ELOS, Bad News for a Bad Day

….ELOS broke down hard today on news that the FDA will delay approval of its cellulite product. The stock was also downgraded by Stephens Inc. I don’t pay much attention to Wall Street investment firm’s analysis nor do I believe anyone in this community should either. I mean, these same firms were still recommending Enron as a buy after it had fallen by more than 50-70% back in 2001. It started to collapse in the upper $60 and was in the teens several months later as several firms were still posting “long-term buy” and “market-perform” ratings. Anyway, the point is to stick to the price and volume action and block out all noise from outside “talking heads”.

Today, ELOS fell over 27% or $10.15 on volume 10x’s the average daily volume. It closed below $30 at $27.05. As I review the daily and weekly chart, not surprisingly, the stock is still well above key long term trend lines such as the 50-d and 200-d moving averages.

We sold out of ELOS on two separate occasions in the past several weeks as we highlighted on this website. As I noted, I always try my best to sell into strength rather than get caught in the type of gap-down ELOS had today. For more on “Gap-downs”, please visit our free Philosophy and Education section. Price and volume allowed us to sell out of ELOS two weeks ago as this quote states from an earlier blog post:
“Recently I see ELOS advancing quickly but the volume the past 3 days has been weaker than previous days.” – November 11, 2004

It should be interesting to watch ELOS over the coming days and weeks. Will the stock with excellent earnings and sales be able to overcome this setback or will the stock retreat into a long term base?

Stay posted to my daily and weekly screens to see if ELOS shows up as a stock rising or a red flag.

Piranha

Sirius Satellite Radio Inc (SIRI)

...Two good friends of mine recently purchased SIRI and are loving every minute of it. They asked me to check the technicals, so I did, and I said the stock would pop to $6-$8 (no lie) in the short term, I should have posted the case study on this blog in real time for interested parties.

I did not buy the stock for 2 reasons:
1. I don't buy companies that don't show a profit.
2. I currently have established positions in other stocks.

This does not mean that the stock (SIRI) can't continue its climb. It's a great spec play in my opinion. XM went to $30 last year and SIRI is on its way to 1 million subscribers.

Personally, I must stick to rules and what works for me and what has always worked for me in the past, no matter how tempting the stock looks (with all that volume). When I have broken rules, I have lost money and kicked myself. Every trader I have ever studied has said the same thing. It's tough to sit here and listen to my one friend gloat every morning as I watch him make a lot of money after I told him I saw it going up from the $3.80 range to $6-$8.

Rules are rules for a reason. Not every stock is for every person. Enjoy to those of you that have bought SIRI - it's been an excellent run so far.

p.s. - You won't see SIRI on our weekly screens because of the fundamentals; otherwise it would have made it.

In the future, I will use this blog to discuss stocks in the spotlight that might not make other parts of the website for one reason or another.

Piranha

Who are Leaders and Laggards?

…Leaders are stocks that breakout immediately when the market confirms a new rally.
In the first several weeks, strong stocks with leadership ability will breakout on volume above their 50-day average. Some of these stocks will breakout on the largest volume ever. Typically, newer stocks that have come public in the past few years will have the most strength for sizable gains.

As multiple stocks breakout from similar industry groups within larger sectors, a confirmation of broad leadership is established. “Sister Stocks” will usually move in crowds and lead the way in similar fashion. Their charts will show some resemblance and their action with be closely related. When one leader goes up, so will the others in the group. It’s not an exact science but almost anyone could chart the progression of leaders during the beginning stages of a rally.

Laggards are stocks that don’t breakout immediately when the market confirms a new rally. They become laggards if they wait a few months to finally breakout while dozens of other stocks have already gone on to excellent runs. Investors must be on the lookout for a healthy correction after several strong months of advancement within a specific industry group or broad sector. As the correction materializes, the original leaders will be poised to continue their run so long as the ‘M’ in CANSLIM is still positive. ‘M’ stands for market health.

Investors must be on the lookout for stocks that only start their advancement on the overall correction. These stocks tend to be weaker and are more prone to failure. The original leaders will have more institutional support and are more likely to advance further. Laggards will often sport a nice breakout during the correction phase, only to disappoint the investor with a reversal.

