"Failing to plan is planning to fail."
-- Alan Lakein
Discipline. Everything begins with discipline. Work ethic is the path. Honor. Loyalty. Decency... the results. Showing up. I start work every day at 3:30 a.m., and I stop every day at 10 p.m. (Yes, I take breaks for exercise, meals and baseball).
How important is it to have a set of guidelines to follow when it comes to investing/trading? What is the purpose of marking time? To get your cover and alignment, sir. Same here.
My thoughts on discipline are simple. If one intends to exist in a challenging world, one must have a clear map to follow. Heard it all before? You're OK then? Follow your own set of rules? More than a few "bull market traders" have disappeared over the years. Once markets turn, as they have, this sport becomes exponentially more difficult.
I speak to the non-professional base. Many of you good folks have not had the advantage of honing this craft full-time over a number of years, or decades. I believe that the most simple, and yet most important rule is simply to know where you want to go, and know where you do not want to go.
Four keys to staying alive in tough markets:
1) Never fall in love. Your spouse might love your filthy carcass. Your stocks do not. They never will. Do not love them back. There is no place for emotion in this business. If you cannot remove emotion from your decision-making, then you cannot run your own money. Period.
2) Baby Steps. Even well-thought-out positions need to be initiated with care. Entry in my opinion is best made in small steps. I usually start with one-eighth (sometimes less) of my intended size. If the name goes against me, I add. If the name goes my way significantly prior to my incremental increase in size, I classify the position as a trade, and not an investment. Happy either way. Opportunity knocks everyday somewhere.
3) Road Map. For every position (or at least every significant position), have a target price, and a panic point. If your target price is reached too easily (as happens sometimes in these algorithmic markets), it is OK to change your target price -- but only one time. You don't get to foul off 10 pitches because the market is going your way. The panic point is not really a function of panic, but more a preset spot on the chart where your tolerance for risk in a given name either no longer makes the position worth your while, or the trader is prepared to add. That choice is the trader's, based on profile, but that choice must come with a short leash.
4) Focus. Holding different positions for different reasons? Too many stocks to look at on one screen? Try this. Limit the number of positions to what you know that you can handle. In the days of the old auction market, my number was 18. I knew if I was trying to trade more than 18 stocks at one time, that my brain would become confused situationally. There is no reason why one might not have different accounts, purposed for differing reasons. Write mission statements. Place them where you see them. This will reduce the number of names that the retail trader looks at on any one screen shot and improve both focus, and subsequently... decision making.
Where The Rubber Hits The Road
Speaking from my own book, I have positions in a number of corporations scheduled to report quarterly earnings Thursday. Questions swirl as we head into Thursday's trade.
Has Facebook (FB) saved internet stocks? Ad growth apparently trumps scandal.
I am going to break out three names reporting after the close Thursday so that you, the reader might experience how this plays out in real time, as opposed to reading it after the fact as would be the case with a morning release.
This one ticks me off, gang. You may or may not remember that in early January, I actually picked KLA-Tencor (KLAC) as my potential best bet for 2018. Know a lot of talking heads that bring up their best bet months later, after the stock goes negative? Well, we're honest here. So, let's dig into this one. Remember, I'm disciplined, right? So, I do have a roadmap.
On Valentine's Day, KLAC increased its dividend. Huzzah. A month later, the firm announced the acquisition of Orbotech, and a $2 billion share repurchase plan. What could go wrong?
In February, with KLAC trading at $109, Citi upgraded the stock to "Buy," and the price target to $120. in March, B. Riley called the shares "attractive" with a last sale of $115.98. Two days later Bank of America Merrill Lynch reinstated KLAC with a "Buy" rating and a $140 price target. At that point KLAC had last traded at $117.19. Having plenty of company does nothing for my P&L. Analysts are nice, but few of them will bleed next to you on a bad day.
Today, we look for quarterly earnings of $1.98 per share on revenue of a cool $1 billion. The revenue expectation is smack-dab in the middle of the firm's own reduced guidance. The share price now trades at just eleven times forward looking guidance. The balance sheet is in great shape. Three-year growth rates for earnings and sales are both strong. What could bite us here might be margins. Operating margin, though very strong for the last quarter at 37.5%, actually declined from the year prior. A rebound there would be grand.
I have already reduced the size of this long position by 90% since January. The chart reveals some specifics for the journey ahead.
The most dangerous thing visible on this chart is not the weak-looking Money Flow, nor the lousy looking daily MACD (Moving Average Convergence Divergence), not even the soft Relative Strength. The stock has broken to the downside out of successive Pitchfork models. Ouch!! Still, KLAC looks to be facing an imminent test of the lows of the February melt-down. This is what I see.
Price Target: $120. Been there, done that, twice. Why do you think I am down to 10% of this position?
Panic Point: $89. Here I either call it a day, or add. Given that I am playing with house money in this name, I may just add.
