Expert Picks from the Models

This week’s choices include several market sectors.

Roadrunner: Align Technology (ALGN) is my pick of the week. Regular readers may remember that I picked this one up a little over a month ago, near the end of May. I might as well take you through the whole thing; it’s a good explanation of how I work.

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I choose stocks when the price is near the bottom of the trading channel. This was definitely the case when I staked out my initial position on 5/25. By 6/23, the stock had appreciated just over 8%, up to around $151 per share. Not only was this a sizeable gain, but also it put the price near the top of the channel. I sold my shares and moved on.

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Then, on 6/30, I saw noticed another dip down to the $150 mark. As a result, that brought the channel down lower and made a re-entry look attractive. I’ll be holding this position for another four weeks at the very most.

J: As you can see from the F.A.S.T. Graphs chart below, this is a P/E ratio of 54.2. The earnings growth is uncertain and fluctuating through a significant range. Are you sure the coyote is not influencing you again?

RR: That is what you said the last time, but it was a profitable trade. My system does not require earnings.

J: At least there is some earnings foundation. I see risk to 55 or so.

RR: That is why you are the investor, and I am the trader. Beep Beep!!

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Holmes: This week I am highlighting Archer-Daniels-Midland Company (ADM), the American global food processing and commodities trading corporation. It is a company established way back in 1898 and is headquartered in Chicago. It is especially familiar to our team.

My focus as always is on the chart below. At first, what interested me was that the stock is trading much below its 50-day and 200-day moving averages. Surely, a sign that it has room for upside. Second, I saw the stock was at its lowest price level at the end of June (comparing its prices for last one-year). Delving into its historical price movements, last October-November, the stock saw a sudden spike in price which was followed by a huge fall. After its recovery with time, the stock dipped again in late-April, to touch its lows. Since May, it has been seeing short ups and downs for another two months. So, I thought the end -of -June low was a very good entry, and it did give me the weekly gain. I expect to collect more gains in the next few weeks.

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J: ADM seems to have little upside and very slow growth. With a reasonable dividend, it is a better candidate for our Enhanced Yield program than one of your trades.

H: It might work there as well. I see a chance for a nice, short-term bounce toward the former highs.

J: The plummeting price in May came because of terrible earnings, attributed to a “grain glut.”

H: Temporary. There will be more hungry people.

Felix: I don’t have anything new this week, but don’t go thinking I’m off on another vacation! I just like to hold stocks a little longer than most of my friends here. Let’s do a blast from the past, instead. In early May I recommended Valeant Pharmaceuticals (VRX).

J: You are dating yourself with that language. Our young trader readership may not follow you. It reminds me of when I was going to use “Herbert Simon Jumps the Shark” as a post title. After some discussion, I found that a Venn diagram of those familiar with both the man and the term showed no intersection.

F: I know about Venn diagrams, of course, and I saw the famous Fonz episode, but who is Herbert Simon?

J: Exactly. So tell us about VRX, a very controversial company.

F: I bought on May 8, right during that sharp incline. Had I been taking a 2-4-week approach, this would not have been a good choice. But again, I take the long view. This worked out well, as you can see. My shares in VRX are up 42%, and I’m still looking to hold onto this one for another few months. Patience is a virtue.

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J: This has been one of the most publicized stocks, engendering a major debate among hedge-fund giants.

F: Is that bad?

J: Not necessarily, if you choose the right side!

F: I suppose that you will next show a chart from a fundamental analyst, like Chuck Carnevale.

J: Of course. His tools are the best! Anyone serious about buying a stock should begin with a look at Chuck’s analysis.

J: The price has gotten low enough that the reduced earnings are OK – if they do not decline further.

Oscar:
This week I have no new choices.

J: You had another tough day today.

O: Yes, although my biotech holdings had an earlier rebound.

J: You also hold bonds. That is usually a good hedge in a dicey market.

O: Right now, at least, bonds and stocks were both selling off.

J: You sound like you are in a slump.

O: Just look at the Cubs. It even happens to champions. I’ll rebound soon.

J: I’m sure you will. Do you have a ratings update for us?

O: Yes. I respond to reader requests. The list reflects their current sector interests.

J: What about Athena?

O: She has been in her office, but did not have anything for this week. Like me, she needs some intermediate-term trends.

Conclusion

It is a mistake for traders to attempt, on the fly, to adjust their methods to fit the crisis du jour. A stronger approach includes the following:

• Stepping back. If the market climate does not fit your trading methods, it is better to wait than to reach for unsuitable trades. This is a lesson from great traders like Richard Dennis and the Turtles, and also from our models.
• If the unusual volatility creates an opportunity, be ready to hit it out of the park.

Since some believe that news events should drive markets, and they act on that belief. If enough do so, the trading algorithms will kick in. You should not be attempting to compete in that very short time frame. With a little patience, it can represent an opportunity.

Here is a summary of the cast of our characters. Find your own favorite! 

Stock Exchange Character Guide