11/03/2013 Calculating a Sell Point

Sector Model	XLK	0.00%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-25.39%	205
QCOM	9/3/2013	5.46%	60
NEM	9/30/2013	-7.15%	33
BCR	10/4/2013	18.87%	29
BAX	10/7/2013	1.14%	26
BDX	10/11/2013	3.96%	22
DECK	10/15/2013	11.46%	18
ED	10/18/2013	2.93%	15
ISRG	10/21/2013	-1.19%	12
EW	10/28/2013	-16.60%	5
(Since 5/31/2011)
S&P	Annualized	11.76%
Sector Model	Annualized	24.35%
Large Portfolio	Annualized	30.66%

 

Rotation: selling DECK; buying FFIV.

Question of the week: do you sell when a stock goes up or when it goes down?

If you trade fundamentals, you either hold when it goes down or buy more of it.

If you trade technically, you may have both a stop loss and a price target.

Statistically, you are better off cutting your losses and letting your winners run.  A lot of folks try to do this with trailing stops.  That is, your stop loss is always a certain amount below the highest price, or just below the most recent low.  I don’t use the static return in my consideration, but rather the annualized rate of return:

Since I use technical considerations on an industry level and fundamental considerations on an individual stock, I have both price targets and stop losses on the industry that will POTENTIALLY rotate an individual stock into the sell zone – but then I measure the fundamentals to see if I actually want to sell it.  Both EW and BCR are in the same industry, for instance – so they will enter the sell zone at the same time.  WHICH one I sell on a given week will depend on the relationship of individual fundamentals to rate of return.

The actual ratio I use is fundamental potential / realized return rate.  The realized return rate on DECK is over 800% annualized, but it does not have a fundamental potential to sustain that rate, so I’m rotating off of a lucky pop and looking for another bargain.  It could go up another 100% during the next year, but will not likely go up another 800%.

Sometimes the fundamental potential degrades faster than the realized return rate, and I’ll take a loss.  But I end up with more gains than losses this way.

The Sector model is another beast entirely.  Unlike the Full model it can whipsaw, as it has this week.  The average holding period is a month, but sometimes we can have a week like this one.  The intraday data even whipsaws after the close, causing me to hunt for favorable gaps the next day.

So then, the Sector model closed in XLB, but AFTER the close the data shows a slight lead for XLK… by less than one hundredth of one percent.

I’m looking forward to the next boring stretch…

The method is to rotate if XLK gaps below XLB, and if not I’ll recalculate toward the close.  I’ve been scalping about half of a percent on each favorable gap, but I much prefer the boring stretches where I can let it ride.

Tim