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John V.
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My methodology is based on William O'Neil's brilliant book "How to Make Money in Stocks" and I'm constantly searching for super-winning stocks. I utilize the CANSLIM strategy popularized by O'Neil and I've added minor modifications to suit my needs. The steps in my process are: 1.... More
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  • Duck and Cover 0 comments
    Jun 10, 2011 9:51 PM | about stocks: SODA, SINA, HLF, NFLX, YOKU, PII, FOSL

    "Duck and Cover!" is what schoolkids were taught back in the 1950's in the rare case of an atomic attack by the Russians.  The kids were told that if they see the flash of a nuclear bomb then they should 'Duck and Cover' to avoid getting hit by glass, debris, or other types of things flying around.  Obviously it would not actually have done much good if a nuclear attack occurred but it was still better than doing nothing.  Yes, I watch the History Channel.

     

    The reason I mention this is that 'Duck and Cover' also seems like the right response for what to do in the market right now as lately we have had a vicious sell-off over the last eight days.  Many stocks have been hit hard and almost everything is either down, broken, or so weak that investors have to be wondering what freight train ran into them.

     

    The majority of people in the market are never really taught how to 'Duck and Cover' when it comes to their investments.  To me the term means that the best way to avoid getting hit by flying market debris is to develop sell-rules for telling you when to get out if the market goes bad like it is now.  Those investors that don't have sell-rules have no way of know when to 'Duck and Cover' and are now being pelted by what seems to be a never-ending wave of sellers and bad news.

     

    Trader-types who do have sell-rules are probably in cash and out of the market by now.  Investors who have big gains are also doing fine because a 10% pull-back means nothing when you're sitting on 200% gains.  Thus the person who is really in the most trouble is the investor who either does not have a profit-cushion to soften the blow from down days, or they do not have a system for identifying when to sell.  Thus they probably are losing money hand over fist on the stocks that they own.

     

    One should always have an action plan ready for handling bad markets like these.  My action plan is to follow my buy and sell rules as they have proven to be robust enough to get me in when the opportunity is good, and to get me out when times are bad.

     

    Do you have a system for selling?  I hope so as it will save you a lot of grief.

     

    Right now I only own two stocks which puts me in the curious position of being long in a down-market.  I do have stop-loss 'triggers' in place on both of them, so if the price goes down and hits the trigger-price I entered then a sell order will be generated and I'll be sold out.  It is not a perfect system but I feel protected in case something bad does happen.

     

    To my surprise neither of my triggers was activated today despite all the selling going on.  I am pessimistic that my stocks will hold up but hey, if they don't sell-off in the midst of a vicious downturn then maybe they are stronger then I thought.  That's the optimist in me and I hope it is true.

     

    I feel that stocks are meant to be traded and not held for long periods, but if you want to be a buy and hold investor then you have to develop tools for that style as well, otherwise you are using the system referred to as 'Buy and Pray'.  I used to aspire to be a mutual-fund portfolio manager but now I'm glad I'm not as the job of managing portfolios of hundreds of stocks is just too hard.

     

    Corrections like the one we are in now are normal but what is scary about this one is how one-sided the trading has been.  The good news is that corrections are ultimately healthy for the market as they weed out the weak stocks and replace them with strong ones.  The only real problem for those on the sidelines with cash is resisting the urge to transact until the proper signal is given.  This can be extremely difficult as most people don't like sitting around and waiting.

     

    To see how bad the recent damage has been let's taker a look at some charts.  There are also a few promising names that are trying to resist the downward pressure and we can check on them too:

     

    First let's look at the Nasdaq index.  This is one ugly chart and the good news is few and far between.  I also included a monthly chart as lo and behold, the Nasdaq bumped picture perfect where it was in 2007 before declining into the crises of the last few years.  It can't be a coincidence, can it?

    One area of pain in the market has been with Chinese stocks.  They used to be big winners but now they are awful and should be avoided at all costs.  The first is Sina.com (NASDAQ: SINA) which is the "Chinese Twitter".  What a difference two months and a loss of 44% can do.  This stock is very broken so please avoid it.

     

    If you thought SINA was bad then take a look at Yoku (NASDAQ: YOKU) which is the Chinese equivalent of YouTube.  This one is down only 55% in about six weeks or so.  Another one to avoid at all costs.

     

    One stock that is nowhere near as bad as those two but still is getting removed from my watch-list is Polaris Industries (NYSE: PII).  Polaris had a promising 'launch' on earnings but the stock never really went anywhere after that, and now the stock has triggered a sell-rule by violating it's 50-Day Moving Average.  In this market when that happens you sell, no questions asked.

     

    Now for a few promising stocks.  The first is Fossil (NASDAQ: FOSL) which amazingly was up (green) for most of the day despite stocks selling off all around it.  FOSL clearly has potential if it can repeat that kind of performance, so that is definitely one to watch.

     

    Netflix (NASDAQ: NFLX) had a nice little run-up after clearing a long-time resistance level at $250, but now the stock appears to be struggling to hold on to those gains.  Time will tell if it hangs on or if the bad market pulls it down.

     

    Herbalife (NYSE: HLF) is also hanging in there after it's recent earnings spike and rise afterwards.  The great thing about HLF stock is the distinct lack of sell-volume, so this bodes well for when markets get better and stocks start rising again.

     

    One last stock that is also hanging in there is Sodastream International (NASDAQ: SODA).  SODA is just like HLF in that it had a nice rise/spike on earnings and is now trying it's best to hold on to those gains.  This one also looks good for when the market eventually turns around and goes higher.

     

    That is it for now so in the weeks and months ahead please don't forget to 'Duck and Cover' in case a financial attack on your portfolio occurs.  If you're a trader you should most likely be out of the market and watching for new opportunities.  If you're a long-term investor then you should be figuring a plan for that, and if you 're a new investor who hasn't sold then get out and use this time for reading, studying, and research so that you're prepared for the next up-market whenever that may be.




    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FOSL, HLF, SODA, NFLX over the next 72 hours.
    Stocks: SODA, SINA, HLF, NFLX, YOKU, PII, FOSL
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