4 Names to Watch in a Tough Market

12/27/2011 7:00 am EST


Joshua Hayes

CEO, President, and Founder, Big Wave Trading, Inc.

Investors need to keep emotions out of the process, and not be discouraged by losses in a tough year, says Joshua Hayes. In Part Two of his interview with MoneyShow.com, he discusses some picks defying the market trends, and also recommends some of his must-read investing books.

Don’t miss Part One of his interview, which appeared Monday.

Kate Stalter: You were mentioning the need to really be watching the market closely, but for people who can’t do that, is being in cash a good option at this point?

Joshua Hayes: Yeah, sadly I hate to always recommend an investment. I know I come from a trader perspective, an active investor, but if you’re a part-time investor, I personally am being fully honest, do not believe you can be in this market. This is not a market to buy and hold.

There are a few great gems out there. The Peter Lynch method has me in love with stocks like Hain Celestial (HAIN), or Hansen’s Natural Soda (HANS), stuff like that.

If you have a 20-year timeframe, it may or may not work out. I don’t know. I can’t predict the future. But if you can’t watch the market every day, my best advice is to find somebody that can and invest in that individual, because only those that are on top of this and that eat, live, and breathe this stuff 24/7 are going to be able to stay on top of it and be ready for the real move.

I’m impressed that I know that a lot of CTA firms [Commodity Trading Advisor] out there that are down quite an amount this year. I have losses this year; I’m impressed by the ones that have made money, and I would love to study their trades.

I know that there’s a couple up around 10% that are trend-following systems. I’m fascinated by that. I don’t know how they’re quite making money in this environment.

But I don’t think personally, Kate, you can be a part-time investor in this market. I don’t think this is the right kind of market environment. Those days are gone, I do believe.

Kate Stalter: I know that you keep a regular watch list—not necessarily that you’re jumping in to buy them or short them at the moment—but anything on your watch list right now that you’re just tracking to see how it pans out?

Joshua Hayes: I run scans on price and volume and they constantly rotate, but that’s just the problem. A lot of stocks start to look good and then they just fall apart, and this is not a normal pattern that I’m used to seeing.

But drugs, like Elan Corporation (ELN), they look good, and I’ve been watching this Cambrex (CBM) stock move up for quite a while. But I’m just basically—I’m looking for anything. I’m just looking for the top sectors. I want to see more than one or two stocks in that sector moving on volume.

But there’s a few longs that we took lately that were cut out on that I’m going to be buying again tonight for the next morning. So there’s always something out there. But there’s not necessarily anything I’m watching.

It basically has to come to me. It has to come to my scan, then I take a look at it, then I delve into the numbers, then I have an attack and game plan for it.

But in this market, what I’m really watching for is for volatility to calm down.

To me, if the VIX was a true representation of volatility, it would be at all-time highs, but it’s, these big gap-up and gap-downs and the big inch-a-day moves and with volume just being right around average—I’m not sure what the final statistics are, but I believe volume is just like average today.

On a big up day like we had today, you would expect volume to be well, well, well above average, not just like 8% on the Nasdaq and then flat on the NYSE. According to my scans right now, it just appears that it’s just at the 50-day volume average.



The only thing I will say, in noticing from the August lows, the only big volume bars on my charts are four up days; however, one of those up days was December 16, and we did close near the lows.

So it does appear that if I was blind and on an island—which by the way, I do live on an island—and didn’t have access to any news, I would think that they’re possibly accumulating stocks here based on a weekly chart of the Nasdaq. But it is so volatile that this is not proper accumulation either way. It will definitely have to calm down. I say you continue to watch the 50- and 200- day moving averages.

One move that was very unique and was pointed to me today is for the first time: I’ve been trying to short Apple (AAPL), as it looks and appears to be topping, that it’s never really quite retaken the 50-day moving average the way it did today. And it did it on no volume, so the recent short I have in Apple, that’s gone and I’ll get out of the way.

But we could easily see Apple rally to new highs on no volume. It’s just a very odd, unique case that I believe has definitely been changed by government intervention into the free-market system.

Kate Stalter: What would you wrap up today with just some words of wisdom for investors? You’ve actually given us quite a few pieces of advice for handling this market, but if you could sum it up for people, what would you say?

Joshua Hayes: Definitely don’t quit. If you love this game, if you want to be wealthy, if you want to change your life and do something different, don’t quit.

I’ve studied the greatest CTA firms. Bill Dunn [of Dunn Capital Management] one time had a 60% drawdown in his account from account high to low, and within two years, was back at new all-time highs.

I’m not down 60% for the year. I’m not even down half that for the year, but I’ve lost a big chunk, and for me, I’m not used to these kinds of drawdowns. However, there’s no way I would ever quit.

You’ve got to keep going. You’ve got to keep pressing. You can’t walk away. You cannot not take your signal. If you take it and it’s long, cut your losses. Don’t even ask questions. Get rid of that ego.

But you’ve got to stick it out. The most important things for investors here, if you feel like quitting now, that means you’re just right around the corner from something finally moving, because you can’t go trendless forever.

So the biggest word of advice, if you’re into it, don’t quit, and if you’re not into it—seriously, this game, it’s not stressful for me, but it’s extremely stressful to a lot of people—and if that is the case, it’s probably best to find a new venture and to definitely give your funds to someone that even enjoys periods like this.

I know it sounds sick, but I’ve learned to embrace this period. What I saw today, I would have been more shocked if the trades would have worked at this point, and I think that that’s about the way you have to handle it.

If you get angry, if you have emotions, if you get happy when you make money and if you get angry whenever, “Oh, I’ve been cutting losses left and right,” this might not be the game for you.

So you’ve got to try to stay on an emotional even keel. The biggest thing is, you just don’t give up. Keep at it.

And while you’re having tough periods like this, read. There are tons of great books out there. Amazing books. I went a while not reading stock market books for the past couple years, and I’ve been reading some again. It’s just amazing the literature that’s out there.

So there are a lot of great trend-following books that definitely people should be reading up on. And I can’t stress enough, if they’ve never read How to Make Money in Stocks by William J. O’Neil, it’s a must read. And also Trend Following by Michael Covel. Pick up those two books, and if you’ve never read Reminiscences of a Stock Operator, that’s a must read. I’ve read that book at least 12 times.

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