Our Philosophy

The first thing before a position is initiated is a clear plan must be in place detailing specific entry areas, their associated sell stops, and potential profit taking zones.

Never trade without a plan. Never enter a trade without a clear understanding of exactly where your entry and exit areas are and why they are there.

There are endless factors to consider such as an individual trader’s personal objectives and goals, their personal progress at any given point, the state of the general market and the many fundamental and technical factors relevant to each individual stock, its sector, industry group and its overall strength relative to the rest of its industry

Risk management is the golden key to consistent success in the stock market. Yes, it is even more important than stock selection.

This is why Bernard Baruch, stock trader and close friend of Livermore said that cutting losses short is crucial. He continued that if a speculator is right half of the time, he’s hitting a good average. Even being right three or four times out of ten should yield a person a fortune if he has the sense to cut his losses quickly on the ventures when he is wrong.

Trading without a sound risk management strategy is no different than gambling in Las Vegas.

Look for companies with annual earnings that are positive and have been increasing year over year for at least three years. Also look for companies with at least 25% quarter over quarter growth in earnings and sales for a minimum of three quarters. These are early indicators of companies that may be ready to explode in growth.

Three-quarters of all stocks follow the direction or trend of the general market. William O’Neil would often say that getting this part of the equation correct is more than half the ballgame. At TraderLion, we have a very specific, quantifiable technique that we use to determine the direction of the general market.

Keep in mind however that the stock market is half science and half art. Hence, this only solves the first half of the equation. The other half involves qualitative factors which largely concern the overall health and breadth of the market’s leadership. Understanding how to correctly interpret the action of the market’s leadership is crucial, especially when the general market is in a correction or consolidation mode. Healthy rotation is always the key.

This aspect of trading is not given anywhere near the attention it needs and deserves. Understanding how to properly manage one’s emotional and psychological capital is every bit as important, if not more so than the proper management of one’s financial capital.

Understanding how they factor into your trading process is also extremely important. Keep in mind, this goes well beyond simply understanding your psychology and emotions as they pertain to trading. How you handle your personal life plays a big role as well. For example things like your health, the health of your loved ones, all of your relationships and personal finances are just as important as your trading and must be kept in balance as best as possible. Trading in the Zone by Mark Douglas is one of Ross’ favorite books covering this topic.

Buy the strongest stocks, in the strongest groups, with the strongest fundamental story and strongest growth characteristics. Period.

There are many ways to calculate relative strength, however, Ross personally finds Investor Business Daily’s proprietary Relative Strength (RS) rating and RS line to be extremely effective.

In general, the RS line for a stock should be in an uptrend and at a bare minimum, confirming new highs in price as a stock moves higher. When the general market is consolidating or correcting, the RS line will start to make new highs ahead of a stock’s price. This is a sign of power and strength that is often a clue that stock is getting ready to move higher.

IBD’s proprietary RS Rating goes from 1 to 99 with 1 being the weakest and 99 being the strongest. Try to buy stocks with an RS rating in the 90’s, preferably 95 and over.

The more money you manage, the more you will learn to love liquidity. There is nothing like being able to push a button and being able to fill your entire stock order instantly with the price of the stock moving very little. There comes a point, however, where extremely large-cap stocks can become quite sluggish and slow.

There are some super large-cap liquid stocks that are extremely powerful. But according to a 40-year study performed by William O’Neil + Co., it was identified that more than 95% of the companies which had fewer than 25 million shares in their capitalization did so when they had their greatest period of earnings improvement and stock market performance. That being said, if all else is equal when given the choice between two stocks, choose the stock with the lower amount of total shares outstanding in their capitalization

Extremely large banks, mutual funds, hedge funds, trust companies and other large financial institutions of this nature account for over 70% of the market’s total volume. Some of these companies manage hundreds of billions of dollars. So when one of their portfolio managers decides to take a position in a stock, it can take weeks to months for them to accumulate a full position.

