Member question on CMED

Today is a question that I received during the day Last Wednesday (one week ago today – 11/23/05).

E-mail Question:

Dear Chris,
Yesterday was a mixed feeling day for me in the market. I tell you the story as I needed someone to cry on!!!

I took a position after a month break as I was moving apartments. I bought shares in CMED an IPO that looked good and was on a strong upward trend. I bought at $37.40 on Monday and it closed slightly off that at day end. Tuesday it starts a big rise and hit $42.6 at which stage I was up 14%!!! In Gib we are 6 hours in front of you so when I checked my position at 7pm here 1pm there I was doing well, I think the price was at $40 approx and the up trend continuing. So I went home with a high - I have not got a computer at home yet. Come into the office this morning open my screen and check the position and it has slumped to $34.18!!! and with a further slump after hour close to $33.43!!!! I am now in a 10% loss position.

What could have happened? Was the news that a new Chinese IPO had postponed its entry as reported on Reuters that negative?

Well I am licking my wounds now and quite depressed, back to the drawing board I suppose. Greed again got the better of me and I should have closed my position before going home.

Take care and talk to you soon.

Regards,
(Actual name will be anonymous to protect the privacy of our members)


My Answer:
Dear Anonymous,

On Monday night, I gave this analysis for CMED:

“11/21/05:

Medical:
CMED – 36.92, three consecutive days of big gains with two gap-ups (possibly a climax run) that may result in a harsh, quick correction.”

Well, that quick harsh correction came at the end of the day yesterday.

You should never try and chase an extended stock. I will still place a stock on my daily screens if it is hitting new highs but I never put CMED on the weekly screens because it was too extended for a buy (in my opinion). The gap-ups and quick gains resembled a climax run which usually results in a harsh correction, similar to what we are now seeing.

At this time when I am not sure what is going on and the position is moving against me, I sell and sell it all immediately! After I sell, I sit back and take another look without any emotion involved and reassess the situation. It is ok, just sell for a small loss and move on.

Good Luck,
Chris

Stock Options Question

...Today I am going to feature a question I received from a member and how I answered this question. As you know, I answer questions all day long for members of this site.

E-mail Question:
Hello Chris,
I hope the Holiday was enjoyed by you and yours. I see MCO on the daily screen and am curious about long term options. As you know, I have AAPL options (both Jan 55 and April 55 calls) that move pretty much in unison with each other. Sometimes the April call actually goes up more than the January during the day. Actually I just missed selling the Jan. options at the top today and am watching them closely (60% profit). Anyway, how much does an option move that is a year out? I've learned my lesson and with options, I will NEVER hope that they will come back and let the loss get bigger than it should be which depends on how many contracts I have. 10 contracts and I can let it go down quite a bit (never more than 50%) but the 30 to 60 contracts that I've held at one time in APPL, not even close to that much of a loss! That's why I asked about the signs of a correction coming but that's for another day.

If you were to buy the long term call for MCO, how high would it have to run before the profit started building up? I'm thinking that far out, it wouldn't move much for the first part of a run.
Bob

My Answer:
Bob,
I am going to use one example to explain this:
Say I buy the Jan 07 $55 call for $10.60 per contract (the asking quote this morning - 11/29/05, 9am).

This means that your break even point will be $65.60 (anywhere during the contract period minus fees and taxes). The break even point is always the call target ($55) plus the premium that you paid ($10.60 in this case).

If the stock moves to $80 in the next two months, the premium will be worth approximately $25 so you would have a profit of 150%. You would have this same profit if it took until next December to move to $80. For every dollar that the stock increases above $65.60, you can add a dollar to the premium you paid. I know time factors and volatility play a role in the actual premium price and the spread between the bid and the ask but the dollar approximation is a simple calculation that can give you a general idea of your potential profits at any time.

If the stock takes 8 months to move to $100, your call premium would be priced near $45 each (a $35 profit per contract or 350% profit). Remember, the breakeven is $65.60 so take $100-$65.60=$34.40 profit; add the original premium that you paid ($10.60) and you get the approximate price of the option contract at $100 = $45 ($34.40+$10.60).

You can have an immediate profit in a long term option if the stock price rises quickly above the breakeven area.


