Review

Our previous Stock Exchange reviewed the “less than smooth” ride during the multi-year bull-run, and how the bumps in the road create opportunity. If you missed it, a glance at your news will show that the key points remain relevant.

This Week: Are You a Patient or Complacent Trader?

It seems counterintuitive to make changes when things are going well, but that’s often the right course of action whether you are an investor or a trader. As an investor, you may be enjoying the sun that continues to shine brightly as the market regularly makes new highs with very little volatility. But let’s not forget the old saying “the best time to fix the roof is when it is sunny.” And from a trading perspective, it often makes sense to sell on the way up (before your profits are gone), and conversely enter your positions on a cloudy pullback.

Trading in and out of positions is not for everyone. It requires doing a lot of work and watching the market closely. Before you even think about entering a trade, make sure you have the patience to see it through and not the complacency to let it fail.

According to Brian Portnoy, a contributor at Forbes:

“there is a fine but important line that divides patience from complacency. The rub is that the two are outwardly indistinguishable. They both appear to involve doing nothing.”

His article from last week, describes “The Good and Bad of Doing Nothing,” and it’s worth a read if you’re starting to feel perhaps a little too confident about this market.

In the same vein, Wayne Thorp offers some sage advice in this article on when to nail down your trading profits (hint: “while you still have them”). And conversely, Aleksey Tatsitov describes his favorite tactic for identifying trading entry points in this article about “pullback trading.” Aleksey runs through specific examples of pullback trades describing the strengths and weaknesses of the strategy.

And The While Coat Investor (Jim Dahle, board-certified emergency physician) reminds us all (in this article) that trading is a job that requires watching the market closely. It’s certainly not for everyone, especially if there are other things you’d rather be doing.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Holmes: This week I bought Alliance Data Systems (ADS). Are you familiar with this company?

Blue Harbinger: Yes. It’s basically private label credit cards. They take shopper data and create marketing and loyalty programs. For example, the company’s Canadian Air Miles program is a popular one.

Holmes: Well the stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see it is below its 50-day and 200-day moving averages. And it has attractive upside over the next six weeks.

BH: From a fundamentals standpoint, this stock looks like it has some upside too, but that is assuming the company’s strong credit performance won’t slide. For example, I saw some recent data that says deliquencies have ticked up at ADS. However the steadily climbing EPS and the share price pullback is interesting. Here is a look at the FastGraph.

Holmes: As you know, my style is based on dip buying and mean reversion. However, you may not be aware that I’m really into protecting assets too. My process drastically reduces vulnerability to drawdowns while attempting to stay invested for the longest possible period of time. I use a mix of advanced trading techniques (including profit taking, stops, and trailing stops) and technical analysis to help protect if the stock price starts to fall from, for example, an uptick in delinquencies, as you described.

BH: From what I’ve been reading, ADS continues to sign new deals with additional retailers, and that’s a good sign. The forward P/E is near the lower end of its range this year which is also a good sign, but I know part of the reason is because of the risks (e.g. rising delinquencies, the potential for more competition).

Holmes: I’m only looking to hold this position for about six weeks. And during that time period I suspect ADS will rise despite your concerns.

BH: Thanks. I’ll watch this one closely. And honestly, I think this is a decent pick, however I prefer to hold my positions for longer than six weeks. How about you RoadRunner—what have you got this week?

RoadRunner: I like Take Two Interactive (TTWO) again. As you know, I’ve been having success with this one in recent months. I like to buy stocks that are at the bottom of a rising channel, and if you look at the chart below you can see why I like TTWO again this week.

BH: Well our theme this week is to know the difference between patience and complacency. You don’t seem to be complacent considering this is your third TTWO trade since May. And you’ve been very successful with these trades, I might add. But have you considered using a little more patience such as simply buying and holding TTWO? Considering this rising channel you keep bragging about, you’d have don’t pretty well with a buy and hold strategy, don’t you think?

RR: Buy and hold is not my style. I typically hold my positions for about four weeks. Besides, I have a track record of doing a lot better by buying low and selling high within the rising channel, even after taxes and trading costs.

BH: Well I’ve said it before, and I’ll say it again, Take Two seems fairly risky to me. I agree the price has been rising steadily, but the company’s earnings are volatile, and the entire franchise is heavily dependent on the success of one video game, Grand Theft Auto. Any missteps with the next release of that game could spell disaster for Take Two. Plus its price-to-(forward)-earnings ratio is already rich, and it has an earnings announcement expected on approximately October 31st that could add to volatility. Here is a look at the Fast Graph.

RR: I am aware of all the things you mentioned, but I mainly like this stock over the next 4 weeks based on its location within its rising channel. I’ll be in and out before that earnings announcement you mention. Plus, I have certain risk management procedures in place if anything goes wrong (e.g. I limit my position size, and I only trade highly liquid stocks).

BH: I prefer to have a little more patience with my picks, but your strategy seems to be working well for you, RoadRunner. How about you Athena, what have you got this week?

Athena: I don’t have any trades this week, and I’m not going to force anything.

Felix: Same here. No trades stood out for me this week, and I’m not going to force anything either. However, for your reference, here is a look at my rankings this week.

BH: Thanks Athena and Felix. How about you, Oscar, what have you got?

Oscar: I still like the iShares Semiconductor ETF (SOXX)

BH: You also picked this ETF a couple times already this year, first in March and then again in early September. I know you like to hold these for only about six weeks at a time, and 6 weeks after your March 24th pick the shares were up big. And so far you’re doing great on your September 8thpick, as well.

Oscar: My style is momentum, and I like to rotate to another sector after about six-weeks. And of course I use stops to control for the risks.

BH: Well I like your pick, but I don’t like your style. How can you possibly know where this stock’s price is going to be in six weeks? I have a pretty good idea that the semiconductor industry will be much higher in six years considering the growing uses and complexity of semiconductors in everything from cell phones, to data centers, to self-driving vehicles, and eventually the arrival of 5G networks. But six weeks from now? Come on Oscar, don’t you think you need a little more patience?

Oscar: You‘ve already acknowledged I’ve done very well with my two previous SOXX recommendations, and I have a track record of success across all of my picks, for that matter. I don’t get them all right, but my winners are bigger than my misses. Plus, buying and holding something for six years like you suggest seems a little complacent, in my view.

BH: Interesting, Oscar. I wouldn’t buy the entire semiconductor industry anyway. There will be clear winners and losers in this space. Some of the smaller semiconductors included in this ETF don’t have the sophistication to keep up with evolving technologies, and their shrinking margins are already showing that.

Oscar: If you’re curious, here’s a snapshot of my rankings for this week:

Conclusion

Holmes and RoadRunner both use an element of “dip buying” to enter their trades, and they don’t get complacent considering they generally hold their positions for no more than four to six weeks before they take their profits. Oscar tends to be more purely momentum-driven, but he also knows not to get complacent and looks to take his profits after about six weeks. No matter what your style, there is an element of patience involved with participating in the market. However, too much patience can become complacency, and that can become detrimental to your financial health.