The Ultimate Guide on How to Build a Portfolio of Losing Stocks
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The traditional behavior of rookie investors normally results in a portfolio of under performing stocks and unrealized losses.
How does the average rookie investor end up with a portfolio of losing stocks? The following is scenario that typically plays out. See if you can identify the potential problems with this stock trading system.
- You select 6 stocks that you feel do well. No one picks three winners, except you. The truth is that 2 stock will go up, 2 will do nothing and the last 2 will go down in a best case scenario. At this point your overall portfolio is break even or a small profit or loss.
- You still think the stocks that you picked are good. At the same time you want to make money in stock market. You sell the stocks that is making money and keep the stocks that are not performing. You can’t get your money back if you sell a under performing stock, it just needs time to come back. A loss is not a loss until you sell. You are making money in the stock market! At this point you have 2 stocks losing money, 2 stocks doing nothing and some cash from the 2 that make money.
- You now pick 2 more stocks that you think are going to make you money. If you are fortunate to pick stocks better than the rest of the market, you now have added to your portfolio one that makes money and one that under performs. Your current portfolio is made of 2 stocks losing money, 3 that are under performing and one that is making money. Once again, you are faced with decisions and you are investing to make money so you sell the stock that is making money and keep the others, they were good picks but need more time. You now have 5 stocks not making money and cash from selling the one you sold.
- You now can only buy one stock with your cash. You study stocks real hard and pick the one you are sure is going to make you money. Statistics will prove that you didn’t.
- You now have a portfolio of stocks that are all under performing.
Summary
You are a good stock picker because you sold a few for profit. The problem now is that you don’t have any more cash to pick more winners. This is how the rookie investor ends up with a losing portfolio.
Lessons
- Cut Losses Quickly - losses are losses - paper losses are the same as actual losses. This is the most fundamental principle in stock trading that you have to master or your losses will eat all your profits. A stock that drops 50% has to move 100% to get back to your purchase price.
- Not all your picks are good - this goes with first principle. Most investors have to pick 5 or more stocks before they find one that does real well.
- Let your profits run - when you find that you picked a winner and it makes sense, sell some under performing stocks and add to your winner stock position.
Dow Jones Industrial Average - August 21, 2010
The Dow Jones Industrial Average (DJIA) and the S&P500 daily charts continue to show weakness for the last 10 trading sessions.
The earnings seasons was mixed and is now over and the market is looking to other economic indicators of the economy. Most of these indicators, such as jobless claims, continue to be pessimistic.
The DJIA and S&P500 charts both have multiple formations going on at the same time. The predominant short term trend is a upwards channel. Many times these are bearish and can break to the downside quickly.
An argument can also be made for an inverse head and shoulders. A break about 10,750 on the DJIA or 1,125 on the S&P would be a confirmation of this pattern.
We will see what the next week brings.
LPSN - Live Person - Head and Shoulders - Short
Live Person - LPSN - has been creating a head and shoulders pattern. It this stock drops below the neckline, around $6.00, the head and shoulders pattern will be complete. The target for live person (LPSN) would be $3.00. This is calculated by subtracting the head ($9.00 during mid April) from the neckline ($6.00) which is $3.00. Subtract $3.00 from the neckline value ($6.00) to get the target of $3.00.
It would be normal for the a head and shoulder pattern to break through the neckline on the downside and retest the neckline again before going lower, creating an additional short selling opportunity.
Stock Market Summary - July 15 2010
The Dow Jones was down over 250 points or 2.5% and closed real close to the low of the day.
Long term DJIA direction: Down - The Dow Jones is still in the final formation stages of a head and shoulders stock pattern. The final confirmation of the pattern is if the Dow breaks below $96 or invalidates the pattern by closing above $10,600.
Short term DJIA direction: Down - The short term direction is resistance at 10,400 and now heading down. The next resistance is $9,600 on the previous low.
Healthcare Sector Could Lead the Market Down
The Healthcare sector has lagged the market during the last 6 up days. This would indicate this sector could lead the market down if we take a pause here.
One way to play a healthcare sector drop is with an inverse ETF that covers the healthcare sector.
We would have to see the overall Market turn today with some conviction before considering buying an inverse ETF. 200% ETF’s are volatile so picking the right buy point with tight stops are real important for capital preservation.
RXD is a ProShares ETF - ProShares UltraShort Health Care seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Health Care IndexSM.
Lets see what happens today! Share your comments.
Vix - Volatility Index - July 13 2010
The VIX closed up today and resisted the 200 day moving average. This would indicate that we may have a short term bottom and trend reversal back up.
Is the Dow Jones Industrial Average Head and Shoulders Chart Pattern Broken?
The Dow Jones had two resistance points to cross through to break the current head and shoulders patter that it is currently in (the above chart is of DIA which is 1/10 of the DJIA).
The first resistance was the 200 day moving average at 10,370. The next resistance is the right shoulder of the head and shoulder stock formation at 10,442.
Today the DJIA penetrated the 10,370 but closed below.
We will have to see what happens tomorrow. Share your thoughts.
Stock Market Summary - July 12 2010
The Dow Jones Industrial Average had a sideways day today waiting on earnings season to begin. Alcoa reported after the bell better than expected earnings. This may help the markets on Tuesday.
The Dow Jones is still within a Head and Shoulders stock chart pattern. The DJIA would have to close above the Right Shoulder of the head and shoulders pattern to invalidate. A drop below the neckline (DJIA 9,700 could signal the index dropping to a target price of 8,600.
Leading and Lagging Industries
The leading industry in last weeks positive stock market move was the Financial Industry. The lagging industry was the Healthcare Industry.
If the market rises this week, financials could continue to lead. A down market could be led by the healthcare industry.
Stock Market Analysis - July 9
The Dow Jones Industrial average had a up week and a strong finish. The Dow Jones average is within a Head and Shoulders pattern and/or descending channel. Both of these patterns would suggest we still have downward prices in the near future.
The Heads and Shoulders stock pattern for the Dow Jones would suggest an 8,600 target for the Dow Jones average.
The descending channel would suggest a 9,500 short term target.
On the positive side, the Dow Jones did close above the 20 day moving average and the candlestick patter for Friday was positive. It could break the descending channel pattern by closing above the upper resistance. The Dow would have to close above the Right Shoulder value of 10,500 to break the Head and Shoulders pattern.
The Vix volatility indicator is hitting the 200 day moving average and previous low suggesting volatility could move up from here.
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