Cutting Corners Is Bad Idea Whose Time May Never Come
Cutting corners to get ahead is a temptation that many investors have difficulty rejecting.
Suppose a stock forms a cup-with-handle pattern. Why wait for the breakout? Can't an investor get in cheaper by buying before the stock breaks out?
Income investors are particularly vulnerable to this temptation because they get a better yield via a lower price.
BlackRock ( BLK ), though, illustrates the downside of cutting corners. On Aug. 5, IBD noted that the stock shaped a cup-with-handle base. The potential entry was 288.92.
The situation seemed to have everything going for it. The pattern was in an early stage. The market was in a confirmed uptrend. The handle formed in quiet volume. The stock had institutional support. Quarterly earnings reported in July had jumped 34%, the best gain in almost three years. The annualized dividend yield was 2.4%.
BlackRock lacked only one thing -- a breakout. But that was coming, right? So why wait?
Actually, what was coming was a weakening stock market. After the Aug. 6 session, IBD's market outlook downshifted to uptrend under pressure. BlackRock declined for weeks, eventually losing its 50-day moving average.
Anyone who bought on Aug. 5 is still under the break-even point. If the same investors also ignored the 8% sell rule, their hope now is to make it back to break-even.
Do you notice the irony? Those who refused to wait for a breakout are now forced to wait for a chance to break even. Sometimes the best trade is the trade you don't make, and rules can help on that score.
BlackRock has work to do if it is to form a new pattern. The RS Rating is only 74, which partly accounts for its 80 Composite Rating.