Great traders and true value investors know that it’s not only the return function that dictat...
Swing! The New Buy and Hold
05/21/2004 12:00 am EST
By following hundreds of advisors for two decades, I'm rarely impressed by a new service. But StockTactics Advisor by Jon Markman caught me by surprise. For those with a swing-trading horizon, this is just one exceptional service. His Las Vegas workshop was no less impressive.
"What is swing trading? I call this the new buy and hold. You buy, and hold for a while. You can sell short, and hold for a while. Everything I deal with is pretty much common sense. I am looking for trades that can last anywhere from a few days to a few months, perhaps longer. In order to develop a strategy of this nature, you have to have a plan. We want to first determine the major economic trends. You need to determine the major news cycle trend. Are people generally bullish or bearish? It’s helpful to know in terms of sentiment. You want to also determine the major market trends. This is all background information you need to have in your head. Then you can focus on the intermediate market trend. This would encompass what the market has been doing over the last six months. We then look for strong and weak sectors to find stocks, which we can play for either a trend reversal or where we see a continuation of a trend.
"Trading strategy really hasn’t changed much since the days of Jessie Livermore, when he wrote Reminiscences of a Stock Operator in the 1930s. It’s probably the best book ever written about investing and follows a stock trader who worked around the turn of the century. Almost everything that is happening today in the markets was happening back then. Psychology is exactly the same. What Jessie Livermore did was focus on three things. He determined the overall economic tide, which helps you trade confidently with the long-term trend. Then he looked for a set of infrequent trading signals; today, we call this technical analysis. Finally, he developed some kind of position management, which allows you to scale into your winners and dump your losers very quickly.
"In case you’ve just gotten in from a backpacking trip in Tasmania, the short story is that new evidence of rising inflation and a sharply improved national employment picture suddenly led investors to believe that the US central bank would begin to raise interest rates in the near future from their historic lows. At the same time, the price of oil rose to historic high levels above $40. And as if that weren’t enough, in came new evidence that the Chinese government had begun a campaign to slow its provinces’ appetite for the world’s raw materials and currency. And of course, there was the Iraq prison-abuse scandal, which threatened to undermine support for President Bush. Yes, it was a quintuple-whammy: Fear of higher interest rates and slower growth scared the bejeepers out of investors and caused many to sell first and ask questions later. The interesting thing is that the smoke is now clearing.
"Here at StockTactics Advisor , we focus on buying the strongest stocks and culling out the weaker performers. It has been a wise method for medium-term traders, and it is the one we have followed with success for years. Stronger stocks in strong sectors tend to get stronger and weaker stocks in weak sector tend to get weaker over short to intermediate periods of time. Over longer periods, stronger and weaker stocks and sectors tend to reverse, of course. You will see that pattern played out in almost all of our successful swing-trades. And to the extent that we occasionally blow a swing-trade (and even, um, several in a row), it’s because we ignore this rule. In a nutshell, we prefer fundamentally sound stocks in rising trends that have bucked negativity in the overall market. We know that "fundamentally sound" can be an empty phrase, as many fundamentally strong stocks go straight down in price. But when you can find companies that have decent valuations and balance sheets whose shares are also appreciating in the market, you have a potentially winning combination.
"We like the trades that we have in place
right now quite a bit: LifeCell (LIFC
has not been affected one bit by the recent negative market, trending up all
year and making new highs in January, February, March, April, and now
May. Its balance sheet is clean, it has reported good earnings, and its
group–medical devices–has been an outperformer as well all year. The company develops and markets
biological products for the repair and replacement of damaged or inadequate human tissue. Our
targets are the 1993 and 2000 historic highs of $12. But keep in mind that this
company is much different today than it was back then, and in a rebounding market those
highs could be breached without much resistance and a target move to
$15 would be in play.
"We have also initiated a new trade in chicken producer Pilgrim’s Pride (PPC NASDAQ), which has advanced all year without much backing and filling, but they have not gone ‘parabolic’, which is trader's parlance for ‘straight up’. Stocks that go up parabolically very often, or almost always, go straight back down, so you want to avoid those kinds of patterns. But stocks in nice easy uptrends tend to have the capacity to stay in motion for some time. As for Pilgrim’s Pride, the stock is not terribly cheap. But it’s in motion, and unless dieters’ interest in low-carb and high-protein eating suddenly slims down, it will probably stay in motion. Margins in the chicken biz are good right now, according to meat-industry analysts. The company has had trouble with its turkey-meat division, but it has taken forceful steps to restructure that side of its business. Another thing to keep in focus in the chicken biz is grain prices. Soybeans and corn prices were going through the roof in the early part of the year, but they have both come way off their highs.
"As for other stocks on our list that are doing well, we would call your attention to Advanced Medical Optics (AVO NYSE). This small-cap ($1 billion market cap) maker of ophthalmology devices was recently applauded on the Street for its all-cash purchase of a product line from Pfizer, used for ocular and cataract surgery. The company also announced that it raised its fiscal 2004 guidance to expectations of $635 to $645 million in revenue and pro-forma EPS of $1.02 to $1.04–all numbers excluding the new purchase. Despite the fact that the stock has risen quite a bit recently on improved results, it still sells for a relatively modest price/sales multiple of 1.6, compared to the industry average of 3.38. Its forward p/e 30, which is pretty high but in line with its expected growth of around 30%. Also we should note that one of the things that has caught our eye, so to speak, with this stock is its ownership and insider-trading profile. There have been a couple of unusual insider purchases lately, something you don’t normally see in stocks at new highs. The CEO bought 10,000 shares on the open market on April 29 at $33.25 and the CFO bought 10,000 shares on April 27 at $33.22. Aggressive traders could consider initiating a swing-trade position at $33.50, while more patient or cautious traders may wish to wait for the stock to consolidate and buy on a break-out above $35 on good volume.
"Another stock we’d like to add to our swing-trade now is right in the thick of American manufacturing. It’s Oshkosh Truck (OSK NYSE), which has in all but one of the last ten years. This year it’s down a couple of percent, but it has hit its 200-day moving average, is highly ranked in our principal multi-factor model and recently reported strong earnings. Its shares were dented on an outlook for defense-related trucks that was more negative than expected, but that’s why we get to buy it more cheaply than usual now. The company makes fire trucks, military trucks, garbage trucks, cement trucks. You get the picture. You can’t have a global economic recovery with out a whole lot of trucks and so if you believe that growth is brewing out there in the world, then this is a good name to consider for the longer-term.
"Finally, some smaller names, which are ranked in the top tenth of the market in our models for fundamental and technical strength, are specialty chip-maker PLX Technology (PLXT NASDAQ), security software maker Symantec (SYMC NASDAQ), Internet security specialist VeriSign (VRSN NASDAQ), and RFID and barcode device maker Zebra Technologies (ZBRA NASDAQ). Our model also likes Acxiom (ACXM NASDAQ), which provides data-integration and info management solutions–it’s a specialist in the new ‘grid computing’ initiative–and is making a bounce off its 50-day support. Acxiom is not a real high-beta mid-cap, but it has performed pretty well all year–particularly in rebounds from the big declines."
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