Posted in Trading on April 26th, 2017
The NASDAQ Composite has hit an all time high yesterday, hitting above 6,000 level for the first time in its history. The Composite did not even reach this high during the dot-com bubble in the year 2000. Congratulations to all those who had faith in technology, buying near the lows in 2002 after the dot-com bubble burst, or in 2009 after the mortgage bubble/financial crisis of 2007-2008. It was a long 9-15 years fighting and clawing back to make it to this level. So, is it time to buy technology?
Of course the answer is, “It depends.” Do you think technology will continue to grow? We have seen signs of life in 2016 in the semiconductor and hardware industry. We also have seen some IPOs that have fallen flat on their faces after the initial enthusiasm of early trading. I do believe we can see some growth and stock price increases in some sectors and companies. However, the sentiment among many professionals is cautionary. Usually, the professionals would be the main cheerleaders as the stock market goes higher. It is an unusual environment, considering wall street is built on higher stock market prices, and that is what they want to see in general.
There is a contrarian hypothesis of magazine covers. In many instances, Barron’s would highlight a company and how great it is doing. Coincidentally, the stock price of the company would start to decline, marking the coverage as the peak of the stock price. Conversely, I recall where Barron’s covered Facebook negatively, where the cover showed Facebook may go down to $15. It had a “thumbs down” version of the Facebook’s “Like” button. Quoted on the cover, “At $23 a share, the social-media colossus remains overvalued. Its future depends on finding a better way to profit from its huge user base. A risky bet.” This was from September 24, 2012. I believe the riskier bet would have been to listen to this analysis. Although the article had some bullish information about FB, the general recommendation was to stay away from Facebook because it could go lower. If people heeded those words, they would have missed out on nearly 700% return in the last 5 years. Yes, the stock lost more than half its value from $48 IPO price. But, who could have predicted that the stock will bounce around for 9 months below $31 before breaking out in a four year uptrend? In hindsight, the Barron’s cover indicated a stock price low for Facebook.
The usual axiom is to buy low and sell high. That way, you could never lose money on your investment. However, one does not control the direction of the price, unless you have endless amount of “money.” Those who can, will buy endless amount of stock and put it on the balance sheet, while “printing” money to pay for them. I have many problems with this axiom, but this will be discussed at a later date. If you have further thoughts on this, please feel free to comment below.
In contrast, another saying by trend followers and momentum traders are, “Buy high, sell higher.” Those strategies are mainly looking for breakouts as a signal and continuation of that trend. If it does not move favorably, ideally one should cut losses quickly. Here, I give an example where I bought a stock at the 52-week high.
Back in October, 2016, I was playing around with 52-week high stock screens for a bit, and Ultra Clean Holdings ($UCTT) caught my eye, as it was hitting those screens for several days. The stock was at hitting 52 week highs, from the lows back in 2015. The price was already double the low at that time. Many would have thought it was overpriced, and wished that they had bought it when it was around $4 per share. However for me, the trend was up, and the price was above the 200 day moving average. Therefore, on November 1, 2016, I decided to pull the trigger and buy some $UCTT at $8.60 per share. If it went down below 2 times ATR, then I would sell. Luckily, it kept on going up. For the last couple of months, it was hovering and dipping below the current 52 week high. However, it was not hitting my raised stop limit, thus I held on. Fortunately for me, the stock price moved favorably in the last couple of days, trending up again, and now I have doubled my investment and I am still holding on until the trend turns. If I did not follow my rules for exits, I would maybe have sold out too quickly and missed on the recent opportunity of $UCTT price moving higher.
Does this mean you should go out and buy this stock? It depends. Do you have a strategy and a plan to buy and sell this stock? Do you have rules in place to exit if the stock moves against you? Do you have rules in place when to exit by raising stops as the price moves favorably? Do you know how much shares to purchase, depending upon your account size and your risk tolerance?
Investors in general are looking for a good deal. In real estate, some people are looking for a great deal in a great neighborhood, because it is such a large investment. For real estate flippers, they are looking for high resale value and a quick turnaround sale in a hot market. For example Sydney and Vancouver seems to be some of the hottest real estate markets right now. Relatively, $UCTT seems to be over-valued, as this stock is higher than its peak about ten years ago. So for a value investor, this stock would not be of interest.
In the stock market, one must have rules for risk management and money management. This means not risking all your money in one investment and knowing when to cut losses quickly or exit with keeping most of the profits intact. That way, the losses don’t become too big to cause emotional stress or have you second guess leaving money on the table. Not all stock picks will become winners. Many investors will have more than 50% losing stock positions, including myself. If the losses are minimized dollar-wise, and the winners are maximized, then statistically the investment account should grow.
I highly recommend Dr. Van K. Tharp’s book “Trade Your Way to Financial Freedom” and its section on position sizing. His other books cover position sizing as well. If your investment strategy calls for investing in stocks and ETFs at 52 week highs, make sure you have rules in place for position sizing and stop loss exits. Make rules for trading and follow them, it is more important than finding the exact bottom for value entry. Potentially, the stock can be $0.00 as the relative bottom.
This article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may have changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure.