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posted on 23 September 2016

Technical Thoughts: How Much Risk?

Written by , A Dash of Insight

Editor's note: We start every week with Jeff Miller's long running post "The Week Ahead" which covers in-depth economic and business news related to investing. The focus there is long-term with only brief comments to traders. Jeff has started an end of week post which places more emphasis on technical issues related to timing of buying and selling securities.


Technical experts are a rich source of new stock ideas. Our trading models each specialize in a different time frame and level of risk. Before their weekly poker game, they spend a few minutes trading ideas. They like to call this their "Stock Exchange." I am the only human and the only one using fundamental analysis. This week we welcome Athena, whose wisdom helps her to know both when to hold 'em and when to fold 'em.

The group had a consensus on energy last week, but now has sharp divisions.

This Week's Ideas

Both trading and investing offer many ways to profit. Differing approaches, all sound in themselves, often lead to disparate conclusions. Technical versus fundamental, trader versus investor, short-term versus long-term - all make a difference. Disciples of each become passionate. The Stock Exchange demonstrates that all might be winners in their own time frame.

Our experts are sharply divided this week. Some favor taking on risk, while our newest member, Athena, advocates a utility stock. Here are this week's top picks.


While I never boast about my careful and precise method, I hope everyone saw that my pick of gold (and especially RGLD) is off to a great start. I am a long term investor, and it is not too late for others to join me in gold. I see similar potential in mining, the sector I am featuring this week. I like many individual stocks in this group, including one that is owned by some famous activist investor. You can get the long-term picture by looking at the XME ETF.

[Jeff] Why do you like basic materials and gold? Do you think that the Fed and Chair Yellen are leading us into another round of hyperinflation?

[Felix] Excuse me? What is the Fed and who is this Yellen person? My investment success does not require me to waste time reading news!

[Jeff] Sorry. I forgot about that. 🙂


Understanding sports is the key to my pick this week. The best NFL running backs are the ones who can wear down a defensive line. Carry after carry, they bust their way for short gains until they work up the momentum for a big run. In Biotech (IBB), I see a sector lined up in the backfield ready to break the plane for a touchdown. Check this chart of the past year:

Occasionally stalled, but with explosive potential - biotech looks like a player ready to hop off the bench and play the second half. You can see similar potential in individual Biotech stocks, like RARE.

All I can say? If I had to stake my fantasy team on that moving average trending back up, it would be a no-brainer.

[Felix] Too aggressive and too speculative.

[Jeff] Biotech stocks require a different perspective. A projected earnings multiple is not helpful, since many are "story stocks." We may not know which will come through, but the sector will be the source of the most important drug developments. Long-term investors can put a little away, but they should not expect regular gains on their quarterly statements. I think we will see a nice gain after the election.


CVS has a very good chart! I reject all but 2% of the stocks in the universe I follow. I require plenty of data before reaching a conclusion. CVS rallied for 4 straight years barely touching it's 200-day MA reaching an all-time high 113. It has been backing and filling for last year. I see a possible double bottom. This is a nice risk reward scenario with a tight stop just below 89. These are the kind of setups one sees from careful sleuthing.

[Jeff] Double bottoms seem to be in the eye of the beholder. The stock has pulled back and it is now almost down to fair value. I agree that It is worth watching.


Some things are so obvious. You guys should pay attention to what is working! We have a nice stock with an uptrend and strong recent price action. I know a good chart when I see one!

[Jeff] If you absolutely must own a utility, this is not a bad choice. I do not like companies with a multiple of over 18 and an earnings growth rate below 3%.

[Athena] Who cares? Pay attention to what is working. If the market ever starts to reflect your thinking, I will sell and move on.


Last week's comments were all about current picks. Feel free to range more widely. If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments and address them to a specific expert if you wish. Each has a special expertise. Who is your favorite?

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks.

Oscar is naturally optimistic and a bit excitable. He definitely likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

An Important Note to Readers

All of the characters (except me!) are models, carefully engineered and tested by one of the leading developers of the last thirty years. They are highly-modified momentum models, with different time frames and features.

I humanize them because it makes it easier to understand the characteristics in their design. I always remind readers that my posts are informational, not investment advice, but that is especially true here. While we are trading based upon all three models, we are always watching and can act quickly when necessary. The models are not suitable for all investors. If you like the approach, reach out to us and I will see if you qualify for one of the programs.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.

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