Note: Our strategies for ETFs and Fidelity Select funds are explained in
The Coolcat ABCs of ETFs.
The Coolcat Guide to Winning Stocks
By Kevin Kennedy
CoolcatReport.com Publisher
First, let me start off by saying there are lot of ways to make money in the stock market. There is no one "right" way. However, after countless hours of work, I believe the approaches outlined below represents a very solid approach to consistently maximizing stock market profits.
You can best summarize my approach by focusing on the 3 Ms:
* Market Timing.
* Momentum Stocks.
* Money Management.
Market timing involves using very basic approaches to determine the current shape of the market and keep us from being too aggressive when the market is weak. When the market is strong, we want to focus on the stocks with the strongest momentum for maximum gains. Finally, money management gives us a set of rules to follow to allow us to control our trading emotions, cut losses short when a stock selection goes sour and let our profits run when we get our hands on a big winner.
Every investor is different and must develop an investing/trading approach that fits their unique circumstances, taking into account factors such as their age, investing experience, risk tolerance, capital available to invest and the time they can regular spend on their investing/trading activities. That approach should change as your circumstances change.
Market Timing
As we were forcefully reminded in 2000-2002, the market does not always go up. My approach is to be the most aggressive when the bull is charging, while holding more cash or establishing short positions when the bears start taking control.
10 Tips for
Successful Investing |
| 1. Focus on the 3 Ms: market timing, momentum stocks and money management. |
| 2. Develop a plan that fits your circumstances, including your experience and the amount of time and capital you have to invest. |
| 3. Diversify your holdings to avoid getting killed by one bad loser and to give you more opportunities to find nice winning stocks. |
| 4. Focus your buying in strong market conditions. Be more cautious and hold more cash in weak market conditions. |
| 5. Focus your buying in stocks with strong price momentum and other characteristics found in great winning stocks. |
| 6. Try to do most of your buying on pullbacks in price from a recent high. Don't buy if a stock is too extended from its 50-day moving average. |
| 7. Use initial stops below both the 20-day low and 50-day moving average to limit losses on your bad picks. |
| 8. Move up trailing stops to lock in gains on your winners. |
| 9. Consider selling at least half your position if a stock doubles. |
| 10. Remember that anything can happen when you buy a stock. Take responsibility for your investments. If you use good money management rules to keep your losses to a minimum, you can be right on just half of your selections and still do very well. |
When the market is rising, stocks with
strong price momentum will tend to rise
twice as fast or more than the market. Of course, the reverse is true as well: when
the market drops, these highflyers often
drop twice as fast or more.
Research has shown that up to 50% of a stock's movement can be traced to the
market action, so it cannot be stressed
too much how important this aspect of investing is.
I track the progress of the Nasdaq
Composite Index and other major averages such asthe Dow Jones Industrial Average
on an intermediate-term basis. The Nasdaq provides a good overall market view. When those indices are above their 50-day moving averages, the market has a bullish intermediate-term trend.
Such a buy signal doesn't guarantee a significant market advance, but bydefinition,
no significant market advance has begun without one. My job here is not to try and guess whether this will be a "bad" buy
signal, a "great" buy signal or something
in between. My job is to start to buy stocks
on pullbacks and position my portfolio for
what could be a good move, then follow
my selling rules to take profits or keep
losses small.
Anything can happen--my job is to put the odds in my favor. Using my unemotional Nasdaq timing tool and concentrating my buying during buy signals is the first step.
The opposite is true when the key indices
fall below their 50-day moving averages.
Now we are going to get more cautious,
raise and hoard more cash, hold fewer
long positions, possibly limit any long buys
to half-positions instead of full positions, be choosier on price and use tighter sell stops. We will focus more attention on more conservative stocks such as blue chips and
shy away from the more volatile microcap
and small cap stocks. We may at times
establish some short positions.
I also focus on key support and resistance areas for the Nasdaq and trendline breaks. I also look at the volume of the Nasdaq. Ideally you want to see it rising on increasing volume and falling on lower volume.
The final and crucial piece of the puzzle is the action of both your individual stocks and your overall portfolio. If you are doing well, you can become a little more aggressive, but when you start to see losses popping up more frequently, it's good to slow your buying down and get more defensive.
The bottom line: three out of four stocks will go up in a rising market and go down in a falling market. It doesn't pay to argue with Mr. Market.
To use an analogy, if I am the coach of a football team with an explosive passing attack, I want to play on a dry field if given a choice because this will give me the best opportunity for my strategies to be effective. I also want to play on a dry field when it comes to the stock market.
