I have a confession to make: Maybe, just maybe, I've been letting my subconscious thoughts affect both my own trading, and my market calls. Let me cite a few examples.
A few weeks ago on the
Fox News Channel
, I called for a huge up week. This was not only before the
Fed Open Market Committee
met, but after a huge down week.
The funny part? My prediction was based 10% on the charts (I had seen some weak ones, but still enough individually strong ones to give me confidence) and 90% on market sentiment. That is, I had the strong feeling that
was feeling gloom and doom.
Given that, what could the Fed possibly have thrown at the market that would have caused more despair? Nothing. Well, OK, a 75-basis-point hike would have hurt, but that was unlikely.
No, with everyone leaning left, there were high odds we'd be up, and if everything worked out, up
. Most importantly, though, I knew, just knew, people had not given up on stocks! No, they
to buy their favorites. In fact, they were begging to buy their favorites. So, what happened? The prediction came to pass. The week of Jan. 31 was up, especially if you now think of the
as "the market."
Example No. 2 is my "TheStreet.com" call on
liked it; I loved it. Sure, the chart was pretty nifty, but a reader reminded me of one other thing: It's one of TSEL, or The Stocks Everybody Loves, per
! And, of course, the reader is right.
Even better, it's still an "undiscovered" TSEL, one that is slowly but surely gaining widespread consensus as a "stock to own." So, even though I liked it technically, I intuitively knew that there was no possible way institutions were going to let it drop too far without it being sucked back up into the stratosphere.
On the flip side, I made an inaccurate -- so far, at least -- call for
to hit 100 by May. Why was it off-base? Well, technically, I thought it was fine. The problem? After the
deal, AOL went from being one of TSEL to A Stock Everybody Loathes! (Actually, "loathe" is too strong. I just needed an "L" word.) In any event, it had certainly fallen out of favor.
So, what does all this have to do with trading and making money? Sentiment matters! If you're on the right side of the equation, it's darn easy to make money. But, if you're on the wrong side, it's a straight uphill hike to Loserville. Shoot, forget about fundamentals. Forget about technicals! Maybe this is just one big beauty contest. Maybe it's
been a beauty contest.
So, along those lines, I've been trying to come up with an easy way to outperform the market, avoid onerous income taxes and minimize wear-and-tear on traders' lives. I figured simply taking advantage of sentiment, and -- egads! -- buying and holding just might show a ton of promise. Of course, this strategy only holds together if a trader picks the right stocks! And, what are the "right" stocks?
OK, here's my definition:
- The 200-day moving average has to be sloped upward since the start of 1999.
The stock has to have a market cap of at least $1 billion. This tends to rule out personal favorites that no one else has ever heard of.
Nary is heard a discouraging word. Maybe in the past, but certainly not now. And "high valuation" does not count as a discouraging word!
The stock has to have widespread appeal. The kind of appeal where people who are in are happy, and people who aren't are waiting for an opportunity.
In other words, let's forget about the stocks so loved by bulletin-board groupies -- and unknown by everyone else. I'm not saying an
Ariba (ARBA) won't be a soaring winner. It's just not the kind of stock that has widespread appeal.
and JDS Uniphase for starters. Maybe
. Former examples?
used to be the kinds of stocks I'm talking about. Throw in
for many years. It isn't beloved now, though.
? Borderline, as I love the company, but the antitrust thing makes the situation iffy.
Now, is this approach new? Ha! No way! It's been tried in one form or another by everyone from
The Motley Fool
Janus Twenty fund.
The difference here? Everyone else wraps their selections around "fundamentals," trying to justify their picks. All I'm trying to do is cut through that B.S., pick the prom queens and hold them until they graduate!
So, what I propose is this: Send me your top 10 TSELs. No rationale. No arguments. No "making your case." Frankly, that would defeat the purpose. I will compile and set up a "fund," if you will, investing a mythical $500,000 spread equally amongst the top 10.
The kicker, though? Every time a stock drops 10% from its initial price, we will add an additional $5,000 (dipping into margin) to that stock's funding. So, if a stock drops 20% in a week, we will plow another $10,000 into that stock. I will then update the results once a week.
Now, some caveats:
- If the stock suddenly becomes "disliked," it's immediately off the list. Once we come up with the list, just shoot me an email with your thoughts. Keep in mind that a pretty big issue is required -- think lawsuit, accounting discrepancy, etc. -- to knock one of the top 10 off of its pedestal. This is open to wide-ranging debate, of course, but the judge's decisions are final!
If a stock closes below its 200-day moving average, it's gone. No questions asked.
Unless they are knocked off the list for the above reasons, the stocks stay on the list, with us buying any and all 10% dips.
And, finally, some concluding thoughts.
If you want rigorous TA, this isn't it. Instead, I want you to think of alternative ways to trade and make money. Frankly, I was so floored by Cramer's picks of Microsoft, Cisco and
during his recent grilling on the
TV show, I simply had to steal from him. I love simple. I love straightforward. The three picks he mentioned were that in a nutshell. Beautiful.
In addition, I'm betting that many of you not only trade -- you overtrade. I know that
overtrade. But think about it: All we have to get is a 40% return this year, and that translates into 67% after taxes. Just for holding 10 stocks. Simple, but effective.
To give you a running start, I've already begun building my own TSEL portfolio. These may or may not make the final list, but I am long the following three since last week:
Carly's a charmer);
(a new high, an increasing buzz.); Nokia (stole this one from JJC!).
But, that's me.
candidates, and by this time next week, we'll unveil the final list. Should be fun.
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time the column was written, he was long Hewlett-Packard, Nortel and Nokia, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at