Adding to this, there are still all of the other fund managers out there with enormous portfolios to invest that also decide to take positions in the same stock which also require the same amount of time given the amount of cash they are managing. It is often very difficult for large institutions to hide their tracks especially when they are all trying to pile into these same stocks. It is for this reason why heavy volume accumulation or distribution is so important and is frequently used as a sign of big institutional players entering or exiting a specific stock

Always use stock charts to enter and exit a stock at its optimal point. This is the point where risk/reward is highly skewed in your favor. Limit your buying activity to stocks that have formed constructive bases.

Don’t buy a stock as it goes through a pivot point or trend line unless it is trading well above its average volume for the day. Don’t purchase a stock more than 3% past its pivot point. Some stocks may warrant a tighter buy limit of 1-2% from their pivot depending on their personality and the market environment

The United States is often on the leading edge when it comes to developing new products and services that change the way we live, work and communicate. These companies are the lifeblood of a healthy bull market and the key ingredient to a sustainable uptrend.

Every bull market or uptrend is led higher by at least two or three groups of well-established leadership and every new bull cycle should be led by a fresh batch of new leaders. Very rarely does the old leadership from a prior cycle come back to life and the ones that do, typically take a very long time.

LULU

Sector: Consumer Cyclical
Industry: Apparel Stores
Summary: Lululemon Athletica inc., an athletic apparel company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth.

LULU’s quarterly earnings and sales accelerated for four consecutive quarters, the quarter ended October 31, 2017 – the quarter ended July 31, 2018. Their quarterly earnings and sales decelerated for the first time last quarter, although their annual estimates going out to 2020 are strong. The stock is currently sporting an ROE of 24% and institutional sponsorship has picked up for the last eight consecutive quarters.

On March 28, 2018 LULU reported EPS and was buyable as it gapped up and broke out of a base that was nearly 6 years long on huge volume. In general, stocks that break out of bases that take longer to form will tend to have more powerful moves to the upside than those which break out of shorter base patterns. Simply put, a prolonged period of contraction, leads to a prolonged period of expansion. Hence the phrase, “the longer the base, the higher into space.”

LULU proceeded to ride it’s short-term 4-EMA higher for five weeks, right after it broke out and respected its 21-DMA throughout the entire quarter. Therefore, most of this position could have been held through their next earnings report on 6/1/18.
LULU gapped up on enormous volume in reaction to their earnings on 6/1/18 report, although it spent the following ten weeks building a new base thereafter. The stock was buyable two times throughout its base-building process, although the first time it quickly failed, and triggered sell stops.

The second buy area worked out well and more than made up for its prior failure. These shares were profitable enough to hold through earnings again on 8/31/18. LULU gapped up and closed much higher on enormous volume in reaction to earnings again.
However, LULU reached an all-time high of $164.79 on 10/1/18 and has been making lower lows ever since.

TWLO

Sector: Technology
Industry: Software – Application
Summary: Twilio Inc. – provides a cloud communications platform that enables developers to build, scale, and operate communications within software applications in the United States and internationally.

TWLO is a recent IPO in the computer enterprise software group, which was one of the more powerful groups in the tech sector during 2018.

TWLO posted six consecutive pocket pivots in a row beginning on 2/9/18, as it formed the right side of its base. It was then buyable for six days in a row beginning on 2/16/18, in and around its $33.07 entry area. The stock trended higher and formed a new base over the next few months. TWLO could have been purchased at a few points as it built this base and depending on one’s average cost, it could have been held through its earnings announcement on 8/7/18.

TWLO continued to trend higher and reached a price of $88.88 on 9/26/18, before it ultimately rolled over and broke below its 50-DMA on heavy volume.

TWLO’s was up 169% in just a little over 7 months.

GRUB

Sector: Technology
Industry: Internet Content & Information
Summary: GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 80,000 local restaurants with diners in approximately 1,600 cities.

