Cherry Picking

The VectorVest edge is quite simple and it works with little fuss. Find shares with both favourable technical and fundamentals stories and buy them when the overall market is rising.

The 5 shares that I am holding have the above characteristics and they are holding their own well in the worst sell off in a long while. They are all trading at less than their VectorVest valuation and have smooth EPS plots rising from the bottom left of the chart to the top right. EPS growth is the engine that drives the share price. In particular Avon looks like on the verge of a major move north once we see some form of bottom in the overall sell off.

I bought the 5 shares in late July when the VectorVest Composite gave a BUY signal which turned out to be chop. I elected to hold the 5 shares (50% of my bank) and watch the stops carefully. I was nearly stopped out on Black Monday)

During the week the market generated a Green Light Buy as defined in last week’s entry. This is an aggressive signal and on Friday the pullback in shares negated this signal and we are back to square 1 with the trend on the Composite being Dn/Dn and showing a red light in the price column. The Composite has traded a double top over the last week at a 62% retracement of the last range and I fear downside in the week ahead.

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I sometimes hear at the talks “Not the Big Hitters again”. I rarely take any notice, as I know and all good traders know, that 90% of the job is to focus on the process of perfect execution of each and every trade. Those looking on seem to think that’s its boring. Years ago I ran a series of short term trading courses with monthly follow up meetings. People would come along and complain that I did that strategy last month. I would have to explain to the class that I do the same thing each and every morning as those who know my Morning Trade will attest.

In the same way I use the Big Hitters Unisearch to find a watchlist of shares and from this I cherry pick my portfolio. The top 10 from the Big Hitters search sorted by VST has appreciated 19.41% in 2015 whilst the Composite is down 2%. The top 10 as found at the start of 2015 was building company heavy and as you know VectorVest recommends no more than two shares from any single area of the economy.

To Cherry Pick I chart all the shares and eyeball the charts which are loaded with Value marked in a thick green line and EPS in a separate window just below the price. If you struggle to get these set up then please call support on 0800 014 8974 in the UK and 0800 981 891 in SA. Remember the old saying to talk to people – the strong silent type has only ever worked for is Clint Eastwood!

First prize for me is a share trading well below its value line with a steadily rising EPS plot that trading sideways in a consolidation. My observations although anecdotal lead me to the conclusion that a break of a consolidation in a share while the EPS is rising greatly improves the accuracy of the breakout.

Lookers is a Big Hitters stock and the share featured in my portfolio during the first half of the year. If you chart the share as discussed above, you should see that it’s trading well under the VectorVest valuation with a smoothly rising EPS plot. While the share was consolidating in a range between 150 and 170 over the last few months the EPS was steadily rising and that pointed to the break which occurred a few days ago on news of an acquisition. The share is now trading at 178 with a VectorVest valuation of 250. This share is in my prospect watch list to consider when the overall market turns.

I hope this helps clarify my Cherry Picking technique and I will be spending an hour on this as the User Group in Bristol on Tuesday evening the 8th September. Please mail me for any info on this meeting.

Please be very careful this week and watch stops carefully. I think most had a good start to the year. Remember that if you take a small loss it will be easy to make that up in the run into Christmas. A big loss will take a lot of fancy footwork to cancel out. There are two types of capital
1. The cash
2. Your emotional capital.
A big loss can leave you in a very poor place and this can hang around in your trading for years into the future. Your mind is hard wired to
a. Associate one moment with a previous moment
b. To avoid both physical and emotional pain
A big loss can cause a lot of pain because of the cash lost and the guilt of not following your rules once more. When another trade comes along your mind (at a very deep level that you know nothing about) compares this moment with the moment that caused the pain. The mind at this deep level will then do all it can to stop you getting involved. I have seen traders get involved with admin, spending weeks on back testing and if fact anything rather than trading its self.

Mark Douglas in his book “Trading in the Zone” discusses the above in great detail and it’s a text that every trader and investor should have on their desk.

Be careful over the next few weeks.

Take a trial of VectorVest for 5 weeks for only 5.95 GBP ($9.95) – click here to get started

David Paul
September 5th 2015