Discretion Is the Better Part Of Valor

Last night I prepared a list of five stocks to watch, but I decided not to add any new positions for now, just ride with what I have. This isn't a call on market direction, but a psychological move to get some emotional distance. Too much emotional attachment has led me to overtrading, so this is a corrective measure.

Posted at 10:20 a.m. Eastern time.

Major Disappointment For the Bulls Today

The last two hours on Tuesday (May 23) were a major disappointment as big gains were reversed and all the averages ended down. In the last hour I put a stop on half my Intermagnetics General (IMGC) position and sold 50 shares. It was a nice gain for a day trade but my intention is not to fall into a lot of day-trading; it's too stressful and I don't think I'd do it well consistently.

I've been so caught up in anticipating a rally that I have to remind myself I'm in a bearish mode medium-term, I have a lot of cash, and I have a couple of short positions, so having things go badly for the bulls is not entirely bad for me. Figuring that true bulls are likely feeling more deflated than I am, I doubled my short position in the Russell 2000 ETF (IWM) to 200 shares in the last hour, which so far looks like a great move. I would have felt a lot more comfortable selling short after a decent rally instead of into this oversold situation, but I have kept some powder dry for more short selling if the opportunity presents itself.

Looking For Trend Reversal By Intermagnetics

This daily chart shows Intermagnetics General (IMGC) in a decline since the middle of February. I never try to catch a bottom but wait for a sign that the decline has turned around. There are many indicators that try to measure these things but my favorite is visual inspection. In this case there was a more-or-less straight line down, and depending on how you read it, this downward trendline was broken yesterday or the day before. There is some art to drawing trendlines. The general rule is to follow the tops on a decline, but you get different lines depending on whether you use the February top or the March top, so I showed them both. This gave me the confidence to buy on strength early today, and so far it's working out.

I also bought 5 shares of Hansen Natural (HANS) early, based mostly on the subjective belief that a long-term winner is going to attract a lot of hot money in a rebound. So far today Hansen has been stuck in a range and I have a tiny paper loss.

Bargain-Hunters Finally Emerge

The stock market was up strongly at the open, with the Nasdaq Composite up about 1%. The only stock I felt comfortable buying instantly was Intermagnetics General (IMGC), which has been badly beaten up in the last few months but was showing signs of recovery in the last three days. I bought 100 shares. Now I'll wait anxiously to see if the smart money just takes this as a selling opportunity and snuffs out the rally.

Posted at 10:05 a.m. Eastern time.

Staying On the Sidelines

All of the indices are down, with the Russell 2000 down almost 2%. I'm not brave enough to try to catch a bottom in these conditions. I'll be thankful I have a lot of cash and a couple of short positions and watch from the sidelines.

Posted at 10:20 Eastern time.

A Case Against Intel

This weekly chart shows Intel's collapse starting in early 2004 while the NASDAQ 100 ETF (QQQQ at the top) has been rising slowly. The bullish case for Intel, or any respected company in this situation, basically rests on two legs. The fundamental case is that the company will turn around its earnings fall in x quarters. The technical case is that the stock market is stupid and doesn't recognize what a great company Intel is, thus driving the stock price irrationally low and handing the brave or astute investor a great buying opportunity.

I'm not in a position to judge the fundamental case. I'm not an expert on chip technology, and even if I were I'd be totally dependent on Intel's pronouncements to know when anything might be released, and predicting the market's reaction to new products is much more of a crapshoot than analyzing the technology. Without inside information or an extraordinary technical insight (such as discovering a flaw in a major new product), I don't see how an individual is going to get an edge on fundamental analysis without dumb luck.

I think the notion that the market is stupid is an oversimplification. On a short-term basis it's certainly over-reactive, but the idea of mass stupidity on Intel lasting for almost two-and-a-half years seems far-fetched to me. Even for an Iconoclast, it seems more rational to assume the market has been right and stay away until serious money starts flowing back into the stock. I don't see any reason to fight this pervasive relative weakness now.

Posted at 10:05 a.m. Eastern time.

Where's the Rally?

All short-term indicators point to an oversold market, which is "supposed" to be the perfect set-up for a rally. Although the earnings news was good, oil is down again, and there were no significant economic reports, the futures market is quite negative. Should be another interesting day.

