suspect Bears were scalping points on the relief rally, keep the price artifically deflated since they don't believe CEDC will really climb its way back up top. Price target here is $10, but it needs $15 to break the downtrend it's in. Long-term play, because as far as technicals go... it SCREAMS oversold.
CHMT:
Although the MACD is weakening on lowering volume - the P&F remains above the old downtrend. A short-term play to capitalize on a projected rise to $10 a share from $5.
BECN:
Very dissapointed with BECN. The P&F chart is very Bullish here, but the WSS charts are showing weakening momentum for this severely oversold stock. Hopefully the Volume will come back.
CLH:
Lost volume suggests sellers were taking profits and going elsewhere, depressing the stock. This weakens the MACD but doesn't change the P&F forecasts.
ANAC:
Lower volume, probably Greek fallout. I'm not sure why though - it was a VERY big volume drop.
LBY:
Ah, Libbey Glass. Shrinking volume is the culprit here, again. Much more modestly than the others, though.
BIOC:
Volume held steady here, all indicators remain fine... not sure why it dropped. Can only guess a sentimental reason - but damn.
STLD:
Everyone likes STLD - leading me to think the Bulls who bought in at $6 took their money now that it's at $15, hitting the stock hard. But with the highest analyst recommendations I've yet seen this stock should start rising. Moreover, it is my second dividend pick - I thought it was stable and with a nifty 2.6% dividend yield for such a highly recommended stock.
MNTX:
Another case of everyone loving a stock - P&F shows clear outperformance ahead for this stock. Recent problems and stalling I suspect to be sell-offs as Bulls take profits from the rally at .50 cents to sell at $6.50.
ADAT:
I'm really, really confused by ADAT's losses. It's holding a clear support level but can't break out. There's some obsessive Bears around this stock...
ARSD:
Long-term play here on a technical pennant pattern. Could quadruple its price, making it my highest potential earner right now. We'll see what happens and if it can recover.
Overall, right now I'm waiting to see what happens after market open on Monday. For now, I think I'm going to let the market run through the Greek problems, then consolidate if needed.
