Updating Tuesday's Action

...On Tuesday, Building Materials (BMHC) (a member of the past 11 weekly screens; first screen on June 1, 2005 at $64.10) was up $4.27 on volume 48% larger than the 50-d m.a. This was the first major push since the stock broke back above the 50-d m.a. Below, you can see what we have said about the stock over the past three weeks. We came very close to removing the stock from the screens but decided against that idea on August 13, 2005 because the stock did not violate any initial buy areas. I am glad that I maintained my PATIENCE (something I always preach on MSW) because the stock is currently trading at $92.12 (Wednesday afternoon) after reports that 2Q profits almost tripled. The stock is up another 12% today as we approach the afternoon trading hours.

Here at MSW, we let the big winners run and always cut losers and today we proved that we were on the mark once again. BMHC never became a loser so we did not cut the stock even though it did violate the 50-d moving average. The stock is up over 20% since I said a “trend buy” was valid this past weekend and the total MSW gain is now above 43% in this poor summer market. The $60-$100 run is nearing completion and I am very proud with my stability and decisions on this stock.

8/28/05
BMHC – 75.12, This is the area to place a trend buy with a tight stop, especially due to the weak market.

8/20/05
BMHC – 72.61, Slightly below the 50-d m.a. but holding above our original buy point. A major red flag would be a breakdown below $68 (a triple bottom breakdown on the P&F chart).

8/13/05
BMHC – 71.72, The stock was down 1.89% on the largest volume of the past few years yet the stock ended the week $3 higher than the lowest point. With the huge volume and the recovery towards the end of the week, BMHC bought itself one more week on the weekly screens.

The lesson: always have patience with your positions that are not showing a loss, especially during tough times in the market. They will reward you well if you learn to let them run (patience is key as Jesse Livermore always said).

As for yesterday, we saw the energy stocks lead the market to a gain after the devastation of Hurricane Katrina became more apparent. Stocks such as Fording Canadian Coal Trust (FDG), Valero (VLO), Peabody Energy (BTU), XTO Energy (XTO) and others lead the sector higher after damage reports were less than expected on rigs in the Gulf. More familiar MSW stocks such as Advent Software (ADVS), CB Richard Ellis (CBG), Sterling Construction (STV), Building Materials (BMHC), Tenaris (TS) and Apple Computer (AAPL) led the market higher. Other stocks that we are not covering that continued to move higher included Kendle International (KNDL), McDermott Intl (MDR) and William Lyon Homes (WLS).

Hansen Natural, a long time member of our weekly screens from earlier in the year is starting to make a move back above its 50-d m.a. but it is doing so on below average volume. Before the split, HANS completed a $60-$100 run in three months before retracing and forming a new base (where we removed the stock from the weekly screen and cashed in our profits). It will interesting to watch HANS as it continues to form the six week base pattern that dipped below the 50-d m.a. briefly. (Side Note: HANS is up another 4.41% on Wednesday bringing it just below the pre split adjusted $100 level ($50).

The NASDAQ is still below its 50-d m.a. but may be forming the bottom of a base that is just starting to take shape on the weekly charts. A quick glance at the daily chart and everything looks great but the timeline is still too short for a valid basing pattern. Relative strength is trying to regain the previous high set back in July but is still a way off of 52-week high levels set last November (2004).

I don’t like speaking about the DOW these days because it is below both the 50-d and 200-d moving averages with a relative strength line that is making multi-year lows (going back to the bubble burst years of 2001 and 2002). The point and figure charts shows us that the index is in a confirmed double bottom breakdown that triggered on August 23 as the DOW sliced below 10,500.

Piranha

What Keeps me Going

...I wanted to share a letter that I just received as I opened my e-mail. Many of you send me e-mails telling me about success stories and some disappointing stories but they all interest me. The market is my passion but reading letters like this really keep me going over the long term, each and every night, grinding out my research and organizing it for everyone in the community. So continue to send me e-mails for your questions and definitely share your stories with me because I am very interested!

Member E-mail:

"The bigger success for me would be to hear stories from the community that you witnessed the data coming in and took action and locked in gains when things started to turn south."

The above quote was from your weekly report. Here's a success story for you, Chris. I bought Well Choice after it had pulled back. I sold it again for an 8% gain, before it started to drop. I heeded your warnings. I also had bought SSNC but my timing was off. After a couple of weeks, I sold for a slight (.5%) loss. I'm ahead for the year! It's really great.

Thanks
Catherine

My Response:

Catherine,
That is wonderful! I am so glad for your results and can see that you are making great progress. I can’t help but think that you will do even better when we get a solid rally in the market. I have a great community because the majority of the people seem to “get-it”, they are starting to understand how investing really works. So many beginners believe that losing is a bad thing but it is not. When stocks drop, it is for a reason and it usually means to get out and lock in gains or cut your losses short.

