Energy markets are experiencing their own March Madness, notes Phil Flynn, senior market analyst at ...
Grab Growth with 5 Leading Stocks
09/16/2011 7:00 am EST
Five of the best-acting growth names continue to catch Scott Redler's eye, but he also suggests a look at some mega-cap techs and blue chips that could offer potential. Redler also tells MoneyShow.com’s Kate Stalter about his three-tier trading strategy, and explains how do-it-yourself investors can profit from it.
Kate Stalter: I am speaking today with Scott Redler of T3 Trading. Scott has made a number of accurate technical calls lately that have reflected the direction of the market, and of some individual stocks. Scott, give us your thoughts on some actionable steps that investors should be taking in these volatile market conditions.
Scott Redler: I think investors need to really actively approach their portfolio. They can do a few things. Figure out their timeframe, whether or not they hold for one to three days, if they hold for years, what they feel comfortable doing.
No matter what, they have to take an active approach—and that’s what we try to preach here, because from a macro sense, in 1998 we were at about 1,100 in the S&P and now it’s 2011, and we’re around the same area.
Within those 12, 13 years, we’ve had major ranges, awesome sectors that broke out, stocks that still made historic highs...and if you sat there and did nothing, if you didn’t want to actively manage a portfolio, you are probably in the same spot 13 years later, and the market is not helping you achieve your financial goals.
So that, real quickly, is my mantra. And on that mantra, earlier this year, I talked about the head-and-shoulders top pattern that was coming into play over the course of the summer. The neckline was around 1,250, so that’s where we tried to get our community out of a lot of their macro longs. Therefore, they can get another entry point at a better spot that makes them more comfortable.
So when the pattern triggered at 1,250 and went down, we hit a low of 1,101, and since then, which is more relevant now, we’ve been trading in about a seven-week range. Starting in early August, we hit 1,101. We traded back to about 1,230, and now the S&P is trading in the middle of that range, say around 1,170.
- Also read: 3 ETFs to Capitalize on Market Shifts
So at this particular point, for those that sold correctly when the market broke that area, it’s time to get back into a tier-one type of long.
We talk about tier systems, like tier one, two, and three. We never like anyone to go all in at one particular point, because no one really knows where the actual price is going to turn and go.
So in this, just say 1,100 to 1,170, I do think is a decent area to be trying to buy some of the leading stocks. If you have the wherewithal to do it, this is an area to get involved in tier one.
We’re going to have to see over the next, I would say week or two, with the headlines that are coming out, whether or not this area holds. Because right now, the jury is somewhat out. We’ve been in this bear flag continuation pattern from the breakdown.
The market is trying to figure out is this enough. Is 20% off the highs enough to correct, vs. the European problems, the US economy? No one even knows—even some of the pros—so that’s why you have to use this type of approach.
So if we don’t hold this 1,101 area, which at this point there’s about a 50% chance the lows aren’t in, you want to be prepared with your list of the best-acting stocks, and you want to know where the market can go so you can get into a tier two, where you can be buying the dip.
Below 1,101, to me, that’s going to be a quick stop at 1,070, but then I think ultimately there’s a chance we get to 1,020 or 1,050 if we start breaking below 1,140 or 1,101. But this is a good area to find some of those best-acting stocks.
If you want, we can go over which ones I think are acting best, and investors should be finding with this relative strength.
Kate Stalter: Yes, please share some of those ideas with us.
Scott Redler: What I’ve been seeing in high-beta tech-land is: I’ve been trading Apple (AAPL) for years, and right now Apple is above all its moving averages. It handled Steve Jobs' leaving in stride. I was pounding the table when the news came that he left, to be buying on that dip.
I think technically it’s holding up. I think this stock sees new highs this year. Right now it’s in the $380 area. I think you can still buy it. This looks good.
Amazon (AMZN), also really near the old highs above all the moving averages. This high-beta tech stock does, I think, make new highs also.
For someone a little bit more speculative, I think Baidu (BIDU) still acts really well. Baidu right now is kind of wedging and looks like it could make an attempt to start making its way back to the highs.
These are fast-moving stocks that you really need to know what you’re doing in order to stay with.
As far as some casino stocks, I’ve been watching Las Vegas Sands (LVS). LVS has been in a nine- to ten-month channel. It’s been consolidating after a big move that we traded from $19 to $45 last year, and I think that once the market gets a bit of traction, it’s going to break above and hold above $48 and make new highs in the year above $52.
Wynn (WYNN), also, the leader of that group is acting well, but I think it’s a little bit easier to handle LVS as far as its pricing. So in casinos, that group is acting well.
