Addition By Subtraction: Building Your Watch List

Recap

Last week I released the 2nd part of my 5 part series on building a better watch list.  Based on the emails I've gotten so far, it seems like this theme of addition by subtraction is really resonating with people. 

So I decided to expand on this with my guest blogger posts on MyTradingBuddy where I introduced my "funnel" based method of watch list building.  In this week's iteration, I'm going to explore the lower portion of the funnel, where we begin stripping out stocks by the variables tied to them.

I view variables on a stock as physical barriers that get in the way of further action (i.e. placing it on my watch list).  Here's a break down of some the riskiest variables I like to avoid, along with some background on each.

Are Institutions Maxed Out?

I use institutions throughout my process and I offered some thoughts on why in a previous post.  It's rare that institutions will come into a position in full and all at once because it creates volatility and artificially inflates value, which ultimately has an impact on their potential profits.  Instead, they prefer a measured transition which is easy to spot if you know what to look for.  

However, some times institutional activity in a position begins to slow down.  It's hard to say why, exactly.  Perhaps there are other stocks that have caught their attention, or perhaps they're maxing out.  Either way, this is going to have an effect on the momentum of the stock and it's more likely to move sideways than upwards.

Earnings

Some people have made their living trading around earnings but it's too risky an endeavor for my taste.  The reason I see earnings as a variable is because I can't predict how institutions will react to the information in a report.  When a normal person like me looks at a glowing earnings report, I may think to myself, With these numbers, this thing is about to break out!

I have no idea if that's the case, because unfortunately, I don't have access to what institutions are seeing.  They may be looking at multiple companies simultaneously and if the one I'm looking at is the 3rd best earnings performer in their eyes, then taking a position on my target exposes me to additional risk.

This is why I like to wait at least 3 sessions after earnings before taking any kind of action.  If the stock is solid, I'm good to go.  if not, my capital is safe!

Passing The Buy Point

I'm sure that every reader of IBD® has run into this at one point or another.  When a stock has solid fundamentals but has passed its buy point it's easy to assume that it's safe to chase.  I can't stress enough how bad an idea this is!  Sooner or later this approach will come back to haunt you.  If the stock is really a winner then it's going to offer you another buy point or it's going to retrace and you can get involved then.

Government Involvement

This one probably seems like a no-brainer but I've still got to mention it.  The only thing more impactful than the behavior of institutions is the behavior of the government!  When I'm looking at a bio-tech company that's got solid fundamentals, I want to know if there are any approvals pending with the FDA or anything like that.  If I've got 10 stocks that have made it this far down the funnel but 2 have government involvement swirling around them?  I'm down to 8!

8 Week Hold Rule

This one circles back to the idea that Institutions can max out.  When IBD® shows that a stock is on the 8 week hold rule, what they're really saying is that you need to wait for 8 weeks for institutions to fully digest their existing position.  Remember, when institutions are sitting things out, the price of a stock is more likely to move sideways.  That's just one more variable I eliminate from my trading equation.  

Growth Stocks Should Survive

You can make money investing in all sorts of ways.  Some people live and die by IPO's.  Some work penny stocks while others rehab and flip real estate.  There's no "best" way to make money investing but I prefer to work with growth stocks.  By using the variables I laid out here, I'm able to better pin point the true growth stocks.

At this point in my process, I've usually got somewhere between 3 and 5 stocks that have made it through my funnel and on to my watch list.  In the 4th part of this series we're going to look more closely at how I structure my watch list and how I rate stocks in a side by side comparison.

As always, keep the comments and emails rolling!

Amin

$MNK $PANW $CCL Moving Up - Is The Market Storm Over?

Has The Storm Passed?

After the pain and volatility at the end of March, it was great to see a positive trend in the market last week. The three major indices that I track every day ($SPY $QQQ and $DJX) showed some positive price movements in a very tight and disciplined way. The 8 day, 21day, and 34 day exponential moving averages (EMA) have been kissing each other since early last Monday. All of these three EMA’s have merged and are slowly but methodically moving up.  

The last piece of the puzzle is volume from the institutions.  To propel these indices through a major resistance ceiling, it's going to take an influx in volume from the big dogs. If $SPY, $QQQ and $DJX continue on the path from last week and institutions come in huge volume, it will be time to establish bullish stock positions.  This is why it's important to close out a losing position and harvest profits on your winners.  If you're trading like me then you've kept your powder dry for the last 2 weeks and have capital available for this opportunity. 


Use Institutions To Your Advantage!