Although I do not teach options on this site, I am open to questions privately and will let you know if I am qualified to answer the question when it relates to options.
Thanks and Enjoy,
Piranha

Placing Stock Sell Stops

...If you follow my articles or my stock analysis, you already know that I am not a supporter of physical sell stops due to the fact that market makers can manipulate these stops during the day. A market maker can drive the price down artificially during trading hours setting off physical stop after physical stop only to allow the stock to rebound and close for a slight loss or a possible gain. The market makers that drive down the price are the same individuals that grab shares at the new intraday price lows, giving themselves an instant profit at the expense of investors like you and me. I fell victim to this trap several times in 2002 and 2003 and became very angry at my stock system until I understood what was really happening. I had established positions in stocks and set a physical sell stop about 7-10% lower to protect from a larger loss. I would come home or take a break only to see that I was automatically sold out of the stock due to a brief drop that only lasted a few minutes to a few hours. The stock would drop anywhere from 15% to 25% intraday only to rebound for a small 1% or 2% loss. In one case, my stock that had been sold out intraday actually managed to close the day with a slight gain, really making my emotions rage. This same stock went on to double over the next nine months but I never had the courage to get back in. I took this anger and quickly converted it into a research effort that would help me understand what had happened and why it had happened and most importantly: What can I do to prevent it from happening to me again?

I started to study the three instances where this action happened to me and I researched other stocks that I did not own but showed the same type of false intraday movements. After reading about market makers and my individual research, I came up with a solution to the problem. If I narrowed down my portfolio to only high quality stocks, both fundamentally and technically, I knew that my risk was low enough to withstand an intraday movement without placing a physical stop. Barring a catastrophic event, I felt comfortable enough to set a mental stop in my head and write it down on a piece of paper so I could review the stop after the day’s close. If a stock I own drops below my mental stop, I will either sell “at the market” first thing the next morning or I will wait for the first hour of trading to end and then make my decision to sell. If the mental stop has been passed by more than 5%, I sell immediately the next day. If the metal stop is only sliced slightly (less than 2%-3%) I will hold until mid morning or early afternoon to sell my shares. Typically, when a stock violates a mental stop that I set; it will drop even further during the first hour of trading but will then rebound as the day moves on, allowing me to take a lesser loss. This is risky but it has been a plan that I have been following for two years with success.

The other more important advantage that mental stops give over physical stops is the prevention of getting sold out intraday during a false breakdown. Since Tower Group (TWGP) is currently on the MSW weekly screens, I will use it as a perfect real time example. Below are the open, high, low and closing prices for the past two days in Tower (the stock has not reached an intraday low below $16 in the past several weeks).

Monday: 19.64 open, 19.81 high, 18.53 low, 18.87 close
Tuesday: 18.86 open, 19.02 high, 15.37 low, 18.49 close

As you can see, the stock went as low as $15.37 on Tuesday only to close back up at $18.49 (a gain of 20% from the intraday low) but what you cannot see without an intraday chart is the fact that this entire move took only 90 minutes of the trading day. Within minutes of the opening bell, the stock dropped 20% but rebounded with strides over the next 90 minutes bringing the price back to the $19 level. From that point forward, the stock gradually fell and lost about 2% for the day but it wasn’t anywhere near the 20% drop from the first hour of trading. If you had a physical stop near $18, a short term support level, you would have been sold out even lower during the intraday drop and would have a large loss in your portfolio. If you had a mental stop, you would not have been sold out and could have made a rational decision on Tuesday night to see if you would like to sell the next day because your mental stop had been violated. The stock managed to close above $18 per share but a major red flag was issued and in most cases, I would sell the next day to be safe. I would then wait after selling the stock to see what direction it was going to take and if the up-trend would continue. If the up-trend continued, I would jump back in at the first solid opportunity.

Some investors think I am raising my risk without using physical stops but I know I am helping my odds by assessing the situation at the end of the day by placing mental stops. I only place physical stops on a position that is showing at least a 20% gain and I will give it room to breathe. If the stock shows a 50% or 100% gain, I will place a physical trailing stop to protect my gains from melting away but I will not place a physical stop on a stock that I just purchased. Too many times during the initial stages of a breakout, market makers will wipe out all of the physical stops and restart the movement without the heavy domino load below. These market makers know about CANSLIM and other stop loss systems and they can see where these stops are placed; so they wipe them out, allowing themselves to get in at a lower price and they release the possible sell-off due to hundreds, if not thousands of stops that have been set due to a specific system strategy such as CANSLIM. Unless you are investing in high quality stocks with strong fundamental and technical ratings, do not employ this strategy or you can lose your entire trading stake. The strategy is a suggestion based on the results it has given me over the past several years after the bad personal experiences that I had with market makers in the past. They may burn other investors, but they no longer burn me – only I can burn me!

