Thanks to everyone who attended the webinar “Staying In-Step with the Stock Market.” There were several great questions asked during the presentation that I didn’t get to answer, so I’m taking the opportunity to discuss them further here:

Q: You mentioned that you try to hold “Type A” stocks for the big move, whereas with “Type B” stocks you take the 15-20% profit. You also mentioned that taking profits on the Type Bs makes it easier to hold Type As through a pullback. Can you elaborate on the difference between the two?

A: Mostly it’s a qualitative difference. Type A companies are doing something really special—often changing the way we live or do business—and have the potential to experience large price moves. Because these companies have extraordinary stories and fundamentals, my conviction in Type A stocks is stronger, so I hold them for that larger move. Type B companies are at the top of their field and growing, but they do not have extraordinary stories or innovation like those in the Type A category. With these mid-level growth stocks, I’m more willing to take a base hit and walk away with a profit of 15% to 20%.

Q: How tight do the weekly closes need to be in order to consider it “3-weeks tight” and add to a position?

A: When I’m evaluating a 3-weeks tight pattern, I go mostly by look and feel. On a weekly chart, I want to see those weekly closes sitting right on top of each other; the tighter the better. The Pattern Recognition program in MarketSmith uses 1.5% as the maximum percentage change between weekly closes, so feel free to use that as a guideline.

Q: How far do you let a profitable position fall before taking profits? Do you use stop loss orders?

A: I would much rather sell a position on the way up (when I reach 20% in profits) than sell on the way down. Decisions get more difficult to make if the stock begins displaying defensive sell signals, and you begin eating away your paper profits. I don’t use trailing stops, but if a stock begins to display some technical sell signals, I would start to begin taking profits (if I haven’t already). You can brush up on your technical sell signals by reading chapters 10 and 11 of How to Make Money in Stocks. Rounding tripping a profitable stock is a cardinal sin.

Q: How important are industry groups in stock selection? Many leaders of the past were not in the top 20 groups.

A: Our studies show that 37% of a stock’s price movement is tied to the performance of the industry group the stock is in and another 12% is due to the strength of the overall sector. Picking a stock in a strong group just increases the chances of success on that stock. You can still make money finding the best stocks in poorer groups; your odds are just not as good.

Q: How much value is there in setting automatic buy orders at pivot points?

A: Personally I don’t do it. There are too many variables besides price that go into the decision to buy a stock. I look at volume, the personality of the market on that day, and the condition of my portfolio. So it’s never an automatic decision based on triggering a certain price. However, I’ll admit that the only reason I require so much control over my trades is because I have the luxury of watching the market all day. For those that have a day job and can’t keep their eyes on the market, automatic limit orders may have some value.

Q: Do you lighten up over earnings releases to avoid adverse moves?

A: That depends entirely on the scenario. The MarketSmith education team did a great webinar on how to handle earnings and they cover many different scenarios. It’s located here: https://www1.gotomeeting.com/register/700546344  

Q: If you used an alternative entry point, do you take profits 20% above your purchase price or the actual pivot point?

A: I usually take 20% profits whenever I can get it, even if I bought early or from and alternative entry point. However, our studies show that most quality growth stocks will run up 20% to 30% between bases. That’s from the pivot point of the first base to the left side high of the next base. So that’s why we take profits around 20% above the pivot point where we made our purchase. If you are using any other “alternative” entry point to make your purchases, the 20% profit target isn’t as relevant.

Q: When the stock pulls back to the 50-day, do you wait for it to rebound? Or do you buy it on weakness?

A: I never buy on weakness or in a downtrend. At the very least you want to wait until the price stops falling and it would be better to wait until you see demand coming in before buying. Buying weakness is very risky and not recommended. You are assuming that demand will come in eventually and support the stock there. If the support materializes, you just picked up shares at a few points below someone who waited for the support to become obvious. If support doesn’t materialize, those who bought there have to get out quickly. When it becomes obvious the stock isn’t being supported at that level, it could break pretty badly. Most investors should wait for the stock to rebound on volume before making the purchase on a pullback.

Thanks again for all of the great questions. If you missed the presentation, you can watch the recorded version here: https://www1.gotomeeting.com/register/320616673  

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