How to Pick the Right IBD 50 Stocks to Buy Thursday, October 9 th, 2014s Jeff M. Roth Co-founder, SimplerStocks.com 1
How to Get the Most Out of This Class In a nutshell... Kick back and listen. This is a well laid out presentation. You don t have to frantically write down everything. This is being recorded and you will get a copy of all the slides and notes. Sit back and soak it in. There are hundreds of people in this class and I won t have time to answer every single question, but I will save time at the end for some questions. 2
Who am I? Why am I here? 3
The ups 4
The downs 5
What is the IBD 50 List? Investors Business Daily is a very popular publication you can get delivered in old fashion newspaper form, online or both. The website is: www.investors.com This is one of the few news sources that I use daily. They put out a list of the 50 top-rated growth stocks with the best fundamentals and strong relative strength in the market.
IBD 50 List (continued) IBD 50 list is starting point TIP: Just because the stock is on the list (even #1) doesn t mean it is a buy The first factor is knowing where you are in the market lifecycle If you re early in the lifecycle then you move into the realm of timing your entry and exit
Stock Market Life Cycles The stock market doesn t go up or down forever There is an ebb and flow The market is like a digestive system the larger the meal the longer it takes to digest. The market is constantly digesting moves on every time frame. From a 5 minute chart to a weekly. Example.
Financial Institutions Banks, Asset Management Firms, Insurance companies, Pension funds, Hedge Funds, 9
Pension Funds Morgan Stanley estimates Worldwide pension funds hold over $20 trillion in assets. Larger than mutual funds, insurance companies, hedge funds, or private equity. Top 300 pension funds collectively hold $6 trillion in assets 10
How BIG is that? If you spent $1 million a day since the year 0 through today you would have spent ONLY about $700 billion. 11
Do Pension Funds Invest in the Stock Market? 12
Examples of Pension Funds California State Teachers $139 Billion California Public Employees $214 Billion New York City Retirement $115 Billion Texas Teachers $100 Billion General Motors $102 Billion
How do pension funds and other financial institutions invest? Let s say you re the portfolio manager for a modest size pension fund out of Boston. You have $10 billion to invest in stocks You do your research and find a small, fast growing semi conductor company called SunPower You decide to put 2% of your funds into the stock or $200 million.
How do pension funds and other financial institutions invest? (cont d) The stock is trading at $32 per share In order to get your full position you need to buy over 6 million shares of stock What s the Problem? Submit a market order, right? The average daily volume of SPWR is 3.2 million shares a day. How do you buy a large amount of shares without drastically increasing the price?
It s not that hard 16
Slow and Steady A pension fund manager will usually allow 90-120 days for accumulation. They will have a price range in mind. I m a buyer between $32 - $32.50 When the stock in that range small blocks of shares are bought to not alert suspicion If the stock gets too high they will stop buying share, even sell some to bring the price back down
This is a long process and the goal is to blend in and not alert anyone they are there 18
Excessive Volatility Traders think that volatility is good and it can be, but it depends on type of trading. If you re an options seller then yes selling premium can be rewarding. If you re swing trading stock volatility can be an account killer. Because if we get some leeway in a stock that is right when it starts to turn
Putting it together Distribution days coupled with volatility can leave you feeling like the market is kicking you around. That s because the market is doing just that! During these times the market participants get more protective and move from growth stocks that you would find in the IBD 50 to conservative stocks that you would find in the Dow 30. (i.e. move from Chinese.com stocks to Walmart and Proctor and Gamble)
How do we get an edge? 21
Waves 101 All I use the waves for, is a heads up on which way the squeeze is likely to fire (when I say fire that means trigger i.e., the first green dot after the series of red dots). C wave = longer term trend on whatever market and whatever time frame you are on B wave = intermediate term trend A wave = short term trend 22
Waves 101 What about the different colors in the waves? I DON T PAY ATTENTION TO THEM AT ALL. All I care about is if the B and C waves are above zero (which means the squeeze will most likely trigger long) or below zero (which means the squeeze will most likely trigger short) 23
How This Looks in TOS old (but still relevant) combo wave 24
ABC Waves for TOS Yes, the ABC Waves are available for TOS as an add on and not part of the licensing agreement we have with TOS. But not necessary for this particular strategy www.simpleroptions.com/abc 25
Moving Averages 26
Moving Averages Strongest trends will bounce off the 8 EMA this indicates you are in a good trade so HOLD ON TO THAT TRADE! Sit on your hands as long as it is above the 8 EMA! It s ok if during the week if the stock probes below the 8 EMA but it shouldn t go beyond the 21 EMA, AND, it should not CLOSE the week below the 8 EMA. 27
Hanging on for the Ride 28
Best Opportunities? I ve found that the best opportunities are as follows: Smaller market cap stocks ($1B to $10B range) Smaller priced stocks (ideally under $60 - not a deal killer if they aren t!) At or near 52 week highs, or, even better, ALL TIME HIGHS (within 10%) I like companies that are less than 5 years old not absolutely critical but they are generally in a faster growth phase than better, well established companies Bonus: Also, have high short interest. Even though all the above is true there s a large percentage of shares short 29
Questions to ask yourself What is my risk tolerance? What s the current market outlook? What s my investing experience? What is the allocation of my account towards growth stocks? What s my position size?
Scaling into a trade If you bet on a horse race you can t change your bet in the middle of the race. If you re scaling into a stock position this gives you the flexibility to change your bet. Decide to add more shares or cut your position loose with minimum damage to your overall portfolio.
I own it, now what? Money is made in the sitting Jesse Livermore Set your stops according to the ATR this is where risk tolerance and position sizing comes in. Key MA 21 EMA on the time frame you re trading.
Time for Questions 33