Ian Woodward's Investing Blog

Wolf Pack Correction or Rotation

A HGS Investor User is a trifle concerned that his recent stock picks are getting hit and was looking for a reason as to whether “it is shorting, profit taking, a full moon or what?”  So I felt I would continue the theme of the past two blog notes and give a more detailed response of the factors to consider at Earnings Report time on great Leading Stocks.

      

rotation

  •  User’s Question: I’m trying to get a handle on what is going on with the stocks that I screen for and I would like some opinions from our more experienced people on this forum. Starting last Wed it seems each group is getting hit hard with selling that I assume is being brought on by short selling. On Weds. I was forced out of a gain in LNN and on Thurs. the same thing happened with CLR, JRCC, BZP and MTL. These stocks as a group have pretty much recovered the haircut they received; unfortunately, I was stopped out of all of them and was too tentative to jump back in.  Today, I bought into CF and MOS figuring that they were safe as their earnings were out and the same thing is happening to this group. I haven’t had collective bad calls like this in quite a while (thanks to HGS). I know last week there were comments on the forum how screens were red but the market was green and I just get the feeling that these strong stocks are getting hit for a reason. Is it shorting? Profit taking? Full moon or what? Seeing I’m getting lumped up, I at least would like to know why? Any opinions would be appreciated. 
  • Answer:  It’s called the balance between Fear and Greed at Earnings Report time, i.e. Qeps Date.  There are four times a year when great leading stocks are the most susceptible to both Fear and Greed: The old adage of Buy the Rumor and Sell the News is always true at such times, especially when great leaders are into climax runs and pushing their luck at third and fourth stage breakouts.  Clearly, the Chemical – Specialty Group is a very recent and excellent example of this. POT and MOS are classic examples.  We can say the same about the Steels, AKS and STLD.  Let’s Review the bidding using Chemical – Specialty:
    1. Classic Examples: POT and MOS are classic examples of leading stocks moving into climax runs.

    2. Climax Run: A Climax Run is defined as a sharp move up over the prior two weeks of at least 25% Gain after it has already had a decent long run.  Invariably the shape of the chart is parabolic and the Index will always break the ascending tops line drawn from the previous two highs to the upside.

    3. % Price Gain from 52 Wk Low: POT is 250% up from its 52 Week Low and MOS as much as 355%, hence they are badly extended and fat with profits. They are story book stocks with all the fertilizer mumbo jumbo, hence they have had halo as far as Wall Street is concerned, i.e. are darling hot stocks in hot Wolf Packs.

    4. Vulnerability at Earnings Report Time: Such stocks will invariably go into climax runs just before Earnings Due Time, and it is usually better to take the gravy of a 25% added Price Gain than to sit through the Earnings Report, no matter how good it is on such stocks.  Of course one can always buy Puts, but the risk of loss far exceeds that of a certain gain under these conditions.  No matter how good the earnings reports, the stocks are invariably downgraded or targets for concern at such times. After all we went through this same scenario for the five horsemen of the previous top leaders…AAPL, BIDU, GOOG, GRMN and RIMM.  GRMN is dead for now, GOOG is recovering and AAPL, BIDU and RIMM have recovered and on their way again.  All had deep corrections, though exacerbated by the Bear Market Correction.  

    5. Analyst Downgrades after Earnings Report: On that last point, POT was cut from a Strong Buy to a Buy, and Barron’s had an article on MOS being impacted by a rising Dollar!

    6. The High Jump Tool: Leading stocks like these two give a strong feel for their personality as they leave their footprints in the snow.  Those are round words, but what I mean is that the High Jump and more specifically the High Jump from the 200-dma gives one a great clue as to when the stock is likely to correct.  Time and again the stock will correct at a certain % up from the 200-dma ONCE it has established its high, higher and highest jumps.  For POT that ranges from 66% to 75%, and true to form, it corrected this time at 65.87%.  For MOS the range is 97% to 120%   and it corrected at a High of 92%.  In other words, the higher the Price Gain, the more difficult it is for such stocks to beat those footprints after they are ESTABLISHED stocks with a known pedigree and behavior.

    7. Stage Breakouts: A further clue for caution comes from the # of Stage Breakouts from their low usually measured within the past year.  A stage breakout is defined as one where the stock rises to give a minimum of a 25% Price Gain and then bases sideways in a tight pattern before it takes off again.  The time of greatest danger is invariably at a 3rd and particularly 4th stage breakouts where somewhere along the line the stock will correct a minimum of 15% to 20% and then go again.  If the stock has had a 25% correction or more, then the stage count can start again, but I like to keep the original count as well until the stock gives up the ghost.

    8. Rotation or a Normal Correction: The $64 question invariably at such times is whether this is a normal correction or is it the start of a rotation out of these favorite Industry Groups? The short answer is that when such great leading stocks break their 50-dma to the downside they are likely to seek their 200-dma and stay dormant for a long time. It then depends on whether the “story” which got them recognition in the first place continues or is over. So far the story is still valid, the earnings reports are excellent and the worst of the Bear Market Correction is behind us for now.

    9. For Posterity Sake, I felt I would give full treatment to the numbers so that those who are new to the Principles of High Growth Stock Investing and specifically the value of the High Jump Tool will have a feel for what to look for in the future as to whether to Buy, Sell or Hold.  If you examine the spreadsheet, I show you both the upside opportunity and the downside risk…without spoon-feeding you.

        ss  Best Regards, Ian.

     

2 Responses to “Wolf Pack Correction or Rotation”

  1. Paul R Says:

    Two great blog posts Ian, the R&R has done you well!

  2. Michael Orlyk Says:

    Ian – you stated that “Time and again the stock will correct at a certain % up from the 200-dma ONCE it has established its high, higher and highest jumps.” Would you mind elaborating further on this statement?

    I interpret this as meaning I should look for three successive high jumps, each succeeding one higher that its predecessor. When I use the 200 DMA high jump I look back several years and attempt to establish an average highest value among the series values for the period. Is this an incorrect application of the 200 DMA high jump?

    Mike

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