Investing is an Incremental Process

Since starting on the Livermore / Darvas / William O’Neil track, I have been going through a number of IBD resources and jotting down my learnings in this blog. There are a lot more interesting materials to go through so readers can expect more such posts to come.

The following points come from a webinar featuring Scott O’Neil on June 26, 2012, titled “Mastering the Market with Scott O’Neil”. The webinar walks through an example of how a portfolio was managed during the recent follow-through day (FTD) on June 15, 2012 (Friday), which I felt is quite instructive

Essentially, you incrementally scale in and out depending on how the market (they used NASDAQ to illustrate) performs.

  • Prior to the FTD on June 15, 2012
    • % invested was 0%.
    • The rally on June 6, 2012 was not a FTD because it was within the first 3 days of the attempted rally. For confirmation that people are buying into a real rally, you need the FTD to occur on or after the 4th day.
  • June 15 (Fri)
    • Marginal FTD, you can be 10-25% invested. 25% is only if you are very aggressive.
    • Scott did not buy anything because he felt the price action was not strong enough, and wanted more confirmation.
  • June 18 (Mon)
    • Market continued to move higher, below average volume.
    • 20-35% invested.
  • June 19 (Tue)
    • Market moved higher, crossed 50-day SMA with volume just very slightly above average.
    • 50% invested.
    • Scott started to put in money that day, buying two safe stocks, Disney and CVS.
  • June 20 (Wed)
    • Market stalled, closed slightly below open.
    • Not unreasonable considering it is the first few days of a rally.
    • 50% invested.
    • Scott actually added another stock during this day.
  • June 21 (Thu)
    • Market dropped significantly erasing the gains of the last 3 days, on slightly above average volume.
    • Need to quickly react and move out incrementally.
    • 20-30% invested.
  • June 22 (Fri)
    • Market bounces up to recover half of the losses on Thursday, volume was high because of Russell 2000 rebalancing. The Russell 2000 rebalancing volume came at the end of the day, prior to that, the volume of the day was low, which is a bad sign.
    • After a really bad day, you need the market to prove to you that it is a strong market by negating Thursday’s poor performance, which the market failed to do.
    • 10% invested.
    • Scott closed out completely during that day.
  • June 25 (Mon)
    • Market gapped down, went below the Low of June 21, and closed even lower. Volume was below average.
    • 0% invested.

Looking Ahead

  • If you have to be in the market, hold defensive and highly liquid stocks, have very few of them, and mostly hold cash.
  • Having distribution days so soon after a FTD hurts the chances of success. Studies done by IBD showed that having distribution days within 3-4 days of a FTD results in a 80% failure rate.
  • The market can turn quickly, you need to keep monitoring the market so that you will get in early.


3 thoughts on “Investing is an Incremental Process

  1. so basically, he made a loss. i guess, we would need better confirmation indicators.

    Posted by KL | July 16, 2012, 3:04 am
  2. yes he made a loss, but in terms of execution I think that’s the right way. Paul Tudor Jones was quoted as saying that if he thinks something will go up, he will keep on trying to go long and keep getting stopped out, until he is either proven right, or something causes him to change his mind. Essentially he wants to get in early on any trend, because it captures the most gain, and the penalty to pay in return is to keep losing small amounts of money if he gets stopped out.

    Posted by whatheheckaboom | July 16, 2012, 3:01 pm
  3. Ahhh icic. Thanks*

    Posted by KL | July 17, 2012, 6:20 am

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