Coolcat Stock Screens
When we determine we are in a strong market, how do we best take advantage of it?
The bottom line when you buy a stock is you want the price to go up. So that's what we look for first: stocks with the very best relative price strength. We want to focus our energies on identifying strong performing stocks that share the characteristics of past winners. My goal is to focus on the very best prospects, whether we are looking for microcap or blue chip stocks. Many of those will go on to become the biggest winners of the year.
We are looking for the very biggest winners: stocks that will at least double and hopefully go up even more. And simply put, HUGE winners start out as BIG winners. This initial surge draws attention from market watchers, who bid the stocks that turn into huge winners up even higher.
Four of our five newsletters cover stocks ranging from microcaps--stocks with a market value of less than $250 million--to more conservative blue chips stocks, which I define as having a market value of $25 billion or more as well as a dividend yield of at least 1%. More risk is generally associated with microcap and small cap stocks than larger stocks.
I use several basic screens as my first step in trying to identify strong prospects, and they vary depending on the size of the stock. Most of our stock selections share the following criteria:
* The stock price is higher than it was 1, 3, 6 and 12 months ago.
* The stock has made a new 52-week high in the past two months.
* The company has positive 12-month trailing earnings.
* The ratio between 52-week high and 52-week low meets a minimum standard.
* The stock price is within 20% of the stock's 52-week high and is trading above its 50-day moving average.
Other factors will vary depending on the size of the stock, as the table below demonstrates:
Size |
Market Cap |
Shares |
Hi-Lo Ratio |
Avg. Vol. |
| Micro Cap |
< $250M |
< 50M |
> 2-1 |
> 50,000 |
| Small Cap |
$250M-$1B |
< 100M |
> 2-1 |
> 100,000 |
| Mid Cap |
$1B-$10B |
< 300M |
> 2-1 |
> 200,000 |
| Large Cap |
$10B-$25B |
< 1B |
> 1.5-1 |
> 500,000 |
| Blue Chip |
> $25B |
N/A |
> 1.5-1 |
> 500,000 |
| ETF |
N/A |
N/A |
> 1.3-1 |
> 100,000 |
| Nasdaq 100 |
N/A |
N/A |
> 1.5-1 |
> 500,000 |
| Tech Bubble |
> $250M |
N/A |
> 1.5-1 |
> 200,000 |
Using these screens ensures that we will focus our buying in strong-performing stocks with good fundamental strength that have good momentum but are not too extended in price.
We provide rankings of about 10-20 stocks in each report depending on the strength of the market. We rank microcap stocks in The Coolcat Explosive Small Cap Growth Stock Report; small cap, mid cap and large cap stocks in The Coolcat Emerging Stock Market Leaders Report; stocks in our Coolcat Tech Bubble Survivors Index and the Nasdaq 100 in The Coolcat Technology Plus Report; and blue chip stocks and stocks from our other four newsletters in The Coolcat Total Stock Market Report. The Coolcat ETF & Fidelity Select Report provides rankings of the top exchange traded funds (ETFs) and Fidelity Select Sector funds.
Our rankings include the following information on each stock:
* Rank.
* Company name.
* Stock symbol.
* Price.
* 52-week high and low.
* Market capitalization.
* Average volume in the past 30 days.
* 50-day moving average.
* Possible buy and stop prices to consider.
Money Management
When we have identified a stock with strong potential in a decent market, we then face additional questions. When do we buy it? How much room should we give it to go down if it proves to be a bad selection? At what point should we sell it to take a profit?
To resolve these dilemmas, I use a money management strategy that gives me some general guidelines for buying and selling stocks. Basically, it works like this:
* I try to buy stocks when they pull back 10-20% in price from a recent high and retreat near their 50-day moving average. I generally use the halfway point between the recent high and the 50-day moving average as a buying point and look to buy stocks that are below this price. I also try to limit my buying to stocks that are less than 10-20% above their 50-day moving average.
* I use a combination of the 50-day moving average and the 20-day low in establishing my initial sell stops to limit my losses if I am wrong. I try to limit my potential loss to 5-15%. The area right above your stop-loss also offers low-risk opportunities for patient buyers.
* If I am not stopped out in the first few weeks I am holding the position, I move my stops up as the 50-day moving average and 20-day low rise to protect my slowly-developing gains or to at least ensure that I break even on the position.