Posted at 9:30 a.m. Eastern time.

Sold MEMC Electronic Materials

On Friday afternoon I forgot to post that I decided to take a tiny profit on my 50 shares of MEMC Electronic Materials (WFR). With one hour left in the session, the trend was down, and I've heard that it's a bad idea to go against the trend in the last hour, so I sold at the market. The market then immediately turned upward and finished the day with decent gains.

I still have 20 shares that I consider a long-term holding. I keep at least token holdings of a handful of stocks that I really like fundamentally because it's too difficult psychologically to watch from the sidelines and continually wonder if I should get back in.

Stopped Out of Shanda Interactive

While I bragged about my great trades Shanda Interactive (SNDA) deteriorated quickly and hit my stop, leaving me with pocket change. MEMC Electronics Materials (WFR) lost most of its gains, leaving me with a paper loss. I put a stop on at $37.24, a little below today's low.

The charts of the popular indices suggest to me profit-takers and short-sellers still have a lot of shares they want to unload, which is keeping a lid on prices. That could change in a minute, but for now I'm assuming this won't be a dramatic rebound day.

Posted at 10:40 a.m. Eastern time.

Breakout for Shanda Interactive

So far Shanda Interactive (SNDA) has been a dream trade. It broke out of its trading range top of $14.55 a few minutes after I bought it. The overall market still looks skittish, and I don't believe in this stock play enough to fall on my sword for it. Therefore I put on a stop at $14.48, insisting that it perform now or turn into an involuntary day-trade.

MEMC Electronic Materials (WFR) has earned my trust over a profitable relationship of several months so I'm being more patient with it; no stop on it but I'm not riding it down to new lows either. So far it's performing well also.

Conventional wisdom says this sort of emotional decision-making is foolhardy, but the Iconoclast is honest enough to acknowledge every investment decision involves emotion. This doesn't mean every decision is ruled by emotion or impulse, but that emotion influences the choice among some rational choices, such as tight stop or loose stop. But this is a topic for another post.

Posted at 10:20 a.m. Eastern time.

A Couple of Early Buys

With Asian and European markets rebounding a bid and pre-open futures market looking positive, I put six stocks on my watch list to buy on strength. I bought 100 shares of Shanda Interactive (SNDA) and 50 shares of MEMC Electronic Materials (WFR) because they were strong out of the gate. So far at least I haven't done anything on Emcore (EMKR), Intermagnetics General (IMGC), Marvel Entertainment (MVL), or Hansen Natural (HANS) because they are down or they've given up too much early gains.

Posted at 9:55 a.m. Eastern time.

Let Us Entertain You

I've noticed a pocket of relative strength on my watch list that I'll loosely call the entertainment sector. These stocks aren't setting new highs, but they're holding up fairly well while so many others are collapsing, which is what I look for in a general market downturn.

First off, I'll note that Disney (DIS) is holding up well. I'm mostly interested in Disney for sentimental and educational reasons: my son has been entranced with Disney parks and theme parks in general since an early age, so I bought a few shares for his account to try to encourage his interest in the stock market. Otherwise it's not the type of company that interests me and I don't have anything else to say about it.

A more offbeat and serious holding is Marvel Entertainment (MVL), which I commended yesterday for its low-risk business plan and relative strength. Today it was up marginally, holding in its very tight trading range while the market dropped yet again.

What really intrigues me is the New Economy entertainment companies, which are trying to make money from people playing elaborate fantasy games with casts of thousands on the Internet. The buzz phrase here is massively multi-player on-line role-playing game (MMORPG), which my son tells me is pronounced "more-peg". Forbes or someone characterized these games as addictive, and I know I've struggled with addictions to games just slightly more involving than Pac-Man, so this sounds like the crack cocaine of addictive games. Selling an addictive product that doesn't kill people is a business plan I can get excited about as an investor.

