Archives for October 2019

“All rise, court is in session.” Once the bailiff says that phrase, you stand because that’s what you do.

The market is seeing a lot of demand for stocks – they all rise, that’s what they do.

If stocks keep rising it’ll be standing room only soon.

Since our last post, Bull Crossing, the S&P 500 made all-time highs and likely many brokerage accounts reached new heights. While the media argues over the fundamentals and technicals, we’ll focus on demand for stocks.

Right now, demand is the new sheriff in town and the last 2 weeks have been full of demand:

But let’s zoom in daily. Last week we made a chart that shows how demand can give the “all rise” signal.

Below are the net buy/sell signals each day. A green bar means more buys than sells for a given day. Red bars are days when sells are larger than buys. As an example, 100 buys and 50 sells results in a 50 green bar.

After big red sticks, look for green. Bailiffs and buyers give the “all rise” signal. I’ve circled the day that led to our last blog post, Bull Crossing.

Bottom line – the trend is your friend…the big money trend.

Last Friday, the big money did something that historically means the bulls are ready to run.

You see, the story of the market’s future, is like many things, often written in the past.

We scan 5,500 stocks each day and get “yellow flags.” This is when big money is moving in or out of stocks in a big way.

A yellow flag is one step below a buy (green flag) or sell (red flag) signal. To get those, you need an extra high-price or low-price relationship with volume to become a buy or sell.

Out of all those stocks, we only get a handful of yellow, green, and red flags. We have 30 years of data, but looking back the last 10 years, we normally get 477 yellow flags every day. The average green flag buys are 62, and red flag sells are 44. Out of those buys and sells, we gather them up for a week and sort by score. That’s how we find the best stocks.

Last Friday we had a big stock market rally with 666 yellow flags- that’s 40% more than the 10-year average, or 2,518 trading days. But we only had 40 green buy flags- that’s 35% below average. Does that mean the market approval of the China news is just another head-fake to ignore?

Well, we looked back over the past 10 years at days where we got higher than average yellow flags and lower than average green flags, on an up day in the market: just like Friday October 11^th. There were 140 times since October 12^th 2009. The average rise on those 140 days was +0.96%. What we saw made our eyes grow wide.

Here it is summarized in a table:

It tells us that a big short cover rally like Friday looks great for the market. The average return for all 6 time frames is positive. And hard to believe as it may be, the S&P 500 was up a year later 135 out of 140 times averaging 13%. That’s 96% of the time.

Since Friday’s close, the S&P 500 is +1%.

Bottom Line: Looking back, history says the bulls are ready to run.

We always say, “we are buyers on dips.”

What does that mean?

Last week sprang this very question from a friend.

If we are going to talk the talk, we’d better walk the walk. We practice what we preach and here’s a little insight on how we go about it.

When markets dip, we push our chips to the center.

Some people enjoy fixing up old cars, building furniture, traveling the world, or playing sports in their free time… that’s what makes life worth living. We focus on finding great stocks. That’s our sport…our life’s work.

After spending years digging into companies, we’ve probably tried every way possible to trade stocks.

So, let’s get back to the convo from last week.

Colleague: what’s the average time between one of your calls and the juice in that name?

Luke: Great question! We’ve studied this over the years and 9 months is the sweet spot.

Colleague: …sometimes we talk and you tell me about something that is ripping and “we profiled that name 4-6 months ago. How do you go about setting your buy price and cut price?”

Luke: Yes that happens a lot…thankfully. But, there are opportunities within that stretch of time. Stocks rip and dip on their way higher. I am always interested in those dips.

Here’s what I look for when buying on dips:

1. If the market is weak and our big money index is low, that’s when I start looking for deals. I’m hunting for prior leaders on a pullback. Just like now…

2. Some weeks, like recently, there is very little buying. This can have boring names float to the top ranks. Examples would be Utilities and Home Builders. Those are typically not monster growth areas. But, this tells me that the names I’m looking to add are probably under pressure.

3. I am looking for the TTD, PAYC, CMG, and LULUs of the world. The handful of names that keep showing big buying for months and months. Deals don’t come every day… patience is key. When it does come, I laser focus in on it.

There are a handful of stocks that are lights out each year. We try and make those the core themes around the research. 

I’ll say it again, be patient. Dips don’t come often in a bull market.

You always get an entry. It could take months, but there is always a sell-off of silliness to take advantage of.

As for cutting, I rarely cut stocks. Great stocks keep going over time and you never know when a company like RH or SAM is going to turn the ship around. I’ve seen it so many times.

But, when our big money index gets overbought – that’s been a great time to trim risk.

Examples of Buying The Dip

A great way to visualize this is by looking at prior options ideas. When stocks go on sale, we look for beaten down winners to play for a pop. Below are examples of bullish option plays we’ve had.

There are good bets, bad bets, winning bets, & losing bets. We win way more than we lose – more importantly, the game is won by continually placing good bets.

Facebook from late November fits the bill.

NVIDIA from late December, too.

Resmed was under a lot of pressure in February.

Bottom line: patience = opportunity.