GRUB’s move began in the middle of 2016 and it was one of the big leading names in the internet content group until the middle of 2018. The stock had a very strong record of earnings and sales throughout the length of its move, not to mention, institutional sponsorship has picked up noticeably each quarter, for the last eight consecutive quarters.

GRUB broke out on 8/3/17 at $38.25 and went on a tear until 9/14/18, which is still the date of its all-time high of $149.35. This is a 290% gain in a little over 13 months. It has been in a downtrend

Since 9/14/18 and it remains to be seen whether it can make a comeback for the next cycle.

SQ

Sector: Technology
Industry: Software – Application
Summary: Square, Inc. provides payment and point-of-sale solutions in the United States and internationally. The company’s commerce ecosystem includes point-of-sale software and hardware that enables sellers to turn mobile and computing devices into payment and point-of-sale solutions.

SQ experienced very powerful top and bottom line quarterly growth throughout the length of its sharp move higher, not to mention, explosive growth in their annual EPS.

SQ clearly changed the way business is done with their point-of-sale technology and they are the clear leaders in this arena. Hence, big institutional investors piled into the stock and pushed it sharply higher over a short period of time.

SQ has been an extremely powerful leader since it broke out in November of 2016. It stair stepped its way higher, ultimately respecting its 50-DMA/65-EMA throughout the length of its move higher, offering many entry areas along the way.

It broke out on 11/25/16 and closed at $12.75 and hit a closing high of $48.86 on 11/24/17, which is a 283% gain in a year. SQ then spent the next 6 months forming a constructive base on base structure.

SQ was buyable at several points along the way as it carved out this base. Its “proper” breakout was at about $58.00 on 6/1/18, it went on to hit an all-time high of $101.15 on 10/1/18 and has been making lower lows ever since.

NFLX

Sector: Consumer Cyclical
Industry: Media – Diversified
Summary: Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens.

NFLX has exhibited explosive earnings growth over the prior 5 quarters, despite the noticeable deceleration for the quarter ended March 31, 2018. Remember, 25-30% quarterly growth is a minimum.

NFLX more than doubled in the first six months of 2018, although it has been an extremely powerful leader for much longer than that. The stocks crossed a post-split price of $4.00 in December 2008 and by June 2018 it traded as high as $423.21.

NFLX was buyable in multiple areas along the way during this sharp, quick run of over 100%. However, it reached an all-time high of $423.21 on 6/21/18 and has been in a downtrend ever since.

WWE

Sector: Consumer Cyclical
Industry: Media – Diversified

Summary:
World Wrestling Entertainment, Inc., an integrated media and entertainment company, engages in the sports entertainment business in North America, Europe, the Middle East, Africa, the Asia Pacific, and Latin America.

WWE broke out through $23.88 on 10/26/17 and hit an all-time high of $97.69 on 10/27/18. That’s 309% gain in one year. The stock was sporting triple-digit earnings growth for four consecutive quarters until their last earnings report. (Comment about estimates and current base.)

WWE was one of those stocks that showed consistent respect for its major moving averages on the pullback, which makes managing the position a whole lot easier, especially when it comes time to sell.

FNKO

Sector: Consumer Cyclical
Industry: Leisure
Summary: Funko, Inc., a pop culture consumer products company, designs, sources, and distributes licensed pop culture products in the United States, China, Vietnam, and the United Kingdom. The company offers vinyl, bobblehead, blind-packed miniature, and action figures; and plush products, accessories, apparels, and homewares, as well as bags, purses, and wallets.

FNKO is one of those one-off, specialty retail companies that nobody realized existed until its stock broke out through $10.00 on 5/30/18, went on a parabolic run and gained 100% in just a little over three months. It hit an all-time high of $31.12 on 9/12/18 and then imploded on massive volume.  By 12/24/18 the stock traded as low as $11.22.

