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INM Feb 2011 - Working on Your Abs and Ass Before the Apocalypse
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
I should have come to the conclusion sooner that a logical, fact-based investment manager simply cannot stop the random flow of orders from customers. It has been decades since I received expert sales training showing me that people do not make decisions based upon logic and facts, they make decisions based on emotions. So there is hardly any point in reasoning with one who is scrambling to lock in profits on investments before World War III hits and everything is destroyed. But please rest assured, you won't see me rushing to get the new "Guide to Investing In the Apocalypse" from the most popular Wall Street publication - which is now advertising that it is available HOT OFF THE PRESS!
We can define support levels and recognize sell signals when they occur, and it is even true that there are times when investors should not wait until they see a breakdown in their stock to sell it. If we saw horribly negative market breadth and were witnessing numerous technical breakdowns occurring, the M criteria would be arguing with evidence that the best thing to do was reduce exposure in stocks and lock in gains. Then we might be justified in selling a stock while it was still in healthy shape above definitive chart support.
The investment system I use sounds like a way to trim down, so let's go ahead and discuss some important areas - the abs and ass!
ABS - Anticipated Buy Signal
I repeatedly have emphasized that disciplined investors wait for definitive proof of institutional buying demand. They resist the urge to get in "early" because they know their odds are best when a proper buy signal occurs. Experts buy right as the buy signal occurs, or as soon thereafter as possible, without waiting until the stock is extended (more than 5%) from a sound base pattern. That way, the stock's momentum can easily allow them to enter a position and quickly have a profit cushion, or at least cover their trading costs very soon after getting in. In the context of model winners that rose hundreds of percentage points, smart tactical traders know that a fluctuation of a few percentage points is often of little consequence. Greater importance rests on recognizing a technical buy signal, or sell signal, rather than if it rose or fell a little bit.
However, a friend insists that "everyone cheats" and speaks of an expert O'Neil disciple coining phrases like "pocket pivot points" and other "advanced" charting terms. Theoretically, there is an argument that one can improve their overall results meaningfully by using the pundit's approach. I am in the doubtful camp as to whether any statistical facts back those hypothetical claims. If it is not a "by the book" example of a proper buy signal, then one may call it an anticipated buy signal (ABS). One might also call it absolute bullshit. Seriously though, if I called up one of our sophisticated Source Capital clients and told them the plan was to load up on a great growth stock in anticipation of its breakout, I would expect them to challenge me on that logic.
ASS - Anticipated Sell Signal
An expert who buys stocks right in the first place knows that they do not have to always sell when they spot their first sell signal. When multiple sell signals start adding up to a conclusive indication, that is another thing. Then there is no loyalty to the position, and no attachment at all. It can always be bought back if it starts to show bullish signs subsequent to being sold. Hanging on and hoping it will rally back for a few recently lost percentage points is likely to be of little reward, especially when put in the context of a very long list of historic stock breakdowns which have caused rapid and substantial damage to investors' portfolios when they had no sell rules.
They often say that the stock market climbs a "wall of worry", but investors these days are way beyond worried. I'd say many of them are outright paranoid! They tend to think "it will never last" and feel nervous whenever a hearty profit is only on paperand not yet officially locked in with a sell ticket. "You don't go broke taking a profit", they say. But oddly, the same people usually are ready and anxious to buy another stock and start climbing again from the ground up, rather than climbing even higher on that same sturdy wall which had allowed for their safe climbing thus far.
Arbitrarily selling seems on the same level of foolishness as arbitrarily buying. Emotions, however, have been known to lead many investors off track. Having seen many stocks they owned in the past break down, some start to see things that might happen. When fears start to swell, and convinced that it will break down and violate its 50-day moving average line or prior low, they conclude, "Why wait?" This may be called an anticipated sell signal (ASS).
Institutional investors often accumulate shares and add to their existing positions in healthy stocks while they consolidate near the classic technical support levels. Smart investors know to be looking for opportunities to "force feed" their winners. Some might not have confidence to average up their cost-basis by buying a small amount more at higher prices when a new base forms. However, selling when the odds are favorable for accumulating a sound looking leader is asinine.
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program. Mr. Gruneisen became a Registered Representative in 1987 and his career includes experience offering personalized assistance to investors with more than a decade of experience as a Registered Principal managing a branch office.
The recommendations made by CAN SLIM® certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil & Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil & Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.