Follow     the     Rules

I often highlight basic rules of Growth Stock investing as preached by Mr. William J. O'Neil (Founder of Investors Business Daily).  These rules help guide us and avoid the pitfalls of trading and investing.  Some of these rules may seem counterintuitive to conventional wisdom of investing.  They do work though.  I shall highlight some very basic rules that worked for me during the last 8 weeks of choppy market.  There is so much noise in the market daily with tariff wars, impeachment proceedings, yield curve inversion, fear of recession and the geo political news of Brexit and the wars in the middle east.  Best thing one can do as a trader and an investor is to just tune off the tv and the print media.  Focus instead on the data.  

Be  data  driven  and  not  news  driven

Mr. Chris Ciovacco(Founder and CEO of Ciovacco Capital Management) had tweeted the following study couple of days ago:

Study: Top Performers Are Very Selective And Focused

Morton E. Hansen, a professor at the University of California, Berkeley, recruited a team of researchers and performed a five year study to identify which specific set of behaviours led to high performance; the key takeaway was summarized in The Wall Street Journal:

"The common practice we found among the highest ranked performers in our study wasn't at all what we expected. It wasn't a better ability to organize or delegate. Instead, top performers mastered selectivity. Whenever they could, they carefully selected which priorities, tasks, meetings, customers, ideas or steps to undertake and which to let go. They then applied intense, targeted effort on those few priorities in order to excel"

I found this tweet to apply very well to all of us a traders and investors of Growth Stocks.  I focused on 3 very basic principles and rules to follow investing in $MTH.  The rules that I observed was:

1. Always buy something on a  "Follow Thru"  day.
2. Add a second position as the stock continues to make gains.
3. Add a third position when the stock bounces off the 200 day sma(simple moving average) in above average daily trading volume.

Here are the details of the trade to show how to profit in Growth Stocks focusing on the 3 basic rules I have highlighted.

• July 24th stock rose +20% within 2 days during earnings breakout session.  Volume was 5 times the daily average trading volume.  This was a clear signal of institutional support.  It invoked an 8 week hold rule.  If one had this stock position than it should be held for 8 weeks because the stock often tends to move higher after consolidating.
•  August 14th was a  "Follow Thru"  day and a small test position was initiated at $62.00.
• Sept 9th, the stock continued to gain in price and hovering along the faster moving 20 day sma.  Second position was initiated at $64.72
• Oct 23rd the stock bounced back up from the 200 day sma in volume 3 times the normal average daily volume.  This reflected institutional interest and support of the stock.
• Oct 24th a third position was initiated at $74.50.  IBD rules suggests that one should follow the institutions.  They ultimately have the power of their trading volume to propel the stock higher.

First position is +21.15% in 10 weeks and 3 days.

Second position is +10.39% in 7 weeks.

Third position is +0.82% in 1 day. 

Currently the stock is trading $37 million daily(stock price $75.11 x daily trading volume of 495,000).  It has an RS rating of 98 out of 100.  It hasn't breached the 50 day sma on a weekly chart since the end of March.  These are the signs of a winning Growth Stock that is currently one of the leaders in the market.  The entire home building group is currently leading the market. 

Happy Trading!

Amin