For some reason MMORPG is most popular in Asia, and the leader there now appears to be Netease.com (NTES), which I've looked at occasionally but never liked the chart. At the moment it appears to be holding on by its fingernails. A competitor I do own is The9 Ltd. (NCTY). That is not a typo, by the way. It has pulled back recently but nothing too drastic so far. The really interesting chart right now belongs to GigaMedia (GIGM), which has had a huge run from November through April, multiplying by more than 5 in that time period. Instead of giving back big chunks like you'd expect in a nasty market downturn, GigaMedia's stock price has gone flat, just like Marvel. This is another stock that people are not in a hurry to sell. Thanks to anonymous for pointing out this stock to me in a comment a few days ago.

Finally, there was an interesting story on a fallen angel called Shanda Interactive (SNDA), the former MMPORG leader in China that lost its position. The stock was in free fall from August 2005 through March, then arguably began a base-building process (price comparatively flat) with fairly low volume, as shown in the chart below. Today they came out with earnings and claimed that they have solved their problems. I have no idea if this is true but someone with money believed them because they drove up the price 9% on almost 4 times average volume. Although I usually ignore fallen angels, I think this situation is worth watching because sometimes a big move out of a base like this ignites a huge rally. If we get a breakout above the current trading range with good volume, it would be a high-risk, high-reward buy signal.

Going Short

I was stopped out of this morning's position in iShares Russell 2000 Index (IWM) and collected pocket change. I realize a rebound can take a day to get in gear, and the Russell 2000 could be 2% higher by the close, but so far I'm not impressed. I entered two short positions and increased a third. I am now short 100 shares in the Russell 2000 ETF, 1oo shares Veeco Instruments (VECO), and 200 shares NASDAQ 100 Trust, the "Cubes" (QQQQ). I first shorted the Cubes a couple of days ago after a rally fizzled. I am now at least partially in synch with the timing service I follow, which is now bearish.

Posted at 1:50 p.m. Eastern time.

Bought Russell 2000 ETF

I bought 50 shares of iShares Russell 2000 Index (IWM) in the pre-open market. I'm not calling a change in direction here, just playing for a short-term bounce. I'll have a tight stop on this holding.

Posted at 9:20 a.m. Eastern time.

Sifting Through the Wreckage: Marvel Entertainment

I have to believe Wednesday was a selling blow-off, and unless more bad economic news hits we are due for a bounceback any moment. I don't know what stock to try to catch a bounce with, so I'm leaning toward buying some shares of the Russell 2000 ETF (IWM).

There are two main schools of thought about buying after a sharp pullback. The value approach is to find big losers, buy them, and feel good about buying a good company at a discounted price. The relative strength approach is based on the theory that the stocks that ignored the general downtrend or even swam against it did so for a reason, and these will be leaders on the next let up. The Iconoclast won't get into debating which approach is better but will accept that either approach will probably work in the long run, and leave it up to individuals to decide based on their psychological make-up. I happen to prefer relative strength myself, and looking at a longer-term picutre I'm impressed with Marvel Entertainment (MVL), the comic-book company. First, I like their business model of creating just comics and collecting the rest of their revenue from licensing fees. The first chart, a monthly chart, makes the point that Marvel can be a highly volatile stock. The trading range from late 1998 to now has been $1 to $25.

That volatility has flattened out in the last two years but it still isn't a sleepy stock. The chart below shows daily prices since November 1, 2005, and the tendency to trade in narrow ranges for several weeks:

Marvel has continued to drift along in a range lately, and today it was up marginally with no news. So far, people holding the stock haven't been eager to sell it, for whatever reason, and "strong hands" have to be seen as a positive. I don't really expect anything exciting will happen tomorrow, but I will get excited on a breakout above $20.50.

Going to the Sidelines

The overall market is too negative for me to try any of my bargain-hunting schemes. Maybe the market will have to get even more oversold. FuelCell Energy (FCEL) didn't hold support at $12 and is down sharply.

Another candidate for oversold status is Applied Materials (AMAT). They announced earnings yesterday, and the analysts are critical, driving the price down more than 4%, which is a significant move for this fairly non-volatile stock.

Posted at 11:30 a.m. Eastern time.

Interesting Technical Situation In FuelCell Energy

The chart below shows daily prices for FuelCell Energy (FCEL) from the first day of 2004 through today:

During this period the closing high was $19.44; a little over three months later the closing low was $7.42. Those levels are marked by the horizontal gray lines. The green arrows show resistance around $12. Clearly the bulls had trouble with the $12 level, finally breaking it last month. Now the stock is back down to $12. The theory of support and resistance says that resistance levels frequently become support after they are breached, so supposedly the odds are better than average that the price will hold here.

