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posted on 29 January 2017

Technical Thoughts: When Should You Reject Technical Ideas?

by Jeff Miller, A Dash of Insight

Last week’s article illustrated how human traders could call upon models as “consultants," effectively creating their own trading room. If you missed the post, please check it out. This week the gang is short on fresh ideas - and I vetoed one of them! We never reach for new trades, and that itself is a good tale.

reaching.too.far.380x200

My crew varies widely in reading skills. Felix reads everything - and very carefully. Oscar reads the sports section. Holmes is a dog. Athena does not read since she already knows everything. It is my job to keep up with relevant world events, and our modeling guru’s (Vince) to create and monitor systems. One way that we judge our team is by comparing our approach to the recommendations of Brett Steenbarger. He is the world-class leader when you want to combine the theoretical and the practical. This week he explains why trading methods need a deep foundation.

…(S)uccessful traders must be able to innovate at two levels. First, they must find new ideas and fresh opportunities. Second, they must cultivate new sources of ideas and opportunity. The first involves exploiting the edges we already possess; the second involves identifying additional edges. The successful trader is never static, never dependent on one type of market condition to make a living. Just as research and development is the lifeblood of technology and pharmaceutical companies, it is the source of long-term success for traders.

When successful traders aren’t trading, they are researching, developing, and innovating. When unsuccessful traders aren’t trading, they’re staring at screens and forcing trades. There is nothing better for trading psychology than being at the cutting edge of a growing business.

This is great advice! Traders who sit staring at a screen when nothing is happening are simply wasting time. It also illustrates the usefulness of having teammates to provide other ideas and spark the thought processes. Let’s take a look at this week’s ideas. As usual, I will conclude with a brief observation.

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen" in each category - stocks and sectors - as determined by readers. Sign up with email to “etf at newarc dot com". Suggestions and comments are welcome. In the tables below, green is a “buy," yellow a “hold," and red a “sell." Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

This Week - When to Reject a Trading Idea

Holmes

This week I’m buying Fomento Economico, a distributor of soft drinks, owner of small format stores, and investments in the Heineken Group.

For the last year this stock has (until Nov 7th) bounced between the mid-80s and mid-90s piquing my interest in a trade. Then (and fortunately) before I had the chance to pull the trigger, it swooned down to 75 and has been basing there for the last 2 months. I don’t really understand why it dropped so quickly and so precipitously, but now that it’s basing I don’t care.

So, I’m buying here with tight stop, 72, and looking for a move back into the mid-80s. It is a nice risk/reward setup.

J: You said that you are buying. Did you come into some money?

H: Uhh.. I meant that I am recommending to our clients.

J: It is an interesting idea, but we are not making the trade.

H: Why not? It fits my criteria very nicely.

J: On rare occasions, we humans override decisions from the trading models.

H: Why would you ever do that?

J: Because we know the criteria you use and monitor facts that you might not be seeing.

H: I see the stock price, volume and other technical indicators. What more do I need to know?

J: Sometimes there are dips that do not really provide a near-term rebound potential. In this case, our new President is talking tough on trade with Mexico. The Peso is lower. A time to buy may come, but there are much better opportunities right now.

H: What is a President?

J: That is exactly what I mean!

Athena

I admit it. I have nothing new this week. The current market has not generated fresh, strongly-trending stocks.

J: That is fine. As you know, it is a mistake to reach for trades. Stick to those that have significant edge. How about reviewing one of your recent choices?

A: My previous pick of Zions Bancorp (ZION) hasn’t done much yet. You were skeptical from the beginning. You said that you liked the sector but it had gone too far, too fast. I had originally planned to hang on for a few weeks at most. Part of me feels like it’s time to get out of this holding and move on to the next thing.

J: This is another name caught up in the Trump transition speculation. When the expectations for short-term interest rates get some clarity, the bank stocks will react. This holding is OK - for now.

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: The stocks are about the same as last week.

F: The list changes, but only as the reader favorites change. I encourage my fans to submit requests.

J: The order of the ratings has changed. Are you going to resume showing us the week-over-week comparison?

F: I am thinking about that problem. Some of the stocks were not rated last week. For the moment, readers must follow their favorites each week.

J: Maybe we’ll get some good new suggestions. What is your featured stock for this week?

F: You will not like my answer. I have nothing new this week.

J: That is what you said last week! Aren’t we still reviewing your request for a raise?

F: Yes, but you should base your decision on my results, not the number of picks. My holding period is longer. As you know I have had the best performance since you added me in September. I have been better than the dog, and a lot better than Oscar.

J: The lawyers say that we cannot discuss performance online - only when we have an investor request. Instead, how about reviewing one of your recent selections?

F: My recent pick of PayPal (PYPL) is sure to make Athena jealous. Since I recommended it on December 29, the price has popped a tasty 3%. Of course - short term returns aren’t really my thing. I’ll probably be holding on here for another few months, at the very least.

J: That has worked out well. I agree that it is consistent with some of your other long-term holdings.

Oscar

Here are my ratings for the top reader interests. There are still three open slots, so keep the questions coming.

J: Interesting. What do you have for us this week?

O: I’m getting into a new sector this week: Healthcare Services. Just look at the chart for Humana (HUM). It’s ridiculous. I don’t think I’ve ever seen a 50-day moving average shoot up at a 45 degree angle before. Now you are the public policy guy, not me, so does this really make sense?

J: No one really knows just yet. We know that there will be a “repeal and replace" policy on ObamaCare. The outlines of this are still pretty vague. I have written on this subject several times; I am standing back until there is more clarity.

O: You cannot always sit on the sidelines. This is worth a shot. As far as timeframes are concerned, I almost certainly won’t hold onto this for longer than a month. That is, unless someone who reads something other than the sports section can find a reason to do otherwise. BTW, I think there could be some upsets this weekend.

J: Isn’t your fantasy football season over?

O: Yes. I am working on becoming an NBA expert while I wait for March Madness.

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange." (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

Our models provide diverse ideas, but that is only the starting point. Every trader needs a team to provide ideas, but also the capacity to reject suggestions that are off base.

Diversity in Ideas is a Strength, but Be Ready to Veto!

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