Last week’s Stock Exchange focused on risk – my first step in speaking with a new client. If you take on too much risk, you will find yourself bailing out at the first modest downturn. Our guest expert last week, Blue Harbinger, helped us in discussing the topic. Mark did a great job, just as he does consistently on his blog, and we got a very favorable response from readers. We will invite some other guest experts in the coming days, and we also hope to bring Mark back.

Once you have a handle on risk, it is time to maximize your returns. This is much more difficult than it seems. There are always many reasons to be fearful. It is only when you have confidence in your methods that you can stay the course through the inevitable blips.

Our models help with this problem. There are differing approaches, but all have been doing great. Holmes has just completed his impressive first year of real-time trading, beating the market with a lot less risk.

Readers see many bloggers who publicize alleged results. Some readers ask us to join in this deceptive game. Those others are either reporting on newsletters or they have bad lawyers! A legitimate investment advisor understands the regulations on reporting results. It is very tricky to put anything on the Internet, no matter how honest you are. We’ll respond to any inquiries by qualified investors with detailed results and a discussion. For most of my readers I must explain in more general terms. Today I include a recent discussion with Vince – the man behind the models. (More background here). I am trying to provide some ideas for your own consideration. While we view them as low-risk when employing our stops, no general results should be regarded as specific advice.

J: The models have all been doing well. Is it just because of the market rally?

V: When the market is strong, the models are even stronger. A rally helps.

J: What if things turn South?

V: Each model has a disciplined exit rule. No method comes without risk, but we do a good job of limiting it. How did Holmes do during the January dip?

J: Holmes pulled back a bit, dipping less than 4%. I was impressed. How do you develop such confidence in your results?

V: My method involves extensive training while preserving a generous out-of-sample period. If the latter period performs like the training time, you know you have something.

J: I add an extra test. When we start trading in real time, I track every trade. I am verifying that the model does what it is supposed to – making the right sort of trades and exiting when needed. It confirms the test results, but does much more.

V: That is only what I would expect. Humans are not really needed in my models.

J: Which brings us back to the old story of the space capsule, previously carrying only monkeys. Humans were supposedly not relevant. The designers of the manned capsule insisted on a window and engineers (like you) thought it was unneeded. The explanation? So that the astronauts could see to pilot the craft! We do not override the model choices very often, but humans remain in control.

To summarize: You need to make hay when the sun is shining. Do not get mired in pessimism. A disciplined method helps you to stay the course.

Getting Updates

I have offered a new service to readers on our Felix/Oscar update list. Each participant can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. If your favorite is not picked as part of the group, I’ll try to provide some individual answers. Ideas and comments are welcome, as always.

This Week— Profiting from the Rally

Holmes

Recently TAP (Molson Coors Brewing) showed up on my list I’m the rebound specialist, and this one really fits the bill. Buying at 97.50 with a 94 Stop, looking for a move back to the 50d MA of 103.75.

I really like the risk/reward of this type of setup. If the stock starts to really move in my direction, I can raise my stops and raise my target price, although I would be likely to take some profits.

While I don’t play strict attention to what analysts say I see that there is a price target of 120.73. This is an added source of comfort for me.

J: Congratulations on your great first year of real-time trading! How much luck did you have?

H: There are always good rebound plays. My method is a natural for traders, and it minimizes risk.

J: Your choice of TAP makes no sense to me. The P/E ratio is over 26 and earnings growth is in the single digits.

H: You humans keep drinking beer! I am playing for modest rebound. You will see.

Athena:  SM Energy (SM) has been down this past week – I see that as more of a buying opportunity than a trend. Energy stocks have been favorable across the board, and here I see an opportunity to take part in a sizeable rally.

J: You and your colleagues all seem to be reaching for energy stocks. In general, I see the idea, but why not pick a name with some earnings.

A: Earnings? Look at the chart, the uptrend, the support…. This is a story. Earnings are not relevant to sustain the uptrend.

Felix

Nvidia (NVDA) recently experienced a sharp bump in price, but don’t let that scare you. The long-term trends here have been moving higher at a steady rate, suggesting the potential for gains over the next year or so. Some correction may be inevitable, but that’s a storm you’ve got to weather to hold out over the long term.

J: The company beat earnings expectations and guided higher, a winning combination.

F: The chart reflects that strength. I see this as a long-term winner.

J: Should we wait for a pullback?

F: For long-term investors it is more important to make attractive purchases when opportunities present.

Oscar

I want to talk about defense this week, and I don’t just mean the Kansas City Chiefs. (That said, eight straight games with at least one turnover is worth mentioning). My favorite sector this week is Defense (XAR).

In the past six months, we have seen a solid upswing in the moving averages here. I still think there’s plenty of room for growth here. I couldn’t say why it’s taken off so drastically since November, though.

J: Did you hear about the election?

O: Sure. Bud Selig in the Hall of Fame???? I did not vote for him.

J: You have a vote?

O: I mean that if I had a vote, I would not have picked him. That All-Star game home field advantage is strange.

J: I was referring to the Presidential Election. The results are viewed as favoring defense stocks.

O: The reason does not really matter, does it? This is a great trade!

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

Last week we noted that accepting risk before year-end might well be correct. This week we balance the risk assessment with attention to possible rewards. The group still sees a very positive outlook.