Microsoft (MSFT) is a story stock. The story is one of re-invention, something every Wall Streeter knows a little something about most likely on a personal level. Microsoft has been turning itself, and shifting the firm's priorities, away from the legacy desktop PC business, and toward cloud computing as a core business.
Now, we'll get some feedback on the firm's integration of its data center with the needs of the firm's clientele. On top of that, we'd like to hear of maintained relevance of legacy software such as Office 365. How that software sells in subscription form, and the health of the company's still-relevant video-game business.
Microsoft is mildly expensive relative to a lot of my other tech holdings, but comes with a well-maintained balance sheet that offers no obvious weakness. Today, we look for EPS of $0.85, with whispers considerably higher than that. Revenue expectations are for $25.71 billion. Again, margins will be closely watched. At last reading gross profit margins were stable, while operating margins actually contracted small. EPS growth has been far stronger than sales growth over the last few years, hence the understandable change in direction by management. Let's see if the chart tells us anything, shall we?
Another broken Pitchfork. Wow, this market has been rough on tech. This is another tech name where I whittled my long down to 10% of my original size. You will notice that this has been a theme for me, as I have been pounding the table both in print and on television on raising cash since January.
There is an obvious positive here. While the top of the chart has wobbled, the bottom has seen a series of higher lows. MACD and Money Flow look awful.
Still, this stock has seen a double top, has found help at the 61.8% re-tracement level last month, and looks to hold the 38.2% level here in April. That will depend upon these results.
Price Target: $97. Three strikes, you're out.
Panic Point: $86. Two strikes will do it on the downside. May reload if support is found around $88.
Intel (INTC) bears danger for me, as this is the one tech name that I have maintained 100% of my intended long position throughout these shaky markets. This is also one of the few stocks in the space that have acted well coming into the digits. This stock is a true favorite of mine, and has been for quite some time. Very rarely does a position sit on my book for the better part of a year as this one has. CEO Brian Krzanich is one of the best in the business. That is my opinion.
Over the last few days, chip names have been hurt by lowered guidance for shipments from Lam Research (LRCX) , a lowered outlook offered by Taiwan Semiconductor (TSM) , and a generally dour sentiment regarding the future of demand for smart phones in general, and Apple (AAPL) iPhones specifically. Intel, however remains an industry leader regarding the future of artificial intelligence, the data center, and autonomous vehicles. In fact, the introduction the Global X Autonomous & Electric Vehicles ETF D (RIV) could spark increased ownership across this space, especially if copy-cat ETFs arise. By the way, Intel is a top-weighted component of DRIV, as is MSFT.
Tonight, we'll look for EPS of $0.72, with whispers a good nickel above that expectation. Revenue is projected at over $15 billion. As always, we do not lay out the roadmap without taking a look at the charts. Oh, by the way, Citi just this week, maintained INTC at a "Buy," and increased their price target for the name to $60.
Well, well, well, an unbroken Pitchfork, complete with support at the 50 day simple moving average. Yowza. Money Flow that is not awful despite the obvious rotation that has spiked the sector. Both the 50% and 61.8% re-tracement lines have worked to perfection. (I did sell 30% of this long and buy it back on the way up).
Intel comes with a higher debt load in relation to cash on hand than do the other stocks that I wrote about today. That said, they can comfortably service this debt. Margins look to be expanding and rapidly at that. Continuation of that trend will be focused upon tonight. Sales growth is not on fire, but growing in stable fashion, and you know what... INTC pays you 2.4% to take on the mantle of risk.
Price Target: $65, within a month.
Panic Point: $48 for a sale, $42 for re-purchase should calamity strike. In fact, if you're feeling like a tough guy, May 25 42 puts were still paying 26 last night. Unrealistic? Too cheap to be interesting? Maybe. That might also be a scalp taken.
Economics (All Times Eastern)
08:30 - Goods Trade Balance (March): Expecting $-74.7B, Last $-75.3B.
08:30 - Durable Goods Orders (March): Expecting 1.4% m/m, Last 3.1% m/m.
08:30 - ex-Defense (March): Expecting 1.1% m/m, Last 2.5% m/m.
08:30 - ex-Transportation (March): Expecting 0.5% m/m, Last 1.2% m/m.
08:30 - Core Capital Goods (February): Expecting 0.5% m/m, Last 1.8% m/m.
08:30 - Initial Jobless Claims (Weekly): Expecting 232K, Last 232K.
08:30 - Wholesale Inventories (March-adv): Expecting 0.4% m/m, Last 1.0% m/m..
10:30 - Natural Gas Inventories (Weekly): Expecting -30B cf, Last -36B cf.
11:00 - Kansas City Fed Manufacturing Index: Last 17.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ABBV) (1.80), (APD) (1.68), (MO) (.91), (BMY) (.84), (DPZ) (1.77), (GM) (1.28), (HSY) (1.41), (ITW) (1.86), (IP) (.90), (PH) (2.63), (PEP) (.93), (RTN) (2.11), (RDS.A) (.62), (TWX) (1.75), (UNP) (1.66), (UPS) (1.55), (VLO) (.99)
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