I often mention that traders and investors alike should always pay close attention to the behavior of institutions.  There are many reasons to do this but here are just a few  

• Institutions hedge their positions and control tremendous resources
• Their success depends on them being right so they use their resources to gather up the best minds and data available
• Given the size of the positions they take, it's hard for them to hide the moves they make.  There will always be a trail of bread crumbs even on their most subtle moves.
• They will rotate in and out of the different ETF sectors and you can actually detect this behavior on charts, if you know what to look for.

As a growth stock trader, everything I listed above has an impact on my trade planning so I like I take my lead from institutions.  In particular, I work in the sectors they're focused on so that I can keep the odds in my favor.

Which Sectors Are Up?

With that being said, institutions seem to be focused on Health Care ($XLV) and Consumer Discretionary ($XLY) right now. I am only looking at stocks which are trading close to their 8 day EMA.  Earnings are also a variable I like to remove from the equation so I eliminate stocks that have their earnings reports due in the next couple of weeks. Here are 3 stocks that meet my strict criteria:

$MNK
$PANW
$CCL

My low risk approach means that I am looking for the $SPY to punch through major ceiling of 213, with QQQ punching through 109. It is best if these resistance lines make their move in high volume. I'm waiting to make a move until the market presents itself with these conditions!

Happy trading!

Amin

This Week: Spring Is In Full Swing

Some Signs Of Life

It appears that the $DOW is poised to break 18,000 and the $SPY is flirting with 2,100. Both are great signs state-side but I'm still paying close attention to what's happening internationally.  China's $FXI is showing some strong momentum and Japanese dividend growth has actually out paced the US recently.


There's a quite a bit of instability in the Middle East at the moment and it's affecting the price of oil along with global supply levels.  In fact, US oil stockpiles hit an 80 year high this week and with a proxy war going on in Yemen, it's quite likely the Saudi's will continue to keep production levels high to keep pressure on the Iranian regime.


Also, the Eurozone is facing a new wrinkle vis a vis Greece that could have near term economic impact.  The IMF will have some more tough choices ahead and it will be interesting to see if there are additional developments in the coming weeks.

A New Opportunity

This week I started my role as a contributing author for the blog at My Trading Buddy which is incredibly exciting for me!  I highly recommend subscribing for their free updates.  A number of the other contributors are putting out some wonderful content too.  Here are a few in particular you'll want to bookmark:

Paul Bratby
Mercedes Van Essen
Easy Forex
Dr Stoxx
Assidium

I'm planning to contribute at least 1 post a week as long as I can up with fresh and interesting content and that's where you come in!  Please keep your comments and ideas coming as they get my creative juices flowing.  

A Tradition Unlike Any Other

You know that Spring has arrived when you hear the lilting voice of Jim Nantz and see the rolling green fairways at Augusta National.  Wednesday kicked off the annual festivities of the Masters Golf Tournament and it couldn't have come sooner.  Many of my friends in the north east just went through one of the most miserable winters in recent memory so a few days dedicated to the glorification of a spring tradition is not a bad thing at all.  

Make sure you carve out some time this weekend doing something out of your normal routine.  I've always found that changing up my energy for a day or two can help to clear out the cobwebs.  Come Monday morning, I want to be fresh and ready to tackle new challenges and this is one way I manage to make that a reality.

Happy trading!

Amin

It's Time For a Watch List Tune Up

PHOTOGRAPH BY RYAN MCGUIRE 

Last week I offered up the first part in a 5 part series on building a watch list. In this installment we'll take a deeper look at the earliest stage in the process.

Let Data Drive You

Are you tempted when Jim Cramer is singing the praises of Tesla on CNBC? Or perhaps your friends brother-in-law knows a guy who works at GM? When it comes to watch list building, only focus on the data that you can verify. 

There will always be a fair amount of noise out there so you've got to learn which information you can tune out, and what you should actually be paying attention to.  I like to keep things simple and with as few moving parts as I can.  It helps keep me from getting dragged into the dreaded cycle of analysis paralysis that every stock trader fears.

Examine Market Conditions

I like to start by taking a look at the chart action of the 3 major indices, $DOW, $SPY and $QQQ. Once I've got a clearer picture of the general market I then like to hone in on the 9 major sector ETF's to see which is showing the most life. If you aren't familiar with the sectors, they are:

1. XLK = Technology
2. XLV = Health care
3. XLI = Industrials
4. XLB = Materials
5. XLE = Energy
6. XLF = Financials
7. XLU = Utilities
8. XLY = Discretionary
9. XLP = Staples

Now that I've got the best performing sector in hand, I want to look at just the top stocks in that sector. This is how I get an idea of where the momentum lies. For me, the Relative Strength is the key component in this stage of the process.