We do have some one-off type stocks that are still near highs, like Green Mountain Coffee Roasters (GMCR). If you have one of those coffee makers, it’s awesome by the way.
Kate Stalter: They are.
Scott Redler: Anyway, there are things are outperforming, and there are things that you can see, because when corrections happen, typically what you see is groups in the stocks that hold up best. They’re the first ones to go once the market gets some traction.
So if you’re not running away from the volatility, you can embrace it, and you can actually find ways to profit from it by being prepared ahead of time.
- Also read: Why Not Profit from Market Volatility?
Kate Stalter: Scott, all the stocks you just mentioned have market caps of $15 billion or higher, some of them much higher, of course. Do you advise that people look at large caps, or are there opportunities in other market capitalizations?
Scott Redler: I think with the market environment right now, I’d rather see you go with large caps, meaning those that have very good balance sheets, limited debt, some even have dividends.
They’re mega-caps, where at least you know that there is a lot of cash, there are great earnings. I know they’ve been out of favor, but as this market environment gets a little worse, people are turning to them.
Right now, Microsoft technically looks pretty good, holding $25.50. If it gets starts getting above $26.50, it can go.
Intel, my traders were looking at it this week; there was a developer conference. They were getting involved around $20. Now it’s up to resistance around $21. I think it can continue to about $22. Even Cisco (CSCO) may be down here below $15.
The mega-caps you have to buy on extreme weakness, unfortunately, because any time you pay up for them, they rarely have momentum. So I see some investors turning to that.
Also some consumer staples like Colgate (CL), Kimberly-Clark (KMB). People want names that they know, that they can trust, that have limited debt, great balance sheets, and that they know will be around, and they can trade out of it.
- Also read: 5 Dividend Stocks to Retire On
As far as the small caps, you really have to have a sell-side support with you. You need to have research, brokers that tell you the story, because young, aggressive growth stocks that have small market caps tend to be risky. Yes, they have rewards, but it’s hard to get involved unless you have the proper support system, besides just price action and technicals.
Kate Stalter: You had mentioned a few minutes ago the tier system for getting into equities. Talk about the asset allocation for an individual. For example, what percentage of one’s investment capital should be used to go into each of these tiers, particularly given the market conditions these days?
Scott Redler: Well, I’m in the camp where I don’t think you should have 30 positions. I usually think you have five to seven. You take that approach so you can monitor your stocks, you can watch the technical actions, and you can read up on them. You don’t need to be so scattered.
Typically out of those five to seven, I would say you would want them to be the leaders of every group. I’m not of the camp where you always have to have money working. I think I’d rather have you into savings if the environment is treacherous and the market’s in a correction, and then you just wait for the best stocks to reset up when we get into better environment.
So just say if you have $100,000 that you’re willing to invest, and you’re looking to do six to seven positions, when you’re in a tier one, I think you should only have about $30,000 to $40,000 invested at that time. Because you need room to get to tier two/tier three.
So if you have $40,000 invested and the S&P stocks are in this lower range between 1,100 and 1,160, be prepared that if we break that range, you’re comfortable to get into that new range, which could be 1,020 to 1,050.
Or if we hold this area, and these key stocks start to act well and some of the problems overseas get resolved and we get some clarity on what’s going on in Washington, you can always add a tier when they start working.
That’s the best way, when it’s moving in new directions. I hate averaging down, but typically sometimes if you pick the areas, you can’t be perfect. So once the situation starts working and you see some improved conditions in the market and the economy, then you add positions when they’re working.
Say, Intel so to speak. Intel was a great tier one at the low $20s when it just broke above this $20 area. Now it’s at $21 hitting resistance. So at this point, if Intel were to go sideways for a little while and hold higher and do a full-flag type pattern, and then after two or three days of consolidating a move from $19.50 to $21, then when it goes above $21, you buy it to a tier two.
So just say you have $15,000 in Intel, maybe you go to $25,000 in Intel. And then above that $21, the next big resistance is $22 and then perhaps you take that tier off, which could be your trading tier.
So this way you book a profit, feel comfortable, feel good about it, and then you’re still in tier one, and you just enjoyed a move from, say, $20 to $22, which for Intel is a pretty big move, a decent percentage, 10% or so. For Intel, that’s a lot.
So I use the tier system so you can stay invested for the longer term, but then add cash flow to your portfolio with the right setup by using technical analysis.
Every now and then the right set up comes on, where you get an action area where you can get a good, explosive, three-day move. So you add capital to it, if the move gets extended, take that capital off and stay with the initial investment.
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