Let’s use a hypothetical example:
XYZ breakouts out in October and runs up 50% in 3 months and then pulls back to correct.
ABC breakouts out 3 months later in January while the correction is taking place (from the same industry group) but has been stagnant the past 3 months as many other stocks in the industry groups have made nice gains (like XYZ).

Laggards stay stagnant during the beginning stages of bull markets. This doesn’t mean that they can’t have a nice run, it just means that the chances for failure are higher because “dumb money” may be bidding up the cheaper stock in that particular group.

The “smart money”, otherwise know as institutions may have ran up stock ‘XYZ’ for 3 months and will most likely allow weak holders to sell before they resume the advance. In the mean time, those weak holders may be the investors running up stock ‘ABC’ because it looks cheap. They may reason that it should be moving up because ‘XYZ’ moved up in the prior 3 months.

Finally, be careful and analyze each specific stock and situation before you make a commitment. This is a general rule to help you select a leader within a strong industry group. The market never works perfectly every time so make sure you are prepared for anything. To review current leaders, please check our Daily and Weekly screens page as they will show the stock with the greatest potential for advancement.

Know when to sell

…I was asked an excellent question by a member on a free forum that I have associated with for several years:

How do I determine my sell points when I already own a stock that has made a profit?

This is an excellent question, if fact, it’s the toughest question that I face with every stock that I own that goes up.

If I own a stock and it immediately goes down, this is the easiest decision I must make – SELL and sell fast. I know how to cut my losses and have been doing it for years. Yes, it’s a blow to my self esteem but I always feel better when I see that particular stock several dollars lower a few weeks later. This is when I feel good about the insurance policy I have (sell rules) to protect my capital.

Take ELOS for example: I started to see this stock on my daily screens in mid October and listed a text case study about Syneron on 9/22/04.

I wanted to buy ELOS in the $15-$16 range but it did not dip back down and give me a solid entry point in this range. I knew the company financials looked great, the product was in demand and the stock was a recent IPO. I did buy ELOS in two separate orders that averaged out to $17 and change.

Recently I see ELOS advancing quickly but the volume the past 3 days has been weaker than previous days. I tightened my actual stop at 12% to the intraday high.
The intraday high was $31.67 which makes my stop at $27.85.
***This is only for protection and can change as the days wear on***

Now that the market has closed, I will review the stock in more detail tonight. I don’t see my self doing anything crazy. I will leave the 12% protection stop (from intraday high) and watch the action in the first hour tomorrow morning, after this point, I will decide if I need to sell any or all shares. If it hits the stop, so be it, I have made a considerable amount in a very brief period. If it doesn’t, I will loosen the protection stop back to 15% and reestablish my mental stop tomorrow night. This is the process every day!

Piranha

Ignore “Talking Heads”

…You should ignore analysts on TV, the radio, the newspaper and all other TALKING
HEADS when it comes to investing!

What stocks do they talk about? - The same old group, every day of every year - Why?
Because they don't know any better, they are sheep like the general public, repeating what every economic textbook says and every other economist tells them to say. Everyday, the same companies are highlighted on the evening news - WHY?

They aren't going anywhere. Some of the stocks that make the headlines every night were leaders of the market 20 years ago. New cycles bring new leaders; this has been proven year in and year out. So many of these TALKING HEADS shout out about "buy and hold" but what are they really holding? They hold old high-flyers that were superstars but have now become fallen stars that sit 20%, 50% or even 90% off of their all-time highs (some may have given you a small return - 10% or less over the past 5 years - WOW - BIG DEAL!). Yes, maybe over 15 or 20 years, you will get your money back - but what is the point? Many of these "so-called" investors tell you how they own XYZ stock and it has returned them 65% BUT they leave out the key factor that it has taken 16 years to get to that point.

One of the strongest and most promising stocks of the early 1900's (1920 decade) was RCA - this stock was one that people claimed you put in your portfolio and hold it till near death - it will NEVER fall and if it does, hold on because it will come back. Well, let’s take a look: RCA soared over 1100% during the 1920's and crashed with the rest of the market in the early 1930's. It went from a low 0f $8.70 to a high of $106 to a crash level of $3.00. Some said to hold, some said buy on every dip. - Guess what, it didn't climb back to pre-crash levels until 1963! 30 years to break even for some. Maybe that stock in your portfolio is the RCA of yesterday; history always repeats itself because human nature is always the same!

