Reader Questions | stockbee


Reader Questions

Markatkar had left a long comment with questions on previous post.

a. In your opinion, how much weight should one put on the sector and then the individual stock. Is it subjective or based on the stock's momentum, EPs, held in a mutual fund, recent sprint because of the earnings surprise or what else? All of the above?

The sector thing gives you more an indication of where opportunities are. For example take the solar energy sector once 1 stock in it had a Episodic breakout, I knew the story and reason why and had high conviction about the sector based on EPS trends and regulatory trends , plus the fact that it is new industry so mutual funds ownership will be low. So I put all solar energy stocks on watch. One by one they popped after that.
Or take the example of funeral services, while going through sectors trend in 4% break in July, August and the episodic pivot list I saw two stocks in that sector breaking out ( SCI, STEI)and having couple of 4% plus moves in quick succession. I researched the sector and knew this was more a value story, where after many years of neglect the sector had cleaned up its balance sheet from previous merger/buyout binge, plus people are not going to stop dying. So I put it on watch and in next couple of months several of them offered better entries.

The most important factors in terms of importance for my personal stock selections are EPS growth, momentum and neglect/virginity. Earnings breakout or acceleration on neglected/ virgin stocks, or momentum breakout on neglected/virgin stocks is what I primary look for. Other things are more background thing in decision making, they play minor role.

b.How do you handle the information contained in the stock checkup. Because, by the time a stock reaches IBD's A+ rating, OFTEN, its best gains are behind.

I don't use that tool. While I use the IBD concept of earnings and price momentum, I do not follow their prescribed methodology. I have studied CANSLIM and other similar methods like those on Mark Boucher, Dan Zanger, Mark Minervini,and others who had very high returns at some stage in their career, but has designed my own method which works for me.

c. The importance of buying at 52 week high is stressed as if it is a religion. That may work during the initial phase of the stock's rise. Or is to frustrate the shorts who may be waiting eagerly to shake out weak hands. What is your experience.

52 weeks high works on certain set of stocks with high EPS if you buy early in their price appreciation and earnings acceleration cycle.

d.You had mentioned that you have a assembly line of ideas that you generate. Are they mainly from IBD?
Or are they from other market aberrations? Or from your databases based on momentum.

I have researched several ideas and know of many that work but I trade only few concepts. There are little subtleties in terms of what works under what circumstances.
Currently I trade following strategies:
1 Episodic Pivots
This includes the earnings lead breakout strategy.The earnings lead breakout is seasonal variation of this strategy, because it works only in earnings season. Many stocks in the 100% plus universe and IBD 200 or the mutual fund list appear under this strategy. More and more of my ideas in recent months and years I find using this approach. While deciding on stocks in this scan to invest in, things like sector, mutual fund ownership etc., come in to play.Primarily to eliminate some of them.
I risk 5 to 10% per trade on such ideas.

2 Neglect/Virginity breakout. This is another strategy where I may risk 5 to 10%

3 EPS/ momentum breakout: This consists of the IBD 200/ IBD Select/ Mutual fund list/Sector Themes/100 Plus universe. This is primarily for finding trades when I don't find anything in first two strategies to buy. I mostly risk 1% on these ideas.

4 Short on former EPS/ momentum leaders with high float.

All these scans are well set and I run them during day and end of day. Most of the discretion is involved in the Episodic Pivots strategy. Others are 98% mechanical.

e. How do you integrate all the information. There is so much information generated by IBD, Worden data, 100% gainers, 200% gainers etc. Agreed it takes an hour or more daily, to filter this information. How do you handle this information overload and filter out various types of useless data/information to arrive at a logically sound and strong stock pick.

It takes me 5 minutes to run intra day scan and 20 minutes to run end of day scan. If I add higher powered computer to my set up I might be able to do it in less time, but that is not a necessity. I spend around 1-2 hours researching the Episodic Pivot list everyday. Lot of that happens during the trading day.

It takes me around 30 to 45 minutes to go through IBD in morning in detail and make my notes. By the end of the day I would have read my notes many times and researched some of it, so most of the time it goes in to my long term memory.

I have a God given gift to remember completely obscure details and facts and for many years used it to win several quizzes. Because of my quizzing background I know of some memory techniques to remember and recall things. In fact due to quizzing, I learned to read newspapers or any piece of information in microscopic details and to store it in memory.Winning quizzes is not about intellect but mostly about ability to remember and recall some perfectly useless knowledge.

Rest of the time I spend on other activities and R&D. At any given time I have around 2-3 new concepts under research. I research lot of things but do not change my trading unless I find something which will significantly improve my returns.


markatkar said...

Congratulations to you on your God given gift of long term, medium term and short term memory(I do not say that facetiously). Not everyone shares their concepts,strategies, sources of information and logic so munificently. I am learning a lot from you and hopefully, continue to do so. It is indeed a pleasure to read your blogs. Thank you.

John said...

Do you offer your prop list to paying custmers, who too can profit from your work?

Vee said...

Pradeep can you please suggest me some good technical analysis books, I am beginner to stock investing.


Pradeep Bonde said...

You are unlikely to find much in technical analysis books. The Wall Street is littered with zombies of unprofitable traders, trying to make money using technical analysis.

Here is what I said some time ago:

There are hundreds of way to make money in the stock market, but the one which has the largest following is technical analysis. If you search Amazon database on investing, you will notice more books on technical analysis that any other topic. There are hundreds of newsletters dedicated to the art of technical analysis and chart reading. Most of them offer a very simple way to interpret the market and offer promises of riches.

Most traders and especially beginner traders are completely lost in the technical analysis jungle. It is difficult for them to accept any other interpretation of market. I know of people who everyday evening go through over 2000 charts or more in search of their esoteric patterns. Most beginner traders get hijacked by technical analyst and some of them are lost forever to the dark arts of technical analysis.

If you have noticed much of the Wall Street big money houses have over last 5-6 years retired or sacked their technical analyst heads. Much of the work is being now done by quantitative tools. But the cult of technical analysis continues to grow.

If you want to escape that trap look at some of the quantitative approaches to making money. Even if you have to follow technical analysis, use a quantitative method to select stocks and then apply your chart reading patterns.

Now if you want to understand technical analysis there is no shortage of books on it. I have read most of them. I can identify most of the common and some very esoteric patterns but I seldom use them in my trading. If I have to recommend only one book on technical analysis, I would recommend, How Charts Can Help You in the Stock Market by William L. Jiler.

Vee said...

Thanks a lot for that book recommendataion, that should do it.
Any other general stock related books you recommend.