Everyone’s Lost But Me–Part III: See With Your Eyes, Think With Your Brain
July 14, 2012
This may seem like either a “duh” title or a very obnoxiously pretentious title. It’s neither. It’s simply a reminder that what I’m going to talk about (the “meat” mentioned in the previous article”) revolves around looking at what charts and trends and patterns tell us and how those, when thought about rationally, do make me wonder about the research companies’ ratings a lot of the time. Don’t misunderstand, I know that these companies do good work and spend a lot of time doing it and that a lot of people put a lot of faith in their reports…I’m just not one of those people, anymore. Here’s why…
Remember Wayne Gretzky’s horrible refrigerator art? There are some charts out there that I wouldn’t call the most gorgeous either. I’m going to my experience with some nasty refrigerator art as examples of pre- and post-Weinstein approaches. What do I mean? Well, read on.
The one that will prove to be the “d’oh!” of the early buys in my history and among the shortest lived of all my holdings, ever, is Stamps.com (STMP). This was, initially, before I really understood how to protect my investment, which is what stop-limits, trailing stops and the like are all about. So…
Stamps.com is an example why being green and not understanding trends was a debacle for me from the beginning. First, when I purchased (late October 2011), it was in the middle of a massive single-day surge, going from just over $26/share to just over $32/share. I bought in at $32.13. Yeah…I saw a “leap” and I leapt, not understanding that was probably the stupidest thing I could have done. The next day it peaked at $33.73. Then, the weekend happened and something cooled off, because that Monday, it closed at $32.56. The following day, it closed at $29.48. The following close was $28.67. I sold at $27.71 before it hit its low of $27.31. This is a classic case of day late, many dollars short.
If I had looked at the rumblings – the trends – instead of listening to the hype and trusting a very poor instinct, I would have purchased on Thursday, at closing, which would have been $25.91. The trend was that the volume was increasing at an odd rate – think exponential, though it wasn’t really. The anomaly, to me, though, is the gap on Tuesday, when it tried to surge from a previous close of $25.41 and on a surprising drop in volume (from 401K to 170K), dropped in price $0.51 on an increased volume of 409K. Now, this makes sense, to a point.
To a point?! Yes, it makes sense to a point. The problem was that the Tuesday volume was perfectly in line with what had been happening the previous weeks. So, to me (now), the indicators were that it was trying to explode, but hadn’t quite made it yet. Enter Thursday.
The jump on Thursday didn’t make sense to me, then, as much as it does, now, increasing $1.9 on much increased 631K. Presently, this tells me that it’s getting over its shyness. However, here’s where n00b Phil stepped in. I saw this flash mid-day Friday… The buy signal was flashed, in my eyes, now, when volume tried and failed to match the previous day (Tuesday vs Monday), but then succeeded on Wednesday and surpassed on Thursday. It’s a micro-trend, but, like I said, now that tells me it’s getting over some shyness and is probably going to have a good day. What I know, now, that I didn’t know then, however, is that the aforementioned good day, was just that – a good day.
Friday exploded, jumping $6.82/share on a strong surge where volume hit 2.1M.
Here’s the thing…remember that refrigerator art? Remember going to where the pass will be rather than where it is, presently? Yeah…I broke all those rules. I saw this surge as a sign that this was going to take OFF! …and it did…for 2 days. Monday saw a slight reduction in price, down by $0.16 on almost half the volume, 1M. Not horrible, right? Well, here’s where it ALL comes together. Tuesday saw the price drop to $29.48 with increased volume. That’s a $2+ decrease on increased volume which, really, in the grand scheme of things, a bit of a warning…you know, when you then set a stop-limit of $28.95/$28.45, which may seem kind of tight, but when it looks like things are going to drop, I tend to play things tight…I use hard-earned tiny dollars and I like to keep them.
The selloffs continued, though not catastrophically, with volume slowly reducing back to 637K on Friday after a total drop for the week of $4.34, giving back a good chunk of the earnings that surged the previous Friday. Now, because of the stop-limit in place, I jettisoned the stock at $27.74, giving up and losing a total of $4.39/share, well above what should have been my threshold for loss, as it dropped 15% and most sane investors would have decided that 8% is quite enough, thanks.
Now, Stamps.com did continue to maintain itself for a while before doing something that all overly cautious investors hate – after coming down a bit and setting down a nice support just under $24 for the next few months, it ramped up, again, from mid-January until mid-February when it should have, again, had a solid stop-limit in place when the stage 3 top formed and then went *poof* into another mini free-fall. The difference with the January-February surge, to me, was that it was done on sane volume levels with no extraordinary leaps one way or another…well, that and the relative strength and momentum were actually moving up, as opposed to in November when they were contraindicated by these two metrics.
Here’s the thing and why these are titled “Everyone’s Lost But Me,” the Monday after the surge, STMP was upgraded from Buy to Strong Buy. It then dropped $7 over the course of the next month at which point it was downgraded to Buy. It then dropped another $3 and over the course of the next month set a stage 1 support floor another $2 below when it was set to Buy. It then does its fun thing in Jan through March where it goes from the $25 support to a high of just under $33 and then back to form another support-looking trend that when you look at it after it dropped to $23.39 and jumped back up $28.52, you’d see that it’s trended more towards forming a stage 3 top, which means…at some point, fairly soon, it’s going to start sliding again. However Sabrient changed its rating from Buy to Hold. Honestly, this is the first one that makes sense to me, since it’s not started dropping, yet, but it’s not really gaining, either. Here’s what made my jaw drop.
As the stock closed at $27.69 or so, the following day, the rating is changed from Hold to Sell. Makes sense, right? Sort of. There was only a slight dip in Relative Strength and the volume was consistent. Was it, then, any surprise when the stock jumped up to $30.24? Not really. What kills me, though, is the “whipsaw” ratings change from Sell to Strong Buy with no in-between. It then tried to break resistance twice and failed and on the ensuing stage 4 drop, the rating was dropped from Strong Buy to, simply, Buy. It staged a micro-rally ( $0.80 ) and was then upgraded to Strong Buy, again. Over the next 5 or so days, the stock dropped just under $4. It was reduced to Buy.
What is my point? Simple – if you had followed the Sabrient ratings, you’d be down a chunk of change. If you’d paid attention to the numbers on the page and lines on the graph, you could have come out a bit ahead. And, finally, if you do what I did, you’ll lose money, as well.
Please don’t misunderstand…I’m by no means an expert at any of this. I just know now things that make my brain twitch when I see what I consider ratings changes that are counterintuitive or contraindicative when you look at the graph, the trends, the “where you’re going” not “where you are.”
“So, Mr. Smartypants, what would YOU have done differently that’s so different from what the ratings say and come out ahead?!?”
That’s a whole ‘nother article…stay tuned, for next time when I bring you “Everyone’s Lost But Me, Part IV: Making Stamps.com Work Phil-style” or something…that doesn’t sound like a very pithy title…