The dashed gray lines show Fibonacci retracement levels. The 38.2% retracement level is right at $12. Fibonacci theory says that this percentage gain from the low is significant.

I'm undecided if this sort of thing ever matters or if it's just a case of random movements happening to make recognizable patterns. I'd certainly like to believe these set-ups have predictive value, and I'll be watching FCEL tomorrow.

Trading Failures

Once again nothing worked for me today. I bought 20 shares of Energy Conversion Devices (ENER) on early strength and had a small paper profit for a few hours, but it faded with the markets and the price of oil, and I wound up selling for no gain. It was an entirely subjective call not to ride it any longer.

I also bought 20 shares of MEMC Electronic Materials (WFR) on early strength at $44.07. The stock promptly headed down and closed at $41.22. This was its sixth straight daily drop on steadily increasing volume. I'm being more patient with it because I have a good paper profit on 50 shares bought earlier.

Posted at 12:30 a.m. Eastern time.

Malaise At eBay and Beyond

eBay (EBAY) won a Supreme Court victory in its patent case, and it announced a deal for free PC-to-phone calling on its Skype subsidiary. Investors never liked the Skype acquisition and clearly preferred that eBay stick to its knitting. This deal indicates Skype isn't doing well, and predictably traders are focused on the negative. eBay has been on a skid all year, and now it's below its April 2005 low at around $30.50. In the process it hit my stop on my last remaining shares.

I was an early adaptor of eBay, long before it went public, even before they started charging for lots under $50. As a seller on eBay I'm very sorry that they have a monopoly on the on-line auction business, and I know how incredibly difficult it is to do anything about it. Yahoo! and Amazon.com have tried to challenge their monopoly head-on and failed miserably. There have been hundreds if not thousands of guerilla operations trying to chip away in niche markets (see http://www.stamphead.com/ for an example) but I don't know of any that have created a viable alternative. I absolutely despise eBay's subsidiary PayPal, which gouges payees. Again I have tried to find viable competition and can't. http://www.bidpay.com/ gouges the payers, and Western Union isn't safe for strangers.

Since I can't beat them, I joined them by buying eBay stock, and from that point of view I love their wide moat, to use Motley Fool's terminology. I considered it my ultimate core holding, but in 2000-2002 I learned never to ride down a stock forever, so the last remnants of this "core holding" are out the door.

I haven't done a scientific study of this but it seems to me every darling of the 1990's is being shunned by the stock market. No matter how successful the company, traders seem to be pricing in major negative developments, and their charts look bad or flat. The iconoclastic reaction is to keep an eye on this group, because the ones that survived this long past the bubble aren't likely to go away. It might take a month, a year, or three years for anything to happen, but opportunities are being set up here among these fallen angels, and I'm sure it would be a mistake to spend 100% of my time and energy looking for oil and metals plays and miss the action in this group.

Posted at 1:40 p.m. Eastern time.

Buys in ENER and WFR

Last night I forgot to mention the current star performer of the alternative-energy sector at the moment: MEMC Electronic Materials (WFR). As of yesterday it was down five straight days in a fairly orderly pullback. It has paid to buy the dips for the last several months. With the market decent, oil up, and several alternative-energy plays up, I added 20 shares of WFR to my position, and I bought 20 shares of Energy Conversion Devices (ENER) in the first few minutes.

I put a stop on ENER at $45.88, just below today's low of $46.06. WFR I'm considering for more of a long-term holding, and it's a lot less volatile right now, so I haven't put a stop order on it.

Posted 10:20 Eastern time.

A Possible Alternative-Energy Trade

Energy Conversion Devices (ENER) makes solar panels and rechargeable batteries. It is one alternative-energy stock that hasn't rolled over from uptrend to downtrend, but it's in a pullback that's rather extreme even for such a volatile stock. It closed today 17% below its peak of $56 last Wednesday. It seems likely the pessimism is overdone on this stock, and it could get a good bounce if the sector gets any good news. If it pulls back another day or two I could get more intrigued. And for full disclosure, I'll note that today's drop made a major break below a very nice trendline started in March, a development chart readers generally consider to be bearish.

