Watch List with Market in Correction

If you continually follow the market timing tab on the Prudent Trader Watch List Google Spreadsheet (wow that is a mouthful), you would have noted that on Tuesday evening the 5th of August – “Investors Business Daily I.B.D) changed the market pulse to Market in Correction.

From an IBD Email:

After several weeks of choppy action, the market went into a correction yesterday. There is no way of knowing whether the downtrend will last a day, week, month or longer. We know it’s easy to get discouraged and throw in the towel, but then you’ll be missing out on many opportunities.

The market’s biggest winners start their run at the very beginning of a new uptrend, so you must be prepared to take action. Here are some tips on how to handle a downtrend in the market:

A market correction makes buying stocks much riskier. If you’re already in the market, keep a close eye on your portfolio to make sure you’re protecting your gains and cutting losses quickly.

Stay patient and confident. During a correction, many investors get discouraged and give up on the market. Many leading stocks build bases during market downtrends and present buying opportunities when the market begins a fresh uptrend.

The Big Picture keeps you informed  (Maintained on Market Timing Tab of Watch List) of the market’s action and alerts you when a new uptrend begins signaling it is the right time to start buying fundamentally strong stocks.

Perform a post analysis of your trades from the last cycle. The best investors learn from their mistakes and their successes.

A new uptrend, signaled by a follow-through day, can be as close as four days away. Use the downtrend as a time to create a watch list of strong stocks to buy when the market has a follow through day.

While IBD does not seem to have rigid rules on what to do they advise no new buying during the market in correction time frames. Unless of course you really know what you are doing :-). Charles Kirkpatrick has similar rules, i.e. no new buying unless he is bullish on the market. I do not know however, how he processes that information and what his current opinion is. If someone here subscribes to his letter please let us know.

I could handle the watch list by selling everything, going to 100% cash and waiting. However I think what I will do instead is use our chandelier method for exits if and when they occur. I will do that for both the 50 and the Kirkpatrick trades.

I took this picture (Below) from the Google spreadsheet shortly after the open on Wednesday. Some of the prices may still be of Tuesday’s close. That is neither here or there at this point in time. This project (following buy signals) is very new and was begun in a very choppy market. The totals and averages look on the surface to be worse than they actually are. The simple reason is I have not taken into account the position size one would use on their portfolio.

Remember the position size is determined by the amount of risk the stock contains at the time of purchase.  That is buy price – exit strategy, the result divided into the allotted capital for that trade. If you have a 100K account as a for instance and you wish to have as many as 10 positions on at any one time then the allotted capital would equal 10K.

Example: From the Google Spreadsheet:

Kirkpatrick|AAL| American Airlines Group Inc| 6/24/14| $44.11 |$40.62| 7/8/14| 39.25

Initial Risk 44.11-40.62 = $3.49  — 10000 / 3.49 = 2,865 shares. Obviously you cannot buy that many shares and stay within your allotted capital of 10,000. So you instead buy 10,000 / 44.11 = 226 shares.  Our exit turned out to be $39.25 because we look for a close through the risk point then exit on the open (again the open is only for tracking purposes, you could probably do better). So our total dollar loss becomes 226 shares times (44.11-39.25) or $1,098 + your commission rate) that is an 11% loss on the trade but a 1% loss to the account. It is all about money management 🙂

Screen Shot 2014-08-06 at 9.56.49 AMVery few of you would be able to do all the trades above. I am quite sure with your advanced skill you would have only participated in the profitable ones – Just kidding.

This watch list trading is still very new originating in mid-June, and run during very choppy market conditions. This should certainly improve in the next cycle if we begin at the beginning of the cycle. Even if all the above trades were profitable, we would not have enough to draw good conclusions as yet.

Talking Points and Stocks Still Competitive vs. Bonds: 

An Insider’s Account of the Yahoo-Alibaba Deal (HBR)
How to Scare Yourself Stupid (MF)
What is the correlation between the alternative rock of the ’80s and ’90s and alternative investing? (Investment News)
An Ironic Lesson In Economic Theory (Alhambra)
Shiller CAPE Market Valuation: Terrible For Market Timing, But Valuable For Long-Term Retirement Planning  (Kitces)
Do Active Funds Have a Future? (Morningstar)
How Increasing Income Inequality Is Dampening U.S. Economic Growth (Standard & Poors
Why Pricing Power Is The Real Secret To Value Investing (Forbes)
Marijuana Retirement: How My Parents Became Late-Life Pot Moguls (NY Mag)
The Most-Anticipated Stock Market Crash (Market Oracle)
The Muddled Road to Overhauling Corporate Taxes (NY Times)
Goldman Sachs: Here’s What Will Happen When Fed Raises Rates (MoneyBeat)
Amazon’s Jeff Bezos: A 21st Century Citizen Kane (MarketWatch)
Just How Likely Is Another World War? (The Atlantic)
Q2 2014 G.D.P. Details on Residential and Commercial Real Estate (Calculated Risk)
Five Threats More Terrifying Than Ebola Arriving in the U.S. (Bloomberg)

Stocks Still Competitive vs. Bonds: Hank Smith

Have a Great Day!