Stocks are worthy to be held over long periods of time, this is a proven fact but don't EVER hold a stock when it is flashing SELL signals left and right (especially if everyone on TV is telling you to buy now on the dip, "it is a bargain"). These talking heads were saying this about every stock on their computer screen in 2000 and 2001 - "buy the dip". The only dip was the guy on TV and all of the suckers watching him/her. I don't mean to offend anyone but you need to take control of your investing life, you need to learn why stocks go up, why they go down and that NO STOCK is immune to a bear market like the one we just had.

Leaders of the market now, won't be leaders in the future - on some rare occasions, a stock here or there will defy everything and grow decade after decade, but even these stocks end their amazing rise at some point. Same is true for old leaders, they won't lead the markets of today - they become too large and their growth slows, preventing them from being excellent growth stocks and giving you excellent returns. Now - I never said you couldn't own a stock like this, many people are satisfied with these companies, they "feel secure", that is fine; everyone has different goals.

Let the market tell you what is going up or down. Watch "sister stocks", I talk about them in our free Philosophy and Education section of the website. What do I mean by sister stocks? They are stocks that are in the same industry. When an industry is strong, most of the stocks in this group will rise, hand in hand. (I say most - not all, laggards always stay behind). Fundamentals will be strong for most stocks in the group and technicals will guide you along the trip - think of technicals as a road map.

Once fundamentals have been established, check the charts, if several stocks from a particular group are breaking out of bases, this is a strong sign that something great is about to happen in this group. The more positive the overall market the better the group will perform (bear markets tend to hold down just about everyone). Why buy a stock that has great fundamentals in a weak group? If all other stocks in that group are acting weak, this may be telling you that the "one" bright spot in this group will eventually come back to the pack, so don't chance it. Investing is about lowering your risk! Don't take a risk on a stock that looks good but the industry is hurting.

Buy the leader of a group where several stocks are showing strength. Never buy the cheap stock that is lagging in performance, this is a sure way of losing money - buy the best of the group - the one with the best fundamentals (accelerating earnings, ROE, sales, etc.) and technicals (basing pattern, breakouts on huge volume, relative strength, etc...). What may look high to the general public; usually turns out to be low to the smart professional investor. I am not talking about the "talking heads" on TV - the smart investors work for institutions - they move the market! When they buy, everyone knows because volume jumps to extreme levels or levels not seen in prior months or years. The everyday guy doesn't have this power - ONLY institutions have this power - learn to understand this power, here lies the smart money.

Finally, as I grind this educational information into your subconscious mind, ignore the “Talking Heads” and learn to listen to the market. Price and volume will always give you the best advice.

Piranha

ELOS - Syneron Medical Ltd.

…I first listed the stock on October 2, 2004 at $17.76. The following week, ELOS was listed on my weekly screens at $17.00. ELOS closed today at $23.94, a 40% rise since October 10, 2004. Less than 1 month!

I bought the stock because of the IPO status, the 539% 3-year earnings rate and the 351% rise in sales figures for past 3 years. Return on equity is above 28% and the float is only 25% of the outstanding shares.

Today’s gain of 18.05% on the largest volume since the opening day of the IPO is very positive. The weekly volume is the largest ever! Results came out yesterday with a third quarter revenues increase of 80% to $15.1 million over Q3, 2003 while net income increases 217% to $7.3 million.

Syneron is an innovator in the development, marketing and sales of combined-energy medical aesthetic devices.

Background from Yahoo Finance:
Syneron Medical Ltd. designs, develops and markets aesthetic medical products based on electro-optical synergy (ELOS) technology that uses the synergy between electrical energy and optical energy to provide effective, safe and affordable aesthetic medical treatments. The ELOS technology combines optical energy, which is derived from light waves, with electrical energy, in particular radio frequency energy that results from the flow of electric charge through a conductor. This enhances the user's ability to target accurately the tissue to be treated and enables real-time measurement of skin temperature, resulting in increased patient safety and comfort and improved treatment results. The Company's products are sold primarily to physicians and other practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction and rejuvenating the skin's appearance through the treatment of superficial benign vascular and pigmented lesions.

Keep this stock on your watch list. Take a look at the weekly ELAB charts from it’s early days for a similar start to an IPO in the same sector.

Enjoy the weekend,
Piranha