By Jeff Miller :
Our Stock Exchange is all about trading. Each week we do the following:
- Discuss an important issue for traders;
- Highlight several technical trading methods - including current ideas;
- Feature advice from top traders and writers; and,
- Provide a few (minority) reactions from fundamental analysts.
We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders.
In our last Stock Exchange , we asked whether you can analyze the market using psychology. If you missed last week's edition, check it out.
This Week- A tough stretch focuses attention on yield
This important topic has already attracted expert attention, as we see in today's Trading Tips.
- Dr. Brett Steenbarger , who is a strong advocate of having method in your trading, has a typically insightful post on the need for flexibility. He always has a finger on the pulse of the trading community, and sees a lot of frustration. Many systems have hit a dry spell. Brett asks:
Are you trading what you subjectively prefer, or are you trading what is objectively present in the market?
A great question.
- Options trading may seem like the answer if you need some excitement. Steve Burns ( See it Market ) highlights ten pitfalls to avoid. If you are not an experienced options trader, you will definitely benefit (perhaps a lot) from spending a few minutes with this post. Here is my favorite pitfall:
When used correctly options can be tools for managing risk by limiting capital at risk exposure and capturing huge trends; used incorrectly they can blow up your account.
[Jeff]I started in the investment world with Chicago market makers, who risked their own money along with that of some backers. Some of them scored big. Many others blew out. Some got a second or a third chance. Steve's questions are definitely important.
I'll have more in this week's conclusions.
Expert Picks from the Models
This week's choices are decidedly more conservative.
Athena: I have another choice this week - two in a row since my vacation. I am looking at the hotels sector, and my pick is: Host Hotels & Resorts, Inc. ( HST ). This stock has made a nice move since November. It delivers consistent payments for its owners. Though the stock had a very slight dip this week, I expect the uptrend to resume.
Jeff: The security is a REIT, so it is not like a regular equity investment. People are reaching for the apparent yield of over 4%, but the P/E ratio is high for a pick like this.
A : You are telling me that current buyers are unwise.
J : Not necessarily. It depends upon their investment objective and the level of risk they are willing to take on. This is a "reach for yield."
A : I am not troubled by that. I am interested in the stock price. I will make a quick profit and then sell.
J : You mean the REIT price.
A : Yes. My method is different from yours - and it is quite effective, as you know.
Oscar: This week I like long-term bonds. Usually I trade a basket of names for each sector. The extra liquidity in this case means that using the 20+ Year Treasury Bond ETF ( TLT ) works well. Here is what I see.
The intersection of the 50-day moving average with the 200-day moving average tells me this sector is getting over the hit it took in early November. The recovery is for real, and we could be on a trend back up to the $135 level. If the next 4 weeks look anything like the last 8, I'll be sitting pretty.
J : A further big move in bonds might mean that money is getting pulled from stocks. Don't you have positions there as well? This was a very good week for biotech. I think we discussed that sector a few weeks ago .
O : Yes.
J : Do you think the move is based upon the President's plans for drug pricing. It is much less stringent than expected.
O : I guess I missed that. The U.S. Open was pretty exciting. But biotech has done well. The only thing that would have made our 5/25 Biotech investments better would be if we had made them on 5/30. In any case, I won't complain about a ~10% pop in one of my three holdings.
J : Do you expect the move to continue?
O : The charts will tell me. There are almost always attractive new sectors.
J : Did you analyze the sectors requested by your fans?
O : Yes. This week's list includes everything that has been requested.
O : The rankings in the sell range do not imply a recommendation to "short" the group. They simply have very low ratings when other choices are much stronger. Bonds have improved dramatically, and have moved near the top of the list.
J : Some readers do not like the rankings based upon your requests. Why not just post your own ratings?
O : I'm working on that.
Holmes: My choice this week is HD Supply Holdings, Inc. ( HDS ). What a tempting chart!
Looking at the one-year chart, the shares which were trading above $36 last August had quite a fall to touch just about 30-31 in early September. However, its recovery was quick in November. Since then, for another eight months in a row, the shares have been consistently maintaining the highs, even reaching close to 42. Early this June, the shares plunged to a low again though not to such lows as seen last September. I expect a nice rebound - perhaps not to the old highs, but good enough for a trade.
J : I checked this out with our go-to site for stock valuation - F.A.S.T Graphs .
While the earnings history is short, it looks good until the big 2018 decline. One of the firms gave it a "sell" rating.
H : That kind of over-reaction by analysts is typical of my choices. I will not be holding this stock in 2018. I need only a rebound.
Felix : Nothing new from me this week. That is not surprising given the lack of significant sector momentum.
J : I understand. Do you have your updated ratings?
F : Of course. My fans have made some new requests, which I added to the list. Keep those emails coming!
F : RoadRunner has been checking his charts, but has nothing for us this week.
Getting active at the wrong time can be a fatal mistake. Brett Steenbarger effectively uses examples from poker. The strategy is similar and the odds calculated more readily. While we see the dramatic hands on TV, they omit scores of deals where the champions are just sitting there.
When there is an overall market move to bonds and bond substitutes, it has a dramatic effect on trading systems emphasizing stocks.
How do our own models deal with quiet times?
- Reducing size, or exiting altogether. That is the current RoadRunner approach.
- Switching to more conservative choices. That is the current Oscar plan.
- Not pressing for new choices. Felix and Athena have taken this approach.
What about Holmes? The dip-buying style nearly always finds candidates. Holmes is not bothered by quiet market times, but will exit completely if things turn dangerous.
Traders need to accept one or more of these methods - or perhaps switch methods with the times. What do you do?
Here is a summary of the cast of our characters. Find your own favorite!
Stock Exchange Character Guide
Average Holding Period
Macro and stops
Dip-buying Mean reversion
Macro and stops
Stocks at bottom of rising range
Recession risk, financial stress, Macro
Background on the Stock Exchange
Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their "Stock Exchange." ( Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present, and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to "etf at newarc dot com". We keep a running list of all securities our readers recommend. The "favorite fifteen" are top ranking positions according to each respective model. Within that list, green is a "buy," yellow a "hold," and red a "sell." Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!
See also Buy Hasbro At $110 - Cramer's Lightning Round (6/22/17) on seekingalpha.com