How and when to buy and what to notice while picking a stock. Take the knowledge and apply it yourself and you are ahead of most of your fellow investors including your past self. Do this long term and your portfolio will be evergreen.
Navigating the stock market can seem daunting, but with a detailed, methodical approach, you can enhance your portfolio systematically. Let me take you through a practical example of how I did this with my investment in Core & Main, Inc. (CNM) on April 29, 2024.
The Strategy Behind the Trade
When I initiated my position in CNM, it was not a spur-of-the-moment decision. Here’s a precise breakdown of my approach:
- Entry and Targets: I bought CNM at an opening price of $57.12. My profit target was set ambitiously at $68.54, with a stop-loss carefully placed at $55.39 to limit any potential downside.
- Market Positioning: At the time of purchase, CNM was a top performer, outperforming 97% of the market with an RS rating of 97 and an industry rank of 8 out of 197, signaling a strong standing in a leading industry.
Why CNM?
- Technical Indicators: The decision was backed by solid technicals. The stock had broken above the EMA-21 line, and the RS line was trending upward, indicating continued strength.
- Market Sentiment: There was significant institutional accumulation, reflected by an institutional ownership trend on the rise and a market U/D ratio of 1.9. This showed strong market and institutional support for CNM.
Calculated Risks
- Risk Management: The initial risk on the position was tightly managed at 2.99%, with the overall portfolio risk for this trade kept minimal at 0.16%. This discipline in risk management is crucial.
- Addition and Adjustment: On May 7, 2024, seeing the position’s success, I added to my stake at $59.54. I maintained a stringent stop-loss of 2.22% on this added position to minimize any potential losses.
The Big Picture
- Market Dynamics: While the uptrend in CNM’s stock price was becoming well-established, there remained a concern that institutions might begin selling off. This potential turning point made vigilance essential.
- Strategy and Outcome: My strategy revolves around starting with small positions and adding to them as they prove their merit. Simultaneously, I’m quick to exit any investment that starts to falter, thereby protecting my capital.
MARKET OVERVIEW
The recommended portfolio exposure to the market is currently set between 40 to 60%, reflecting the indexes’ slight uptrend. The S&P 500 is showing signs of recovery from its recent correction. Its price has moved above the 21-day exponential moving average and has reached the 50-day simple moving average, indicating an upward trend. The market appears to be gaining strength. Similarly, the Nasdaq is mirroring this behavior, positioned right at the 50-day moving average and seemingly poised to cross above it, signaling improving conditions.
In light of these observations, I am increasing my portfolio positions. The growing strength of the market is further supported by more stocks breaking out of their bases. As a standard practice, I initiate investments with a small position. If the initial position proves successful, I incrementally increase my investment to capitalize on the favorable market conditions. This strategy allows for measured exposure while taking advantage of emerging opportunities in the market.
GENERAL STOCK REQUIREMENTS
Choosing the right stocks isn’t a game of chance; it’s a deliberate strategy. This time, with a plethora of options at my fingertips, I could afford to be pickier. So, what were the non-negotiables?
First off, industry leadership was paramount. I zeroed in on stocks from the top echelons—specifically, the TOP 10 out of 197 industries. Why? Because these represent the crème de la crème, the TOP 5% leading the charge. It’s not just about being good; it’s about being outstanding.
Next, the foundation matters. I looked for stocks with base depths signaling strength without overextension—ideally, between 10-20%, stretching up to 35% for those in a cup pattern. It’s a balance between stability and potential, ensuring our picks have solid ground beneath them.
Moreover, the up/down ratio needed to be above 1.0, a clear indicator of upward momentum. Similarly, the trend in institutional ownership couldn’t just be stable; it had to be climbing. These are the signs that savvy investors are not just watching but actively betting on these stocks.
The RS line and rating were the final seals of approval. An uptrend in the RS line and a rating of at least 85 out of 100 ensures we’re backing winners, not just participants.
By setting these stringent criteria, we’re not casting a wide net; we’re spearfishing for the best. In a sea of choices, we’re not looking for just any fish; we’re after the prize catches that promise not just to survive but to thrive.
TERMS AND DEFINITIONS
EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.
SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.
SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.
STAGES OF THE BASES
STAGE 1: BASING OR BOTTOMING STAGE
Definition: A period following a stock’s decline where it starts moving sideways, forming a base. This stage signifies the easing of downward pressure and the beginning of stabilization, indicating that the stock is not in an uptrend yet but is preparing for potential future growth.
STAGE 2: ADVANCING OR UPTREND STAGE
Definition: The phase in which a stock breaks out of its base on significant volume, indicating a strong buying interest and the initiation of a new uptrend. This stage is considered the most opportune time for investors to purchase the stock, as it is expected to achieve substantial gains.
STAGE 3: TOP OR PEAKING STAGE
Definition: A stage characterized by the stock beginning to exhibit signs of losing momentum after its upward movement. The stock may start to move sideways with increased volatility compared to Stage 1. This suggests the stock might be reaching its peak, and the existing uptrend could be weakening.
STAGE 4: DECLINING OR DOWNTREND STAGE
Definition: This final stage occurs when the stock breaks down from its Stage 3 pattern and enters into a downtrend, marked by a sequence of lower lows and lower highs. It signifies that selling pressure has surpassed buying interest, usually serving as a signal for investors to sell the stock to mitigate further losses.
Looking Ahead
As of now, both positions in CNM remain open, and the journey continues. With experience in CAN SLIM trading and investing, I’ve learned to manage my trades to avoid significant losses, often ending up with small losses that don’t heavily impact my portfolio.
Final Thoughts
So, what can we take from this example? Meticulous planning, a keen eye on market indicators, and disciplined risk management are key. It’s about making smart choices, one stock at a time. What strategies have you found effective in managing your investments, and how do you adapt to market changes to safeguard your portfolio? Let me know here.