Have The Right Tools

Adding a stock to your watch list is only the first step, now comes the real work!  There are countless tools out there but since I focus only on growth stocks, my tool kit begins and ends with Investors Business Daily.  The true value of IBD® is the quality of the data they provide.  In addition to their full break down in the IBD 50 and the Big Cap 20, their editorial section sheds light on the news of the day as it relates to the markets.

The reason IBD® is so critical for me is because they've combined the science of fundamentals and technical analysis with esoteric elements like momentum.  They've done all the leg work for me and I trust their proprietary ratings so it's a no-brainer as far as I'm concerned.  

I also like to cross reference my research with some other industry sources like Schaeffer's, Barron's, and Value Line.  My Twitter feed is actually configured to instantly publish new content from these trusted sources throughout the day so have a look if you'd like a consolidated stream.  

This should give you a fair idea on getting through your initial prep work and building out your watch list with the lowest hanging fruit.  Watch for part 3 of this series next Wednesday where we will examine what I see as barriers to taking a position.  

If you're interested in taking a closer look at my methods I have a few openings left for a free Webinar this Friday April 10th from 3 to 4 PM EST.  Email me ASAP if you would like to take part as space is limited!

Easter Is Over: Monday Market Spotlight

Ever Wonder What Determines Stock Prices?

Traders and investors alike need to be aware that over 70% of the volume in the US stock market is driven by institutions. One interesting thing about institutions is that rarely do they take a position in full all at once.  Instead, they prefer to build their position over a few weeks. However, when they decide to take profits and exit their positions, it's sudden and has the same effect as a guillotine. This is the scenario we watched unfold last week. 

PHOTOGRAPHED BY RYAN MCGUIRE

It's difficult to know what caused institutions to behave the way they did. Perhaps the jobs report wasn't to their liking? Did the GDP report spook them? Or maybe the recent comments from the Fed were the real catalyst. Could it even be the pending deal with Iran?  All I know is that they reacted by dumping their weak stock positions in high volume. The result? All major indices are trading below the 50 day simple moving averages (SMA).

What's Coming This Week?

Earnings season starts this week with companies reporting their Q1 performances.  First quarter GDP is unlikely to impress anyone it's tough to predict how institutions might react to this new round of reports. Surprisingly, some sectors such as; energy (XLE), industrials (XLI) and the materials (XLB) are already trading below the 200 day SMA. With the transport sector (DJT or IYT) trading below the 200 day SMA as well, it's not looking pretty for the health of the over all manufacturing zone of our economy.  You can be sure that institutions are keenly aware of all of this.

Institutions Are Flush With Cash.  Where Will They Send It?

IBD® is calling the market as “Uptrend under Pressure" and last week we added some more distribution days on the SPY and NASDAQ. For those that don't know what a distribution day is, IBD® has a great break down available here.

We've faced a total of 18 distribution days this quarter - 4 coming just last week. That is pretty alarming to me so I'm inclined not to take any new positions right now.  Instead, I'm conserving my capital so that I can deploy it when the market isn't as volatile. 

For bolder traders, take your lead from institutions.  They have maintained some of their core positions in the retail sector. Under current market conditions, look only at stocks that are in the sectors institutions favor. I also check to see if a stock is trading above the 21 day EMA. Here are 3 stocks that meet such strict criteria:

$FL
$EA
$KR

I'm sticking with a low risk approach in order to conserve capital. I'll feel more at ease when institutions get back into the fold. The road sign in my opinion is when the SPY breaks above 213 long term resistance in high volume for at least 2 days in a row.  I want to do everything I can to get the odds in my favor and I sleep a lot better when I know that institutions are participating in the stocks I like.

Watch for my next post on Wednesday where I'll dig into the 2nd part of my 5 part series on how I build my watch list. 

Happy trading!

Amin

Now Hear This! My Week & My Gift To You

PHOTOGRAPH BY RYAN MCGUIRE

Nuke Deals, Indiana, and Market Volatility - Oh my!

News cycles this week were heavily centered on the long awaited deal with Iran over its nuclear program.  Make no mistake, this agreement is going to have a major impact on energy trading throughout next week.  Don't be surprised if the $EURO is affected as a result too.  

In the sports world, March Madness has grabbed up a lot of attention.  With the Final 4 coming to Indianapolis, local businesses have been prepping for a swarm of rabid fans.  However, a new law in the state of Indiana has thrown a wrench in the works for pro-growth advocates and has pulled attention away from this popular annual sporting event.  Once the dust settles, it will be interesting to see if Indiana's long term business health has been jeopardized as a result of the law.   

