Growth Upgrades/Downgrades

When stalking a growth stock awaiting better entries or looking for new growth stock ideas, one of the best things you can do is get a hold of Wall Street's Upgrades and Downgrades each morning.  TheStreet.com has a good one if I recall as do 24/7 Wall Street and Benzinga.  Look for something a bit more in-depth that will give you a sentence or two synopsis of each analyst ratings change.  Learn to spot the bullsh*t downgrades over time and start studying how the higher-growth stocks tend to react to them - both initially and over the intermediate term.  Typically a fast-growing company will stumble on a specious analyst downgrade and then the accumulation will resume as the institutional fans of the story get over it and come back with buy orders.

What constitutes a bullsh*t downgrade?  Anything that can be perceived as having a hidden agenda or that sounds like the analyst is just looking to be a bit more visible or justify his work.  This happens all the time.  So do bullsh*t upgrades when a big client of a brokerage firm needs someone to drum up enough buyers to make an exit from a particular stock.  You can see it in the tape, little buyers cleaning up a big seller.

But I digress...

Some examples of Bullsh*t Downgrades:

1.  Valuation - growth stocks don't trade on "valuation", they trade on sentiment and the expectation of future earnings, see the numerous valuation-based downgrades of lululemon and Whole Foods.

2.  Dropping Coverage - believe it or not there are institutions who will actually sell on the news that a brokerage firm is dropping or suspending coverage in a name due to an analyst leaving or something.

3.  Channel Checks - there is only one thing sell-side analysts suck more at than tackle football and that is "channel checking" - they literally cannot do it in such a way that there are actionable insights to be gleaned from it.  Think about how many times you heard about strength in non-Apple tablets (there never really was any) or weakness in the iPhone 2 (also, never really happened).  Channel checks are a money-loser in most cases - wait for the actual hard data, forget what people say they'll do or think they'll do.

4.  Short-Term Pressures - chances are if you are interested in a growth stock investment, what happens tomorrow or the next day has little to do with anything.  For example, I saw an analyst downgrade Buffalo Wild Wings, one of this moment's greatest growth stories, because of a rise in chicken wing costs in early February.  And while the analyst was correct in terms of those costs rising, it's really a trivial, short-term matter to anyone who intends to invest in the business.   $BWLD is being bought for the massive national footprint they'll be building out for the next ten years, not a penny or two in wing costs.  The stock is up like 20 points in the 3 weeks since that downgrade, btw - managers in the growth space simply have to own it.

5.  Strategic Direction - some people are meant to run businesses and others are meant to analyze and critique them. When a company announces a new strategic direction or goal, the knee-jerk Wall Street response is to cut it to neutral due to "uncertainty".  I have no interest in seeing sell-side analysts vote on the strategic decisions of a company - management often knows more about their market than the eggheads do.

Find undervalued companies, then wait and see when they start trending up.

On determining how to make a recession model using current(CEI) vs leading(LEI) indicators:.
1.Heading for the hills more than 5 months before recession is more likely counterproductive than productive

2. You need not isolate your decision points to LEI’s only 

a. LEI can be subject to false positives 

b. LEI only give you an extra 33% “edge” 

3. Couple or stage your actions with recession models using more accurate CEI’s to still capture 2/3 of the benefit 

It takes about 4 - 5 months for market to get over medium bad news from when it first starts.

“Old Rules…but Very Good Rules”

1. The first and most important rule is – in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.

BigPic  - “Here is the best free advice you will ever get:
The easiest, simplest, least risky thing you can do with your money is to dollar cost average on a monthly basis into a few indices – SPX, QQQ, Emerging Markets, Small Cap. If you can add a risk management component – get out of stocks when they break their 10 month moving average – that’s even better.

SPY 50M shares in 1 hour, good indication of bottom / turning point.

Exponential 20MA in 1hour ticks for SPY at 25M good indication of bottom / turning point