Stock Exchange: Do You Buy At All Time Highs?

The 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. If you have some ideas, please join in!

Review: You Can Trade For A Living, If You Do It Right.

Our previous Stock Exchange shared our view that: You Can Trade For A Living, If You Do It Right. We noted that the idea of trading for a living is alluring, however “doing it right” means being realistic, understanding that markets are constantly evolving, and recognizing there are benefits to enjoying the experience.

This Week: Do You Buy At All Time Highs?

This is meant to be a general question, as well as specific to this year as the market has made multiple new all time highs. And if you’ve built up your nest egg in recent years, new market highs can seem nerve wracking, especially with memories of the housing/financial crisis still vivid in many investors minds.

Perhaps comforting (or not), you cannot really have much of a long-term run in a position without experiencing a series of new highs, and in this regard, new highs can be very bullish.

Psychologically, the fear of a large market decline can be paralyzing, but in many cases a “fear of missing out” can be helpful.

From a trading perspective, rather than focusing on very long-term market wide trends, recent stock specific “price action” can be very important, irregardless of whether or not the market is reaching new highs. For example, legendary trader Charles Kirk won’t even consider a trade without the right “price action,” as described in the following recent excerpt:

For our own trading models, we absolutely need to see the right price action. However, we also use a mix of “momentum” and “dip-buying” models to help diversify some of the broader market risks, while also maintaining the potential for strong returns.

Also worth mentioning, when markets are in a “boom” phase, that phase can extend for a long time. However, its not our intention to simply “ride out” any future recessions either. As the odds increase, we will scale back the size of stocks and move to safe alternatives. Further, our models are programmed to exit the market completely when trading conditions are bad (which is not currently the case).

Model Performance:

Before getting into the specifics of some of our most recent trades, we first share the performance of our proprietary trading models, as our readers have requested, and as shown in the following table:

We find that blending a trend-following / momentum model (Athena) with a mean-reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

This week’s Stock Exchange is being edited by guest contributor, Blue Harbinger. (Blue Harbinger is a source for independent investment ideas).

Expert Picks From The Models:

Holmes: This week I purchased shares of Chipotle Mexican Grill (CMG). Do you like their food, Blue Harbinger?

Blue Harbinger: Sure do, but why’d you buy the shares?

Holmes: I bought because I am a dip-buyer, and as you can see in the following chart, there’s been a nice setup on Chipotle.

BH: Interesting, Holmes. I see the dip, and I like the setup. It’s been a wild ride for Chipotle in recent years with multiple food borne illness outbreaks (e.g. E. Coli), but it seems to have regained investor confidence and is firing on all cylinders again. A lot has changed at Chipotle in recent years (more efficient and safer food prep, more channels to order through), but a lot has remained the same (delicious burritos). Here is a look at the Fast Graph.

Holmes: Thanks for the walk down memory lane, but my typical holding period is around 6 weeks. I exit when my price target is hit (or when my stop loss order hits).

BH: Ok then. I’ll check back with you in 6-weeks. Thanks for the trade idea, Holmes. And how about you Athena–any trades to share this week?

Athena: I bought shares of Molina Healthcare (MOH).

BH: I am familiar with this stock, especially because you also bought shares of Molina 2-weeks ago. Why’d you buy more?

Athena: I bought it for the technical setup. I am a momentum trader, and I typically hold for about 17 weeks.

BH: Well, Molina continues to have momentum after its strong earnings announcement last month. And you also have a great track record Athena, particularly over the last 12 months, as shown in our earlier performance table. For your reference, here is a look at the Fast Graph.

Athena: Thanks for sharing. And how about you, Felix–any trades to share?

Felix: Yes–I bought Akorn (AKRX). It’s a niche pharmaceutical company that develops, manufactures and markets generic and prescription pharmaceuticals, as well as, animal and consumer health products.

BH: Interesting pick, Felix. I thought you’re supposed to be a momentum trader? These shares have been decreasing in price. What’s the story?

Felix: I hold longer than the other traders, typically for about 66-weeks. These shares have upside. I wouldn’t have bought the them if I didn’t think the momentum trade will be intact for the next 66 weeks.

BH: Then perhaps you’re more into fundamentals than the other models? Here is a look at the Fast Graph.

Felix: Thanks. I also ran the Russell 2000 Small Cap index through my model this week, and my top 20 rankings are included in the following list.

BH: I see World Wrestling Entertainment (WWE) just barely made the top 20. Big Ronda Rousey fan, Felix? I also see Tandmem Diabetes Care (TNDM) made the top of your list. Now that is a stock with some serious momentum. Good to know you like it over the next 66-weeks.

Oscar: If you are into ETFs, I ran our comprehensive and diverse ETF universe through my model this week, and my top 20 are listed below.

BH: I see you’ve again given your highest rank to the Direxion Daily Small Cap Bull 3x Shares ETF (TNA). That’s perhaps another indication that you too believe this bull market can keep running.

Conclusion:

Psychologically, it can be tough for some investors and traders to hit the buy button with the market sitting near all time highs. However, the market tends to go up more than it goes down, and if you never bought after a new high, you’d be sitting out on the sidelines forever, missing out on returns, and watching others make money. In fact, this is exactly what happened to many investors after they saw names like Google and Apple setting impressive new highs many years ago–they missed out on the even more impressive returns in recent years.

We pay attention to economic conditions, and we wouldn’t be investing the same if we believed a market recession was imminent. We continue to see attractive price action on many stocks, and we continue to buy using our disciplined investment and trading programs.

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 out Background on the Stock Exchange 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.

Stock Exchange Character Guide:

		Style	Average Holding Period	Exit Method	Risk Control
Felix	NewArc Stocks	Momentum	66 weeks	Price target	Macro and stops
Oscar	“Empirical” Sectors	Momentum	Six weeks	Rotation	Stops
Athena	NewArc Stocks	Momentum	17 weeks	Price target	Stops
Holmes	NewArc Stocks	Dip-buying Mean reversion	Six weeks	Price target	Macro and stops
RoadRunner	NewArc Stocks	Stocks at bottom of rising range	Four weeks	Time	Time
Jeff	Everything	Value	Long term	Risk signals	Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Trade Alongside Jeff Miller: Learn More.