* When a stock performs well, I move up my stops more aggressively. I may use a stop just below the low of the past week or two instead of the past four weeks.
* I strongly consider selling half of my position if a stock doubles. In a strong market, you may want to increase this target to a gain of 150% or even 200%. In a weak market, you might start taking profits at 50%. I also consider selling all or part of my position when a stock moves 25-100% above its 50-day moving average, depending on what type of stock it is. Again, a good alternative is to use an aggressive trailing stop to make sure you lock in most of your paper gains.
* Lower your targets and tighten your stops if the market rally last more than 12 weeks, particularly if you see signs of excess speculation. This is when you start to see 3-4 stocks go up 50% or more just about every day.
* Finally, if they key market indices start breaking down and flash don't buy signals, I will strongly consider going to 100 percent cash on the strength of that signal alone. Of course, if the market is breaking down, we will start to see that in our stocks hitting stops anyway.
Another good time to sell is to apply the Calculator Theory. Basically it goes like this: when you start taking out your calculator to figure out how much you've "made," it's usually a good time to do some selling to lock in those profits. This often happens when your overall portfolio rises 20-25% in a relatively short time.
Followed diligently, these approaches will:
* Concentrate your most aggressive buying in strong stocks in strong markets.
* Give you an approach to sell to take profits and cut losses.
* Focus your portfolio in cash when the market is doing poorly.
On the buying side, this strategy forces us to wait for a decent pullback in most cases before committing our capital and helps us avoid stocks which are too extended in price. I generally don't want to buy a stock on the day it is making a new high or when it has gone up 4-5 days in a row or more. Stocks like this are due for a pause. I want to buy when they take that breather, especially when it comes on much lower volume than when prices were surging forward.
If you confine your buys to stocks that pull back, you will generally not overpay for them. As you continually get better entries on your stocks, you tend not to get whipsawed as much by price dips. You are also able to start taking profits at an earlier stage. You also lower your risk if the stock turns out to be a sour pick and you are forced to sell it at a loss.
Sometimes the market is so strong that many stocks are breaking out without pulling back much. It's easy to feel you are missing the boat at such times. You may want to get some positions established with little regard to price early in a market rally and then get more choosy on price. Another approach is to buy half the position at the current price and half on a pullback. In this way, you are at least aboard for the ride if the stock continues to rocket higher.
This approach has the effect of focusing your portfolio in the stocks that keep going up and rise beyond anyone's expectations while cutting out the pretenders before they can hurt you too badly. It's these few big gainers that will have the biggest impact on your portfolio, because in a typical market you will more or less break even on 50-75% of your picks as some smaller winners will cancel out your small losses.
While I want to give my stocks enough room to make things happen, my key focus always has to be on preservation of capital. That's why I look to throw in the towel when the stock violates both its 50-day moving average and its 20-day low. A break below here tells me I made a "mistake" and that, at the very least, my timing was bad or unlucky.
Anything can happen when you buy a stock, and you have to plan on a fair share of your picks being losers. There are no magic formulas that only pull winners out of the hat, and my screens are no different. When you buy a stock that turns out to be a "mistake," cut it loose before it can do some real damage to your portfolio. Hoping and praying these ones will come back is a loser's game.
Let me say it again just to drill the point home: no matter how good your selection criteria is, some of your selections will be losers, particularly those made just before the market turns sour. If you use selling rules to keep your losses to a minimum, you can be right on just half of your selections and still do very well.
Portfolio Size
In my opinion, the ideal portfolio size is between 8-15 stocks.
Holding this many stocks limits your exposure to the big loser that falls 30-50% in one day on bad news. It also increases your chances of finding the huge winners that will make the big difference in your portfolio.
It also gives you the patience necessary to let some of your stocks rest for a while, allows you to hold stocks longer and lets you participate in more winning stocks breaking out at different times of the year.
Of course, if you cannot adopt a firm money management plan that clearly spells out the terms on which you will buy and sell your stocks, ONE stock is too many for you to hold.
Using the Coolcat Report Newsletters
CoolcatReport.com publishes five newsletters:
* The Coolcat Explosive Small Cap Growth Stock Report
* The Coolcat Emerging Stock Market Leaders Report
* The Coolcat Technology Plus Report
* The Coolcat ETF & Fidelity Select Report
* The Coolcat Total Stock Market Report
Each newsletter includes two model portfolios for educational purposes. The model portfolios are used to demonstrate how my approaches work and to give subscribers the opportunity to see those approaches in action.
