Wednesday, May 12, 2010

BAGAKOAA May 12, 2010 The return of the rally?


May 12, 2010 The return of the rally?

I am getting very close to calling this a return of the rally. Upward momentum has me excited although I am re-entering the market with a little less vigor than in the past. In the past 48 hours, I have bought AAPL, IBM, CVX, INTC, CRUS (new position), FLS (new position), TGT, SBUX, IDSA (new position), HAS, MCD, ARMH (re-established part of a former position), BA, KTCC, and added to GLD and SLV.

On occasion when asked to evaluate a list of equities, I will say, that is fair valued, so let’s wait for a dip in the price. In seeing that in the notes I send or the posting I make it seems a bit counter intuitive. If its fairly valued then buy it, would be a logical response.

That would be true if we were talking about long term investing and if that is your thing, (more than 24 months), than fairly valued is good enough. Keep in mind that I NEVER, and I say that with confidence, NEVER buy a stock without putting a stop on that stock immediately after the purchase of the stock. I used to use a 10% stop and watched them like a hawk, then I used trailing stops where the stop tracks the rise in the price based upon the parameters you put in place, and I got burned on a few of those. Now I use an 8% stop and adjust them as I see fit. My reason for this is that I usually review a stock at least once a quarter at earnings time, or if the stock is up 25% or more, or if it is 8% down. If you follow the math, I can have 3 bad decisions for every correct one. I don’t use the trailing stop now as I spend an hour or two every night reviewing the stocks and adjusting as necessary. But I digress.

With my logic in place and knowing I am not a long term investor, not that I would love to be, the market just does not allow for it. Buy and hold does not work in the environment of the last 3 years and will not work for the next 5 years. Active Value Investing is what it will take to do almost as good as the overall market. So when I say its fairly valued let’s wait for a better price, all I am saying is I want a slight hedge to support my 8% down. If a stock is fairly valued at 10.00 a share, I want to buy it at at least 9.50 or 9.80. I want to add a 2-5% buffer to my 8% stop allowing me a volatility swing of 10-13% (8+2to5). The only time, (note that only was not in caps) I break this rule is if the company has a real strong shareholder’s yield formula working. Again, that would be strong free cash flow used to pay down or eliminate long term debt, issue dividends, and buy back shares. If I see all three in the last 3-4 quarters I will buy a fairly valued stock. If not, I want a bit of a bargain.

Let me put in golf speak. I am at the masters. I see the Amen Corner Golf Shirt in the Golf Shop at Augusta. The Price is $80.00. I know it is a $50.00 shirt, but it is the Masters, it has the official Masters Logo, and I have to have it. So I buy it. I get home and someone asks if I can get them that shirt. I go on eBay or Amen Corner’s website, I do not want to pay $80.00 for the shirt. I want to buy it somewhere between $50 and $79. Now that I read that, the analogy sucks, but it stays anyway.

Tonight I went back to last several corrections we experienced and compared to the current market action, taking out the 750 point Black Swan (by the way if some one says Black Swan, ask them what it means. I had one guy tell me it had something to do with a trade in Australia. In case you don’t know it is a term to describe a rare fluke which I know is redundant, but it is meant to be. Genetically it should be all but impossible to have a Black Swan. The parents are white the grand parents are white, but some how we have Black Swans.) and can see similarities to the July 9th, 2009 adjustment, the November 2, 2009 adjustment, and the February 8th, 2010 adjustment. Based upon those patterns, I would say we are about a week away from a return to a full fledged rally. Actually when you average out the 750 point Black Swan, you could almost say the rally from February 19th is continuing. I do not think that. I am buying as I feel that we will be in a market rally mode soon.

Now you are reading the blog of a criminal. I was notified by Schwab yesterday that one of my accounts was in breach of an SEC violation. Cool, little ol' me. Anyway what happened was when the portfolios got stopped out of so many positions; I wanted to get them re-established as soon as possible so I went on a buying spree in pre-market trading on Friday. While the market did skip quite a few of my limit buys, in one account I got in on most of my orders. Unfortunately it was a cash account. No Margin. The sales had not settled and I was buying with the house money. The SEC does not like that. The account is frozen to only cash on hand orders for 90 days. To quote that world famous investor from Orange County California, Steve Martin, "WELLLLL Excuuuuuussssee mmmeeeeeee!"

Salve Lucrum


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