Chart Link: TWGP Chart

MSW Mid-Week Screen

...I am posting a mid-week screen to everyone today, a typical breakdown of the best performing stocks on MSW and detailed market analysis. This specific list also narrows down several stocks that made solid moves in the market Wednesday and are at or near new 52-week highs with strong fundamental and technical characteristics.

MSW Mid-Week Screen:
The MSW weekly screened stocks are starting to heat up! Today, the group of 24 stocks was up 3.56% collectively with only two securities giving us a loss (CPTV and WC, down -0.18% and -0.33% respectively). Our top gainer of the day was CUTR which has been itching to make the official screens for the past several weeks. As you already know, this stock has been on the weekly screens since August 20, 2005 when it was listed at $22.41 (with today’s close, the stock has gained 45% while sitting on the watch list). With a 20.85% gain on volume 978% larger than the 50-d m.a., I can say that the stock has made it presence. It posted earnings of $0.27 a share versus $0.07 a share last year. Analysts expected a jump to $0.14 while the company expected a move to $0.13 a share, both well below the actual report.

CB Richard Ellis was up an impressive 13.55% on volume 444% larger than the 50-d m.a. after crushing its earnings estimates. Third quarter earnings surged to $0.75 per share, well ahead of analysts estimates near $0.60 per share. Last year, the company reported earnings of $0.16 per share or profits of $11.9 million (yesterday the profits came in at $56.9 million). The resistance level that we have been establishing for this stock and the buy area that we have spoken about near $50 was crossed over today in a hurry as the stock made me proud after keeping it on the screens though the tough times. I rated CBG a buy for trend traders and momentum buyers over the past two weeks.

PATIENCE is essential; I have been writing about patience for months and days like today make me look like I know what I am preaching. This year (2005) has been tough for stock investors and it has been especially tough for equity research communities such as MSW because people start to lose faith in me instead of understanding what is taking place (they expect 100% gains every year and don’t like to see 20%-30% gains). Officially we are in a rally both on MSW and in IBD so stocks can be purchased but I would do it with caution until the NH-NL ratio returns to prominence. Eleven stocks from our most important screen (weekly screen which will become the MSW Index in the near future) were up at least 3.5% with eight of them doing so on above average volume. I will repeat that the MSW weekly screened stocks will always outperform the market on good days because I narrow down this list to the best performers with the most strength. Are the weekly screens repetitive? Yes they are from time to time but the stocks pay off in the long run and you will understand why jumping ship from stock to stock is a losing proposition. With strong stock selecting skills and the patience to wait until the “M” in CANSLIM is right, you will make some of the best returns of your life.

Why am I so excited today? Because my leading stocks are giving me signals that the market may be ready to move. I am now in the mode to grab shares in stocks I have been following over the past two dismal months. I will be cautious because the NH-NL ratio must confirm the action but I also don’t want to let too many stocks get too far extended. If the NH-NL ratio does not confirm, be prepared for a nasty pullback so don’t get over anxious. I know the MSW All-Star list has been stagnant lately and many new subscribers expect to see the triple digit winners from the start but this is not realistic. If this new rally lasts and turns into something stronger, you will see fresh names make that list but until the market creates a new bull, most of the gains will be under 100% but far better than the market and most competition.

With the NASDAQ back above the 50-d m.a. and the strong surge today, we can feel safer adding new positions to our portfolios. Do not use margin until that NH ratio starts producing at least 800+ new highs per day. As this rally continues to develop, you can slowly move away from the cash reserves that I had you move into over the past couple of months. Last month in the mid-week screen, I said that a critical point for crude oil was $60 per barrel and if the number was penetrated, the market may turn higher and the energy sector may be in trouble. Crude oil ended at $59.75 today, the lowest close since July. With earnings beating expectations across all sectors, the market is finally moving higher when it should (after positive announcements). The NH-NL ratio ended at 298-91 today, the strongest new high total for the week. Since many stocks have been beaten down over the past two months, this indicator will take a few more days and or weeks to reach the required rally territory. If the indicator fails to produce 500+ new highs per day over the coming weeks, I will get worried. Until then, I will use the MSW weekly screened stocks as my gauge for the strength in the market and will confirm what it is saying as December approaches.