On the market side, the volatility of this first quarter has been pretty frustrating but if you're trading like me then you managed to grab some profits and you stopped out before seeing any real damage to your portfolio. 

My Week On Twitter

Twitter has increasingly become a resource in my research, I'm really starting to understand why the platform has become such a powerful force in recent years.  This week I came across a number of interesting people which I've started organizing into Twitter lists. 

You can check out my lists here but make sure to check out Floren Cabrera and Russel Barbour in particular.

My Gift To You

In my post this Wednesday I mentioned that I would provide a document to help people build their watch lists the same way I do it.  As promised, here's a copy of that document!  When I find a stock that I might be interested in taking a position on, I pull this up and check off each item in order as I work through my research.  I'd love to hear your thoughts on how it fits into your process!

What's On Deck

If you're in the Tampa Bay area, our Westchase and Tampa Meetup groups are getting together on April 14th.  If you're interested in attending, make sure to RSVP and please spread to word to your friends and family.  One of the biggest reasons we host the event is to meet others like us, share stories of our success, and learn from each others mistakes.  The more active and vibrant a group we have, the more we all can get from it!

I've also got some exciting new opportunities lining up in terms of expanding the reach of my message.  I'm also planning to roll out a series of new services based on feedback I've been getting from my readers so watch my blog next week for more news on that front!

In closing, I want to remind everyone that the markets are closed in the US today but elsewhere they're still open so make sure to limit your exposure if the charts aren't in your favor right now. 

Happy trading!

Amin

FREEZE! You Need A Better Watch List

My 5 Part Series On Building A Watch List

In the month of March I introduced my 9 Simple Steps To Creating a Trade Plan and I received some great responses from my readers.

A lot of people asked me for advice on how to better identify stocks and what exactly they should look for in a stock so I decided to build on my message in the month of April with a new series that covers how I build my watch list.  

As a part of this process I will provide you with a spreadsheet that you can actually use to build your own watch list so keep your eyes peeled for my next post on Friday where I'll have a copy available for download!

In this post I will give a general overview of the philosophy I've put together but each week we'll dig into a specific element so that we can explore it in greater depth.

Where Do I Start? 

I like to picture my watch list stocks flowing downward through a funnel where only the best opportunities make it to the bottom.  In my mind, the top of the funnel focuses on the broadest aspects of the market so I like to review the chart action for the 3 major indices; SPY, DOW, and QQQ to give myself an idea of the general conditions I'm working with. 

After that, I move into the next phase of my research where I focus on the 9 major sector ETF's.  My goal here is to determine which of the sectors is leading the way and has the most action.  Once I have identified the best performing sector, I start looking at the top stocks within just that sector to help give myself some context.  At this point of my watch list preparation I'm reviewing charts with an eye towards the Relative Strength in order to get a clearer picture of a sectors general momentum.


Eliminating Variables

I view variables as barriers to action so now that I'm in the middle of my funnel, I've got to eliminate some to help me narrow things down. At this point I begin incorporating IBD® more heavily into my process. I'm looking for 9 specific things in a stock

1. Relative Strength must be at 90 or higher
2. EPS rating must be at 90 or higher
3. Volume traded per day must be a minimum of $100 million
4. IBD® accumulation distribution rating, B or higher
5. Up down volume must be at least 1.4
6. The stock must be in the top 40 group
7. I look for a general trend that shows me an increase in price and an increase in volume.
8. I review IBD® mini charts and make annotations for the buy point zone.
9. The stock must show increased sales and earnings in the last 2 quarters.

Building The Watch List

Once I've applied the above criteria I can begin putting together a true watch list.  My watch list criteria are very strict but even still, I may add as many as 10 stocks if they fit my framework.  However, I only take 1 position at a time as part of my trading philosophy so at this point in my process, I need to select only the cream of the crop as my prime opportunity for taking a position.

To help me determine which stock gives me the best opportunity for profit I consider the following:

1. Is this stock moving up in relative strength.
2. Is this stock increasing in volume
3. Is this stock showing increased price
4. Is this stock approaching its resistance line
5. Is this stock approaching its buy point

.
Now I am at the bottom of the funnel! 

One opportunity has made it through my gauntlet of stress tests so now I'm ready to identify a profit target, establish a loss threshold and, define my window of opportunity

If you're interested in taking a closer look at my methods or if you'd like a walk through of my step by step process please let me know!


Amin Hemani 
investorspotlight@gmail.com