Wednesday, May 13, 2015

$SWKS: Managing Risk In a Weak Bull Market

Last week I started a blog series on the importance of monitoring positions

Today, I'm going to highlight what I see as weaknesses in the structure of the economy and why I see back testing as a critical component for managing risk in a weak bull market.

I'll also break down one of my recent winning trades on $SWKS to show you why it was a winner and hopefully you can identify others like it in the future. 

The Weak Bull Market

One thing that has become really apparent to me is that we are in the midst of a weak bull market.  As a growth stock trader, I try to focus as much of my attention as possible on stocks that have true momentum and lead their respective packs.  In a strong bull market, new opportunities for growth and momentum spring up constantly.  However, in our current market, I'm seeing that all of the best opportunities have already been jumped on by institutions and in most cases they are maxed out.

The biggest warning sign to me is that institutions are throwing their profits at thin stocks lately.  In some cases they're even getting behind stocks that trade less than $50M a day.  This is incredibly uncharacteristic behavior for them which just proves to me that the prime opportunities they're used to are exceedingly rare in the current market. They're hedging their risk by stashing their cash in stocks where they can control the price. 

Economic PTSD?

I have spent a lot of time trying to figure out why it is that "new" growth stock opportunities are not popping up at a quicker rate and I think it all boils down to a sort of economic PTSD.  What do I mean by that?  Well it seems to me that this ongoing issue of there being a lack of demand world wide has finally caught up to us.  Governments, monetary policy experts, financial institutions, and many other large interests, have been artificially propping up demand for the past seven years hoping that eventually the private sector (and consumers) would get their acts together and start demanding more products and services again. 

Unfortunately, that just hasn't happened.  I'm not entirely sure what the reason is but it seems like consumers are still gun shy and waiting for the other shoe to drop.  Big corporations are sitting on heaps of cash due to uncertainties in the market that they have no control over.  We also have a noticeable shortage of leadership when it comes to any tangible pro growth initiatives that everyone can get behind.  We've also seen plummeting numbers in terms of the public's trust of large entities.  

This artificial growth we have right now has been propped up for a very long time and it just can't hold up much longer.  I think that is the reason that the recovery has underperformed.  As a result, I think that's why new growth stock opportunities have been harder to find in recent months.  

Learn From Your Winners

Now that I've established how precarious things are, I think it's important to show an example of a winner within these troubled times.  A recent example of a winner for me would be $SWKS.  This stock gave me a profit 10% in January 2015, and another 10% in March 2015 when I got into it again.  The key with this stock for me was that I managed my risk by harvesting profits and re-deploying them on this same stock when it hit my watch list and the math was in my favor again.

So let's look at why I won on this trade.  First of all, I watched this stock for a good 5 months before getting involved with it so I was able to document its momentum (institutional support) and set up some benchmarks for myself.  In addition:

  • The RS remained above 90 and it was the best performer among its peers
  • This sector showed strength the whole time I was in my trade
  • This group showed strength over the same time span
  • This stock was the strongest within its group

And most importantly

  • When a recent market correction hit, this stock withstood that correction.

When I apply my back testing to $SWKS it's clear to me that my system of using strict must have criteria worked to my advantage.  With that said, I'm going to continue using the successful elements of my system and try to improve them over time.

Hopefully my insights on the weak bull market demonstrates why it's so important to manage your risk.  At times like this when things get choppy, it's critically important to preserve your capital  

Next week we'll take a closer look at a trade that went against me with a focus on why things turned out that way.  

As always, keep me posted with your questions and comments.

Happy trading!



Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.

The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.