Update On Market and Hansen

As soon as I posted a complaint about the stock market ignoring today's good news, a rally started that carried some indices to a positive close. Hansen Natural (HANS), which I've been writing about, bucked the negative start and rose strongly from the open, finishing up 12.7%. Investors showed once again how it got to be the best ten-year performer. I had sold 20 shares at $190.90 on the way down; I replaced 10 at about the same price, and Hansen rose from there, closing at about $195.

As of now I would have been better off to stay put and ignore Hansen's wild gyrations of the past week. Sometimes all my moves are wrong and the buy-and-hold approach wins. I can can take comfort that recent sales A.O. Smith (AOS), Harris & Harris Group (TINY), and Intermagnetics General (IMGC) remain locked in downtrends.

Alternative Energy Sector Run Down

One of the more obvious mega-trends I've been investing in for several years is the rise of alternative energy. This hardly counts as a novel investing idea, so investing in this sector means wild swings of hype and despair, all closely reported by the financial press, with the Motley Fool chortling at every downturn. In spite of the Motley Fool's disdain, I'm certain that some companies are going to make a lot of money with alternatives to petroleum. Maybe my optimism is misplaced, but I'm trying to make some money for myself in the process. And my impulse to so-called "socially responsible investing" leads me to try harder in this sector than other wildly volatile sectors, such as the Internet.

Socially responsible investing is a topic for another day, but for now I'll note that this sector is correlated to both oil prices and the technology sector, so both falling at once is a double blow. I had fairly tight stops get hit on Sunpower (SPWR) and Suntech Power (STP) today . My third solar-engery holding, Evergreen Solar (ESLR) has a loose stop on it and is in danger. I have taken profits in Evergreen Solar as it's moved down from $17.50 to under $12. This has been a long-term holding that I'm loath to completely sell, for sentimental as well as tax reasons, but its uptrend has totally fallen apart.

I was also stopped out on a closed-end fund, Central European Equity. This has become an oil proxy because of its holdings of Russian oil stocks.

For some reason the stocks of electrical products manufacturers have been hot lately. For example, A.O. Smith (motors and water heaters) more than doubled between September and April. This is normally a dull industry, and I have no idea what caused this run-up. The stocks are fading now, and I was stopped out of Regal-Beloit (RBC) (motors, generators, and controls) today.

Another Bearish Day

At mid-afternoon Eastern time, gold, oil, and long-term interest rates are down. If the bulls were in control they would move the stock market up with this good news. When the stock market ignores good news it's a sure sign the bears are in control, especially when the market is short-term oversold at the beginning of the day.

Market Timing and the Lure of the Forbidden

Conventional wisdom says that market timing is impossible and attempting it will probably reduce your returns. As an iconoclast I'm drawn to challenge that as a bull in the ring is drawn to a waving cape. A big reason to question this piece of conventional wisdom is that the mutual fund industry is pushing it, both on their own and through their minions in the financial press. The industry of course has a vested interest in people not timing the market because they don't like the expense of handling transactions, and if too much money moves around it could disrupt operations, though not as drastically as the poor dears would like us to believe.

Putting aside mutual fund propaganda, I've studied the argument that market timing can’t work, and I don't buy it for several reasons. The simplest reason is that I’ve seen market timing systems work astonishingly well for many years at a time. Maybe no system will work forever, but they can work well long enough to make a lot of money. I tried for years to come up with my own systems for timing indices and individual stocks and never could figure out any system that worked for holding periods over one day, so I’ve turned to professionals with better minds and computers than mine and subscribed to a timing service. I follow it absolutely for mutual funds and exchange-traded funds. I will buy and hold stocks when the timing service is bearish, but I am definitely more cautious when a sell signal is on.

My subscription terms don’t allow me to report signal changes but I will say that the timing service is currently bearish.

Hansen Natural Part III--Looking for Re-entry

With its huge run-up and the horrible market action today, Hansen Natural (HANS) was ripe for a bout of profit-taking. I got stopped out on half my position early at $190.90, and it closed near the day's low at $184.29, down $16.77. Now the question is when to get back in. My iconoclastic take on this is that determining "fair value" or what the stock "should" trade at is a total waste of time. Stocks trade at whatever price someone will buy them, and that price is determined by people with emotions--by market psychology. Since I don't have the resources to find and poll a representative sample of people trading Hansen stock, the next best thing is to look at the charts.

