Saturday, March 31, 2012

Big Wave Trading Portfolio Update And Top Current Holdings

The biggest cause of trouble in the world today is that the stupid people are so sure about things and the intelligent folks are so full of doubts. — Bertrand Russell

It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change. — Charles Darwin

The Big Wave Trading portfolio remains under a BUY signal.

There are concerns with the current condition of the rally but nothing internally is moving our model away from the BUY signal. The most problematic issue is that new longs are simply not performing well. New longs continue to give us small cut losses or small gains. The only two areas not doing this are our IPO and Medical/Biomed/Drug stocks. They remain a high reward/risk win/loss ratio play. This has been one of the strangest uptrends we have seen at Big Wave Trading since my career started in 1996.

For the first time ever, during an uptrend longer than three months, the Big Wave Trading portfolio is lagging the overall stock market. This is more than likely due to the slow steady nature of this uptrend, the lack of volatility, and the lack of explosive moves on explosive volume. Big Wave Trading normally will purchase 5-20% of the strongest CANSLIM quality stocks with the best chart patterns in the stock market, when an uptrend is strong. When we make these purchases and they show low reward/risk win/loss ratios we reduce position size and spread out into more speculative names with higher quality chart patterns to reduce risk. These stocks are not performing like they have in the past. Past rallies from 1996-2000, 2003-2007, 2009, and late 2010 were extremely profitable using this methodology (see Past Big Winners on this website). During this current uptrend, that is not the case.

Our market model methodology using the TQQQ long and short is crushing our current returns with a YTD gain of 33% (without the March shakeout gains would be 60%). This methodology continues to be superior to our stock picking ability ever since the 2011 top. Eventually, our stock picking methodology will come back into favor. For now, however, it is clear that using the 3x ETFs is where the majority of our capital should be deployed.

If the market refuses to selloff this year, we expect that a potential large rally may be around the corner. If that rally comes, just like in most longer-term uptrends, the large gains in individual stocks should follow. Following the 1998, 2002, and 2009 lows, this was the case. We do not expect an explosive uptrend to begin here, though we realize it could, due to the Nasdaq price being so far extended from the 200 day moving average. It would be very beneficial to the market for the price to continue to work its way lower and consolidate so that the 50 and 200 day moving average can tighten up to the price. As long as we remain extended, a risk of a pullback remains very high.

We continue to hedge our long side positions with shorts in speculative stocks with no earnings/sales growth or paid promotional manipulation pump-and-dump stocks that have made extended/parabolic moves in short periods of time. When these stocks reverse hard off their extended runs on huge volume, we take short positions. So while Big Wave Trading remains under a BUY signal we clearly recognize the fact the VIX is low, sentiment is too bullish on the Investors Intelligence survey, and the price and 200 DMA of the Nasdaq are too wide for a significant move up here.

As always, we are ready for anything and everything that the stock market can and will produce. It is the only way to play the game. The most important rule remains to always cut losses immediately when we are wrong. Big Wave Trading never holds a losing position. If Big Wave Trading purchases a stock or ETF and it does not move in our direction immediately we begin to scale out or get out immediately. No questions asked. It either works or it is removed.

Top Current Holdings – Percent Gain (non-margin) – Date of Signal

SWHC – 72% – 1/3/12
KORS – 66% – 1/17/12
AVD – 50% – 1/10/12
RF – 45% – 1/5/12
LNKD – 37% – 1/19/12
BVSN (short) – 36% – 3/16/12
EPAM – 36% – 3/1/12
LHCG – 32% – 1/19/12
CIS – 29% – 3/12/12
CCU – 28% – 12/21/11
SUNH – 26% – 3/9/12
CERS – 25% – 2/10/12

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