Heyer Capital, LLC

A question came up the other day at the Investor’s Business Daily Meetup: How should I invest in stocks that are screaming ahead?

Let’s call it what it is: playing with fire. Well, maybe that’s not entirely accurate since there’s no real upside when playing with fire, but there can be upside when investing in stocks that are screaming ahead.

I do not suggestion “buying on the dips.” A stock that has just advanced 25% may be ripe for a pullback, but after it has slipped a few bucks, the short term trend is against you. It can keep going down.

Instead – if you want to play with fire – wait for the stock to drift sideways for a few day especially if it meet resistance against a certain price point. The idea is to wait (keeping capital safe) until the stocks resumes its move upward.

I strongly suggest keeping a rolling stop loss order underneath your entry price. Keep it tight – just a percent or two. If the stock reverses from the breakout, protect your capital. As the stock advances, keep your stop loss trailing upward, but give the stock a bit more wiggle room.

Here is a visual reference and example. Click on the chart to make it larger.

Trade away.

One of the most powerful screening tools (for even non-subscribers) is the “Stocks on the Move” prominently displayed on the www.investors.com website. It is updated throughout the day showing stocks with strong earnings growth and relative strength moving at least $.50 up or down on increasing volume compared to the typical volume at that time of day for that stocks.

Think about that for a second. Rather than compare it to the daily average volume total, the IBD goes the next step and compares it to the typical trading volume at that time of day. If a stock is trading 200% more shares in the first hour of trading, and up $1, there’s some buying pressure behind that move, and it deserves your interest.

Watch for a post here on the blog for ideas on how to trade a typical big move.

For the life of me I can’t find the “list of bonds that yield the same” that I read today. That author’s point is that bond investors worldwide have overlooked risk for so long, there’s a surprising list of global investments that yield the same as the US Treasury. In other words, if a ’safe’ US Treasury bond gives a yield of x%, why try to chase something exotic to get the same yield? I’ll keep my eyes open for it, dear reader, as it was very revealing.

Every bond owner (and CD investor) should read this article below on how Uncle Sam abuses the inflation numbers. http://www.whiskeyandgunpowder.com/Archives/2007/20070420.html. I’ll post an analysis soon.

As I lead the local Investor’s Business Daily Meetup Q&A, probably the most common question I get is: how do you find stocks ready to move?

There’s no substitute for homework. For me that means looking at many, many charts. I’m a visual person. For you, it may mean sifting through tables and screens of fundamental data.

If you do not get the Investor’s Business Daily, I suggest you get the April 19 edition and review the “IBD’s Top 200 Composite Stocks” table on page B5. Review each stock listed. There’s a reason Bill O’Neil puts that data together…trust his guidance. It is not a “buy” list; just a good place to start prospecting.

It seems there’s been a lack of broad strength as the market has rallied. What caught my eye today was the very few stocks in the Investor’s Business Daily’s “Stocks on the Move” tables. Their table shows fundamentally strong stocks moving on higher volume. (Volume is the key to validating a stock’s move.) At one point today, only eight stocks were shown that meet the IBD’s criteria. To my eye, when the market is making new highs, you should have a full table of them with a minimum of 100% volume gain to get on the list.

Balance that with the sell off at the end of the day, pushing the Nasdaw lower, and I’m going to count this as a distribution day. A few more days of selling on increasing volume can take the starch out of a rally.

Days like today re-emphasize the importance of investing at proper buy points, i.e. staying in the sidelines and waiting to pounce when a stock starts moving in your direction. Be patient. When we get a solid rally, there will be many buying opportunities.

The indexes are at “C” or “B” Accumulation/Distribution ratings, indicating at least a balance of buying pressure lately, which is an improvement over last month’s “E” and “D” ratings.

From investors.com: Click, then click “learn more” in the Stocks on the Move table.

The qualification criteria for listing in ‘Stocks On The Move’:
Stocks must trade on the Nasdaq or New York Stock Exchange.
Stock price must be at least $20.00 ($16.00 for Nasdaq).
Stocks must have a price change of 1/2 point or more.
50-day Average Volume must be a minimum of 60,000 shares.
For stocks up in price only, the Earnings Per Share (EPS) and Relative Price Strength (RS) Ratings must each be a minimum of 70, Accumulation/Distribution Rating must be D+ or better and next year’s earnings estimate must be 15% or higher from the previous year’s earnings. (Stocks without earnings estimates are included.)