This week, we have been watching as several sectors are moving to the front of the pack and they include medical stocks, transport stocks, computer software stocks and other technology related industries. Specifically speaking, transportation and insurance industries have been making a lot of noise this week with investment banks also moving higher.

Tonight, I will cover several big performers from the MSW weekly screens and I will also post up some strong performers outside of the MSW stocks on a blog post that will be uploaded tomorrow morning. Enjoy the gains today and get ready to rock and pull the trigger if this rally last, don’t get gun shy, you can always sell at a small loss or for a small profit if things turn bad. Don’t kick yourself in the side six months from now because you missed the beginning stages of an attempted rally. Play the odds, use risk control and you won’t need to worry no matter what the markets throws at us. If the market develops a strong rally, your reward will be a big fat portfolio gain, one that you earned based on sound rules and judgment and you will be happy to pay the capital gains in a year or so. I am always happy to pay capital gains because I know I had a great year!

MSW Movers Today:
CUTR – 32.52, up 20.85% on volume 978% larger than the 50-d m.a. The stock crushed earnings today and is now extremely extended from any major buying opportunities.

CBG – 56.32, up 13.55% on volume 444% larger than the 50-d m.a. The stock was up near $55 within the first hour of trading, almost 10% past the official entry area. CBG now has a 51% gain on MSW since May.

THE – 48.42, the recent case study was posted yesterday and the stock added another 4.78% to the recent gains. Volume was up 48% versus the 50-d m.a. The stock has gained 36% since being listed on the screens at the end of September.

AAPL – 59.95, I hope everyone held earlier in the month when I specifically came out and told you that I was a holder until it broke key support lines (moving averages). Since the drop to $47.87, the stock has rebounded for a 25% gain. Since it was re-listed to the MSW screens in July at $41.55, the stock is up 44%, one of our top performers during the dreadful summer months. Since the first MSW weekly screen last October, the stock is up 153%. The reason it is not an All-Star is due to the fact that we sold the stock earlier this year when it started to breakdown and correct. If I held the entire time, it would be on the All-Star list. I try to be honest with the rules of the site.

ESRX – 78.15, up 4.13% on volume 97% larger than the 50-d m.a. This stock was added as a $60-$100 candidate on October 15, 2005 at $61.16. In a couple of weeks, the stock has gained 28% on MSW.

ADSK – 47.60, up exactly 4%, this stock rounded out our biggest winners today that made gains of at least 4%. The stock is up almost 30% since June when it started to consistently make the weekly screens.

NNDS – 38.80, the stock passed the original pivot point that was reached two weeks ago before the reversal but needs one more big day to make that new high and be a sure breakout. A move above $39.79 would qualify.

WFMI – 149.87, this horse has been a champ since getting support near the 50-d m.a. We now have a 28% in the stock since the first screen in May at $116 per share. Some thought the stock was too high once it crossed over $100. What are they saying now? Buy with the trend and you will be okay, never think a stock is too high to purchase or too low to sell.


Other Stocks Making Noise Today:

Medical:
WOOF, HOLX, STJ, SMTS, HITK, ISRG

Business Services:
EXBD, SAY

Computer Software:
BLKB, KNXA, BBBB, CRM, TALX, CNQR

Internet:
TRAD, GYI

Others:
HANS, MIDD, NWRE, ELOS, MNT, EXBD, BOOM

Several stocks listed above have made past MSW weekly screens but were removed due to corrections or for profit taking. These stocks include HANS, HITK, CRM, ELOS, BOOM & WOOF. The most recent stock from this group that was removed was CRM as it corrected with the market over the past two months. Recent action has kicked it back into gear as the stock is trending higher. Hansen (HANS) broke out to a new 52-week high and looks to be ready to make a $60-$100 run for the second time (it made the run earlier in the year before the split). We followed the stock from the $60 level until it hit $100 here on MSW. If options were available, I would be buying “at the money” calls with at least a 9-12 month time frame.