I am often asked which of the five newsletters I recommend the most. Naturally this depends on the investor's unique circumstances.
You may have a special interest in microcap stocks, small cap stocks or ETFs and feel that subscribing to our report that focuses specifically on that area is the best option for you. But whether you are an aggressive investor or are more conservative, a seasoned pro or are just starting out, you can benefit by diversifying across at least 2-3 asset areas. Because of that, I believe the best approach is to become a Coolcat Premium Member and get all five newsletters.
Sometimes microcap stocks will be the leaders. In other times, mid cap stocks or ETFs will pace the market. During weak market conditions, you might find the relative safety of dividend-paying blue chip stocks or a larger cash position more appealing.
Typically, you will find that the larger the company, the lower your risk and also your potential reward. The smaller the company, the greater your risk and the greater your potential reward.
< MORE RISK-REWARD --- LESS RISK-REWARD >
Microcaps * Small Caps * Tech Stocks * Mid Caps * Large Caps * Blue Chips
ETFs * Fidelity Selects
The other thing to consider is that as you grow and change as an investor, you may become more open to investments that you weren't previously interested in.
You may tire of the risk associated with microcaps, for example, and want to control that risk better by shifting your focus to small caps and ETFs. Or you may want to move to other end of the risk spectrum with blue chip stocks, which cut down considerably on the volatility you experience why still offering you solid price appreciation potential.
Later on, after trying our reports, you may find just one that is particularly well-suited to your investing makeup and you can then switch to that one only.
Which Stocks Should I Focus On?
New subscribers will sometimes get confused when they read new stock listings and then see a portfolio of positions we have already purchased. The best approach to using the newsletters is to focus on the stocks as they are added to the model portfolios.
Determine how many stocks you will hold when fully invested, and then divide your portfolio into that many equal positions. Diversify your buying by time and by sector. In other words, don't load up by buying all the stocks in the same week, and don't buy only tech stocks, for example.
You'll want to make sure you don't buy too many shares of a thinly-traded stock. Your position in a stock should not exceed more than 5% of the average daily volume, and ideally your stake will be significantly less than that. Exposing yourself to too big a position can make it tough to get out of a stock in one piece when it comes time to sell.
Here are some other suggestions on using the newsletters:
* I provide a lot of information. Don't necessarily try to adopt the ideas I present overnight. Watch a little. Focus on the most recent stocks added to the newsletter screens and model portfolio rather than those that have already been around for a while.
* The stocks listed are higher-momentum stocks that can be unsuitable for a longer-term buy-and-hold approach. They will generally do poorly in bad market conditions. If you are going to considering buying stocks listed in the newsletter, strongly consider selling them as well when they lose momentum and violate selling rules. It's very easy for a 15-20% loser to turn into a 40-50% loser or much worse. Get used to taking small losses when you have to and focus on preservation of capital.
* Take responsibility for your investments. The stocks presented have the characteristics of past winners, but that won't prevent many of them from becoming losers. Recognize that upfront and adopt appropriate money management rules to cut losses on the "mistakes" while riding the winners.
One final word: try to avoid second-guessing the daily action of your stocks. Stocks go up and stocks go down. Try not to get too shook up when one of your stocks goes up or down $1-2. Let your money management rules guide your actions and try to do so in a calm, businesslike manner. Don't get too excited when things are going well or down when the market or your stocks hit a rough patch.
If you have any questions or comments about the newsletter and its approaches, please feel free to email me. However, I can't and won't make specific recommendations about your portfolio or investments.
I wish you all the best of luck in your investing.
Kevin Kennedy
Publisher
CoolcatReport.com
Giving Investors The Tools To Succeed
Coolcat@CoolcatReport.com
(559) 875-0613
Now publisher of 5 great investment newsletters!
* The Coolcat Explosive Small Cap Growth Stock Report
* The Coolcat Emerging Stock Market Leaders Report
* The Coolcat Technology Plus Report
* The Coolcat ETF & Fidelity Select Report
* The Coolcat Total Stock Market Report
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Information for CoolcatReport.com investment newsletters is obtained from a variety of sources. I am not a stockbroker or financial adviser. The information provided is not to be considered as a recommendation to buy certain stocks and is provided solely as an information resource to help investors make their own investments. Past performance is no guarantee of future success. The contents of CoolcatReport.com investment newsletters are copyrighted and reproduction or retransmission without permission is expressly prohibited.
© 1997, 1997-2006 CoolcatReport.com