I enjoy speaking with you every month, so keep the e-mail coming.

Chris

Trade for Real

…I read a comment by a forum member on another site earlier today that suggested that every investor should back test their system for at least twenty years. I disagree and will now tell you why. Back testing and paper trading seem to be the most over emphasized techniques offered by market theorists, educational elite, market novices and/or market fakes. While learning the pure basics, I can see why a novice investor may want to paper trade; to see the results of the developing system but I will warn that these results are completely false. The results will not contain the emotional decisions that go along with risking your own cash. Anyone and I mean anyone can paper trade successfully. It’s simple, place a trade and hope it goes up and if it doesn’t, you have no worries because you can’t lose. The emotional imbalance that occurs when you really start to lose money is not present. Don’t fool yourself by believing the results of your paper trading or virtual simulation portfolio. These things may give you some confidence in your system but they don’t prove a damn thing in the real world. The real world, specifically the stock market, is run by emotional human beings. People make decisions that are irrational and base their trading decisions on fear and greed. Paper trading lacks fear and greed because there is no gain and no loss; therefore there is no consequence to deal with.

Don’t worry about back testing for 20 years because historical back testing is never very accurate. The most accurate testing is real time. If you can back test real trades (actual trades that you have made in the past), then this would be just as good as real time testing (or forward testing). Back testing can get you somewhat of an idea of how your system will perform but there is no emotional attachments to this type of testing so it is not realistically accurate. We all know emotions are tied to our decisions in the markets so we can only get accurate results through real testing. Learn to ignore the talking heads and the people on TV and that internet chat room that claim they are up over 1000% trading a fake account. What really makes me laugh is the person that sets up a virtual trading scenario and then allows each participant to trade $500,000 or more in their account. If you are going to trade a fake account, at least keep it real so you try to learn something, maybe money management.

I setup one virtual trading competition a few years back and I only allowed each participant to start with $10,000, a reasonable amount, an amount that most people start trading with. The competition was fun but it was not real for me or the others. I didn’t care what risks I took and I never had a problem pulling the trigger which does happen in real life. I did try to keep my trades in line with my real life account but it varied slightly. I witnessed other traders making 20 trades per day or 20-50 trades per week. This is not real because the commissions alone, even with a discount broker will wipe you out. I did allow margin because I use margin in my account but I saw other investors abusing the fake power of margin in their virtual account, again, playing the game for fun instead of learning something valuable. As a fellow investor, keep testing your system in real time and you will know what works and what doesn’t based on real trades, not simulations. Professors and the like teach theories while investors actually do the trading! Back testing may convince some people but I am only convinced with what works now, in real time. Besides, why would I waste my time playing for fake money when I can learn and do for real? Back testing may be good for some people but I have been testing my systems in real time since the day I started investing seriously. Currently, I am testing the $60-$100 theory using options in my newest account. I will not have concrete data on this system for another year or two, most likely two years down the road. I could back test the system but how will that help me realistically going forward? It won’t, it may show me some probabilities and the possible expectancy of the system but it won’t guarantee anything until I place a position for real.

If you want to test a system, open an account with real money, even a minimal amount and give it a try. Make sure you use enough money to allow emotions to be attached to your decisions. Without the emotional attachment, you are cheating yourself and your potential system.

Weekly stock on the Move

...Currently at noon, CB Richard Ellis Group Inc (CBG) is up over 6.62% to $49.14. CB Richard Ellis is the nation's largest commercial real estate services company. Late Tuesday, CBG reported sharply higher second-quarter earnings on improved leasing activity, and raised guidance for the full year.

According to yahoo finance, net income surged to $50.4 million, or 66 cents per share, from $3 million, or 4 cents per share, a year ago. Excluding one-time items related to the Insignia acquisition and debt buyback charges, the company earned 70 cents per share, more than double last year's earnings of 32 cents per share.

The results easily topped analysts' expectations for profit of 42 cents per share, according to a Thomson Financial poll. Revenue grew 22 percent to $672.2 million from $550.9 million last year, fueled by a steady leasing recovery and continued investment sales strength.

MSW members have been aware of the company since the week of May 15, 2005 when CBG debuted on our daily screens. That same weekend on May 21, 2005, CBG made its first weekly screen at $37.20 and has not turned back. We established a breakout and/or pivot point of $38.95 and declared a strong support level near $33.00.

On June 23, 2005, we featured the stock as a highlighted case study when the price was at $41.03 and we detailed the setup and breakout of the pattern. The stock has made 11 consecutive weekly screens and has been a strong performer on the daily screens as well. If you were one of our members that purchased the stock at the pivot point, you would currently have a gain of 32% in less than three months (10 weeks to be exact). Keep up the good work and always stick to you buying and selling rules. Never let a solid gain slip away due to faulty system management.

Piranha