Thank you Yahoo for giving folks another lesson on the 200 day moving average. Yahoo fell 11% this morning and opened way down near its 200 day average. The lesson? Don’t listen when people say moving averages are meaningless, frivolous, and always irrelevant.

I would not be a buyer at these levels, but that’s just me. Tens of millions of shares are changing hands today, so somebody is buying. The trend has changed lower as I see it, and the PE is still precarious for a stock with trouble growing quickly enough.

Below is a link to a very useful lesson on chart reading, particularly how resistance and support are formed. It is worth your time, but only if you have (or plan to have) more than $4.16 invested in the market in your lifetime.

http://www.minyanville.com/articles/support-resistance-uptrends-downtrends/index/a/12615

For some reason, people don’t seem to mind buying Harley Davidson stock. To most folks, every heavy cruiser bike on the road looks like a Harley, so they must be selling a lot of them, right? Talk about great advertising for the brand: you can hear them as well as see them.

I guess folks in Wisconsin like buying Harley like folks in New Jersey like buying drug stocks and folks in Texas like oil stocks. We just know enough people that work there or are otherwise familiar enough to us that we think we know more about the company than we actually do.

Let’s set aside the increase in delinquencies on Harley’s loans to customers. (Rising delinquencies cure themselves as the lenders stop making foolish loans and the folks that are prone to default, actually do so.) What’s a write-down among friends, anyway?

Harley has put in a series of lower bottoms, Point C. That by itself usually indicates the trend is lower and the stock will continue the decline. However, at Point A the stock inched ahead of its recent high at Point B. This indicates a pause in the decline. If the stock moves above of Point A, that would make consecutive higher highs, and a possible place for bottom fishers to pick up some shares.

The fact that lower volume (Point D)has accompanied the price movement detracts a bit from the favorability of the pattern indications. However, exchange volume overall has been muted the past few weeks.

Interesting price action on Infosys – INFY. It’s definitely one to keep on your watch list.

Let me walk through the chart…. Point A is the cup that started in mid-February (before the big drop at the end of the month. Market leading stocks can lead up and down.) Wait for a handle to form somewhere around Point B. To make it actionable, look for a pullback on light volume with a possible buy point at the peak of the handle.

Points C, D, & E point to where the stock found support at moving averages. At “C” the stock fell along with the rest of the market, but found support at two days at the 200 day moving average. I think of the 200 day average as the last line in the sand. Institutions will pick up ‘bargains’ that have drifted to the 200 day line. However, if the stock repeated breaks below the 200 day line, look out.

Points D&E are the 50 day line and 21 day line respectively. Note in July the stock resumed its uptrend and finds support (buyers) around the 21 day line. Aaron Task of thestreet.com suggests that a 21 day average is popular among hedge funds.

As the INFY rally gets a little long in the tooth in November, the stock starts to rest on the 50 day avg., before starting the latest base.

Here’s a recent thought process on screening for ideas and a trade. Jim Cramer – who is right up there along with the Investor’s Business Daily in providing quality ideas and commentary on the market – recently suggested we look at money center (mega) banks instead of regional banks due to more favorable valuations as a group.

I entered Citigroup – “C” – at www.investors.com to get a Stock Checkup. In addition to the usual useful data, it shows the leaders in the industry group. That is usually a good place to start sniffing around and checking charts and earnings growth.

Here’s Bank of Nova Scotia, a Canadian mega-bank.

The blue line in the chart is the 200-day moving average of the stock price. Note how often the stock moves close to the 200 average and finds support. “Finds support” is the highly technical term that means someone did some big buying–big enough to move the stock price.

The big-picture lesson here is that investors should watch for large cap stocks approaching the 200 day average. (The usual earnings quality screening and sell-protection rules apply in this method too.) I think that adding shares along the 200 day average adds a decent margin of safety.

If the stock has a history of bouncing along the 200 day average, I infer that means large instititutions are using the 200 average as buy-points. When you can, invest alongside with the big boys.

No position in BNS; just commentary.