RE: Trailing stops and taking profits (was: RE: [CANSLIM] AAII letter to the editor)

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: Trailing stops and taking profits (was: RE: [CANSLIM] AAII letter to the editor)
Date: Thu, 17 Jul 2003 13:13:10 -0500
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Hi Hong,

The minimum price, while not a direct reflection of liquidity, is related,
according to WON. He believes that most institutions are limited to
purchasing stocks $10 and above. Theoretically, you are more likely to be in
stocks that are *effectively* more liquid, as the big guys are helping bid
the price up. I honestly have never seen any real evidence that $10 is a
cutoff for a substantial portion of the institutional investing community,
so I don't know how realiable this particular guideline is.

I did an interesting study this weekend that relates to your question on
lower priced stocks. I took the stocks that were the best
fundamentally/technically at the market low 10/10/02 (I used our "green" CE
Zone to determine this, that is each stock has to have both fundamental and
technical scores in the top half of all possible scores), then I looked at
their performance to date. I split the group into stocks that were <$10 on
10/10 and those that were >=$10. The lower priced stocks had about 2x the
performance *on average* as the >=$10 group. The group itself was comprised
of a large number of stocks, so, the average was not necessarily skewed by a
few super performers. I did the same thing by choosing green stocks as of
the 3/17/03 follow-through day and found that once again, the <$10 stock
group outperformed by about 1.5x.

However, these kinds of studies are useful as a means of drawing a bead on
the market, but unless done over long periods of time and under all types of
market cycles, one can't draw any generalized conclusions. For the most
part, in strong Bull markets, WON is correct that cheap stocks are cheap for
a reason. That is, they're stinky stocks that don't attract any buying
action. Coming off the bottom of a secular Bear (or in a rally within a
secular Bear), I imagine that the lower prices are more reflective of the
toss-em-at-any-cost attitute than they are of the underlying attractiveness
of the stock and/or the business.

Katherine


- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Hong Hsu
Sent: Thursday, July 17, 2003 11:45 AM
To: canslim@lists.xmission.com
Subject: Re: Trailing stops and taking profits (was: RE: [CANSLIM] AAII
letter to the editor)


 >  On prices, WON suggests you stick with more liquid issues that
attract institutional >interest, but there is no reason why one cannot
dip below these prices and find >perfectly acceptable candidates.

Katherrine,

   Thanks a lot for helping me.   A additional question.  I thought that
the liquid of a stock reflects the daily trading volume or total float
of the stock, not price of the stock.  Am I right?  An example of this
is LU which is below $2 now, but a lot of liquidity.

I agree with you completely that some big winners had low price when
they had their first B/O. Two examples of them are BLUD, CHTT back to
Jan. 2002.    I even think $10 low price stocks would have higher % gain
than $80 high price stock.    Does it hold true in general?

- -Hong






Katherine Malm wrote:

>Hi Hong,
>
>Your question:
>"Isn't the Comparative RS just mimic price/volume action?  So it doesn't
>give any new info."
>
>Answer:
>Absolutely not. First, the comparative RS does not consider volume, just
>price. The comparative RS calculation takes the stock's price on any one
day
>and divides it by the value of the SPX (S&P500 index) on that same day.
This
>is the reason why the RSLine (comparative RS) does not have a scale. This
>ratio is then viewed over time to see how this particular stock is doing
>against the market as a whole. For example, you can have a stock rising in
>price and still have a declining RSLine. Why? Because the stock is not
>rising as quickly as the market. Conversely, you can have  a stock falling
>in price and still have a rising RSLine. Why? Because the stock may be
>falling at a slower rate than the market is falling. This is a very
powerful
>tool and I place far more importance on it than the RSRank itself, as it is
>not muddied by the weird behavior inherent in ranking systems.
>
>Here's a tutorial on the RSLine you may find helpful:
>http://www.breakoutwatch.com/katherine/RSLineTutorial.zip (this is a zipped
>MS Word document)
>
>There is some additional information on the RSRank and RSLine in our chart
>help file at:
>http://www.breakoutwatch.com/html/chart_help.htm
>
>Also be sure to do a search on these subjects at investors.com. I have an
>entire folder dedicated to RS and RSLine in my CANSLIM binder, collected
>from years' worth of Investor's Corners and Ask Bill columns.
>
>Your question:
>"...CMTL was under $10 with 78/93/A+.   It wouldn't convince me to buy it
at
>that time until the end of May with noticeable volume surge.    How can
> you find a big winner early in general?"
>
>Answer:
>Guidelines for mining for CANSLIM stocks are often misused in my opinion.
On
>prices, WON suggests you stick with more liquid issues that attract
>institutional interest, but there is no reason why one cannot dip below
>these prices and find perfectly acceptable candidates. However, the less
the
>liquidity, the more likely you are to be whipsawed with price action. You
>have to be very selective about picking very good stocks if you're going to
>do this. Next, on RS/EPS/SMR rankings. WON suggests that RS<70 is a laggard
>stock, but there is nothing to prevent you from mining for stocks with
lower
>RSRankings, performing due diligence, and reading the price/volume action
to
>determine if these are healthy, buyable stocks. I think the IBD does a
>disservice to its readers to suggest that one stick to mining for stocks at
>RS>=80 or 85, as this is not what WON teaches.  RSRanks jump all over the
>map and can change from RS=53 to RS=80 in a matter of days. It's a chunky
>measurement, so take it with a grain of salt. The RSLine will often tell
you
>far more about the stock's relative strength. EPS and SMR are also ranking
>tools. I haven't used EPS in years and only give a nod to the SMR ranking,
>instead favoring a "preponderance of evidence" look at the raw fundamentals
>themselves. I want to know where the stock's strengths and weaknesses are
>and evaluate them against the desirable qualities in a CANSLIM/growth
>candidate. That takes a bit more work, but doesn't lock you up in the
>EPS/SMR  measurement shortcomings. If you choose to use them, just set the
>bar lower so that you can get a look-see at possible candidates.
>
>Katherine
>
>
>-----Original Message-----
>From: owner-canslim@lists.xmission.com
>[mailto:owner-canslim@lists.xmission.com]On Behalf Of Hong Hsu
>Sent: Wednesday, July 16, 2003 9:18 AM
>To: canslim@lists.xmission.com
>Subject: Re: Trailing stops and taking profits (was: RE: [CANSLIM] AAII
>letter to the editor)
>
>
>Katherine,
>
>I really appreciate all of your effect.  The explanation with the
>example gave me very clear view.   I bought CMTL on 5/27.   Seeing price
>drooping continually lead me rethink and ask my initial question.  I
>didn't have good sleep two days because of dropping price.
>
>A couple of questions:
>
>Isn't the Comparative RS just mimic price/volume action?  So it doesn't
>give any new info.
>
>Secondly because CANSLIM uses EPS rating, back to the end of March, the
>CMTL was under $10 with 78/93/A+.   It wouldn't convince me to buy it at
>that time until the end of May with noticeable volume surge.    How can
> you find a big winner early in general?
>
>Many thanks,
>-Hong
>
>
>
>
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