FNKO’s quarterly earnings grew at a triple-digit pace over the prior three quarters. At first glance, these numbers seem exciting, but upon closer inspection, it is important to note that their quarter over quarter earnings and revenues, both decelerated over the same period, which is the opposite of what we are looking for. While it’s not impossible, it is highly unlikely that a stock like FNKO will ever recover and make new all-time highs again.

DECK

Sector: Consumer Cyclical
Industry: Footwear & Accessories
Summary: Deckers Outdoor Corporation, together with its subsidiaries, designs, markets, and distributes footwear, apparel, and accessories for casual lifestyle use and high-performance activities. It offers premium footwear, apparel, and accessories under the UGG brand name; sandals, shoes, and boots under the Teva brand name; and footwear under the Sanuk brand name.

DECK’s quarter over quarter earnings for the last 5 quarters have been solid but erratic. Meanwhile, their quarter over quarter revenues for the last 5 quarters have been much steadier albeit, clearly on the low side.

DECK’s institutional sponsorship has risen steadily for the last eight consecutive quarters, it currently has an ROE of 19% and it is a well know, liquid leader in its industry group, with a track record of success.

DECK broke out through $73.45 on 11/22/17 and hit an all-time high of $137.49 on 11/8/18, which is a gain of 87% in a little less than a year. The stock formed 2 constructive bases and offered several entry areas throughout the length of its move. It will be interesting to see if DECK can continue to make new all-time highs from here.

AMZN

Sector: Consumer Cyclical
Industry: Specialty Retail
Summary: Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions in North America and internationally. The company operates through three segments: North America, International, and Amazon Web Services (AWS) segments. It sells merchandise and content purchased for resale from vendors, as well as those offered by third-party sellers through physical stores and retail Websites, such as amazon.com, amazon.ca, amazon.com.mx, amazon.com.au, amazon.com.br, amazon.cn, amazon.fr, amazon.de, amazon.in, amazon.it, amazon.co.jp, amazon.nl, amazon.es, and amazon.co.uk. Amazon.com, Inc. operates three Amazon Go cashier-less convenience stores in Seattle.

AMZN’s quarter over quarter earnings have proven to be extremely volatile at times over the last few years, however, nothing short of spectacular, especially recently. Notice the extreme acceleration in their quarter over quarter earnings growth for the last five quarters shown above. Not to mention, a solid, steady stream of quarter over quarter revenues to support their bottom line.

AMZN has been a very powerful leader for a long time, although its angle of ascent clearly steepened when it gapped up and broke out on huge volume on 1/30/2015, and it has hardly stopped to look back since.

There has been no shortage of opportunities to buy this stock over the years, from which risk/reward was optimal. However, AMZN hit an all-time high of $2,050.50 on 9/4/18 and is currently on the verge of breaking its pattern of lower lows that have been in place since.

ATHM

Sector: Technology
Industry: Internet Content & Information

Summary:
Autohome Inc. operates as an online destination for automobile consumers in the People’s Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including company generated content, such as automobile-related articles and reviews, pricing trends in various local markets, photographs, video clips, and live streaming.

ATHM is just one of many Chinese stocks with sound fundamentals to lead the way in 2016, 2017 and half of 2018. Most Chinese stocks have been trending lower since the middle of 2018, although many are still young enough that it would not be surprising to see them build new bases and break out again.

ATHM started moving higher in earnest back in May of ’17. The accumulation in this stock was clear as it formed the right side of its base, just prior to its first buyable break out on 5/8/17.

A positive EPS report on 5/10/17 sent the stock powerfully higher for a month after it broke out and then its action tightened up as its volume dried up, which is constructive. It gained about 49% from its earliest entry area and about 37% from its “proper” entry area.

ATHM reported another positive quarter on 8/9/17 which sent the stock flying again. It then spent the next four months base building, before breaking out again at the beginning of 2018.

ATHM’s breakout on 1/2/18 led the stock to additional gains of 81% over the next six months. It reached an all-time high of $119.50 on 6/1/18 and has been trending lower ever since.

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February 6, 2019

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