The daily chart above shows a trendline for the last four months, during which time holding Hansen was relatively stress-free. Then massive volatility and a flood of hot money struck (note the volume spike in the lower window). Future charts will give us a clue where that hot money is going. If it all leaves, it will bring the stock back down to the trendline at about $150. That would be a strong buy signal for me. If sellers take control and push it significantly below the trendline I'd consider that a sign of serious trouble and would think about abandoning this stock entirely.

Fundamental analysts typically look at chart reading and technical analysis as the stock-market equivalent of reading tea leaves, a superstitious waste of time. Iconoclasts look at charts as the best clue available to read market psychology, which is the ultimate mover of stock prices.

Hansen Soars Again--Time to Lock In Profit!

Hansen Natural (HANS) was up another 14% today, breaking $200, on top of a 16% gain yesterday. Then for good measure it was up another 1% in after-hours trading. Yesterday there was good news to move the stock, but today the only news was that Goldman, Sachs initiated coverage with a buy rating. The iconoclast always trades against an analyst pronouncement if there is no other news to move the stock, so I'm going to put a trailing stop on half my shares at about $10 below today's close (ignoring the after-market price). The philosophical reason I trade against the analysts is that they aren't any smarter than the market, because they pretty much are the market. The practical reason is that the effect of an analyst pronouncement usually fades away in a day or two. When you add in the fact that the stock is already in a parabolic pattern, I'm convinced it's going to correct pretty hard and there will be time to buy back at a lower price.

I unfortunately don't have a lot of experience trading on the right side of a parabolic increase, so I don't have any rules for where to set this stop. I pretty much picked $10 out of my hat.


A minor holding in Veeco Instruments (VECO) hit my stop and was sold today. This was a casual purchase in the nanotechnology field. The sector looks promising but I don't know how to evaluate the companies and I have mostly lost money in it. Motley Fool, a favorite contrary indicator of mine, bashed Veeco and mentioned that it makes machinery used by nanotech companies. This seemed to me to be a sensible way to play the sector, it has a miniscule profit, and the chart looked good, so I bought a little a few weeks ago. Starting April 28 it went up smartly 7 days in a row, which put me on sell alert. Today it started correcting seriously so I set a tight stop and took about a 10% profit.

A Favorite (and Lucky) Iconoclastic Stock Pick

The logical stock to boast about today is Hansen Natural (HANS). The "energy drink" producer was up 16% today on earnings and a distribution deal with Anheuser-Busch.

My favorite stock-picking technique is to find mega-trends that haven't been reported to death and invest in companies that will benefit. This strategy led me to Hansen. One mega-trend I've latched onto is the strong sales growth in "natural" and organic food. This trend has been well-documented for a long time, but I think it's underestimated. My iconoclastic take is that growing alarm over environmental degradation and toxicity is driving an emotional reaction to buy safer food as a self-protective measure. That makes me think that this sales growth isn't a fickle fashion choice but has real staying power.

When I went looking for stock plays in "natural" or organic food in 2004, I couldn't find many. It was a pleasant surprise when I discovered Hansen, which I remember from my first experience in a co-op grocery store as the vendor of premium bottled juices.

I was also surprised by how well the stock was doing, both before and after I bought some in October, 2004. The lucky part of this pick is that the market has latched onto Hansen's "energy drink" business, which has grown phenomenally, and the old juce business that got me interested in the first place is now pretty much a historical relic. So the spectacular success of this stock pick was based on ignorance and luck. I will add that other picks based on this theme have also done well, so my mega-trend analysis is still valid.

I have traded some shares of Hansen several times since I bought my first stake, though I've always kept a core holding. With the stock at $176, about $30 above a very nice 3-month trendline, it's very tempting to put on a tight stop for a few shares and look to buy it back cheaper when the inevitable correction comes. I have found that the longer I hold a stock, the less appetite I have for trading it. Partly it's a tax consideration, but I think a bigger factor is that it's easier to be a good boy and let winners run when I have a large paper gain. My decision for now is to leave my position alone.