How do you know when to sell a stock?

How to you pick a stock?

LESSON SIX

AIRLINES - PART TWO

Over the past dozen days we have watched the price of oil drop from over $135 to as low as $122 per barrel, or nearly 10%. It remains volatile, but the fact that we have not approached new oil price highs for half a month is encouraging enough that one could hypothesize that the price trend is now down, or at least flat.

Anyone who says this is THE buying opportunity for airlines is just guessing. (Remember, we said that if oil drops significantly, airlines will probably get a serious bounce upward of maybe 50 to 100% or more.) This opportunity might come after the summer driving season or after a hurricane induced oil price bubble, but when it comes we would like to profit from it.

In the last blog , we suggested that one might be a buyer of airline stocks on any $10 per barrel price decline and this was achieved June 3.

Reviewing the airline play:

1. Oil prices are likely to fluxuate by large percentages.
2. On any significant decline in oil prices, there will probably be corresponding jump in airline stocks.
3. I'm suggesting that on any decline in oil of $10 per barrel, airline stocks should be bought.
4. This is a trade, not a long-term hold, and these stocks are highly speculative. So one should be ready to
exit on any loss of over 5% from your buy price or any decline of 10% from a peak.
Examples: A) Buy at 10.00 - exit at 9.50 to limit your loss to a maximum of 5%.
B) Buy at 10.00 and the stock goes to 14.00. Sell at 12.60, or a decline of 10% from the peak.

Recent June 3 June 5
Low Close Close

American (AMR) 6.22 7.32 7.82
Continental (CAL) 13.18 14.52 15.24
Delta (DAL) 5.50 6.10 6.80
Jet Blue (JBLU) 3.97 4.02 4.32
United (UAUA) 7.52 8.52 10.05
US Air (LCC) 3.96 4.06 4.43

Note: From the low date through 6/5, this group has run up 8.8 to 33.6%. And in just the last two days, the airlines have bounced approximately 5 to 15%. This move in such a short time frame on a fairly small move in oil prices is strong evidence of the inverse correlation between oil and air and the strength of that relationship.

As I listen to the "experts", the overwhelming consensus is that oil is not going under $120 - but, if history is a reliable guide, at some point the conventional wisdom is going to be wrong and we may be in for a move that is much bigger than anyone currently suspects.

TODAY'S LESSON: Know when you are getting into a speculative trade, like this one is. Monitor it on a daily basis. And, above all, proceed with DISCIPLINE! Have a clearly defined exit strategy and stick with it. Do not let a small loss turn into a killer.

Also, for the cautious investor: If a trade appears to be outside your comfort zone - try entering with a minimal purchase of shares and then add to the position should you start to show a profit on the trade.

Blog written on June 5 after the market close.

LESSON 5

After a monster move in a stock market sector, we all look back and kick ourselves and wonder why we didn't see that train coming. Let's look at some examples:

A) During the housing boom/bubble - many of the home building stocks went up 500% or more.
B) Similar gains have been made in the past three years in Chinese stocks and in just the past two months there have been stocks in this sector that have gained up to 100%.
C) In the past few months, many steel stocks have seen moves of 100 to 200%. (For example, Oregon's Schnitzer Steel has gone from the low 30's to the high 90's since January 2007.
D) And in just the past few weeks and months, many of the solar energy stocks have moved up 50 to 200% and more. (Example: Canadian Solar is up from 10 to 44 since last fall.)

But there is one big problem in finding these kinds of life-changing stock buys.

I don't seem to get the word from brokers, advisors, TV pundits, and stock publications on these kinds of moves until they are largely over.

So let's see if I can help you to nail down one of these big market sector moves.

******************

When the price of oil & jet fuel goes up -- airline stocks will accordingly suffer. And right now this group is in the dumpster.

Recent High Current Price

American Air (AMR) 17 9
Delta Air (DAL) 18 7
US Air (LCC) 31 7
United Air (UAL) 41 13
Continental Air (CAL) 37 18
Jet Blue (JBLU) 12 5

There are few things in financial markets that yield more than the rate of inflation, plus a point or two, that are a one way street. At some point the price of oil will fall. (There will be a speculative bubble that will take the price too high and too fast. A recession will dampen demand. Alternative energy development and conservation will affect demand.) Some would agrue this point with me, but from the tulip speculation of the 1600's to the internet bubble of Clinton years, there is a pattern. The dips in oil may be short lived but there will be dips.

Oil prices may well advance to much highier levels (I'll leave others to speculate on this.) But at some point, the price of a
barrel will go too high and we will have a correction. And when this happens, I want to be ready to pounce.

Based on history, when oil prices come down, airline stocks will respond in the opposite direction. I'm not suggesting a long term hold on airline stocks -- these are companies that will be struggling for profitability into the forseeable future.
But if oil drops from $125 to, let's say, $75 to $90 a barrel -- we will see a trading opportunity in airline stocks that could move the stocks from 50% to 200%.

WHEN WILL IT HAPPEN? I have no idea -- but I am watching carefully and I'm ready to pounce. (If I had to guess, I might go with next fall - after the summer driving season. But it counld very well be a year or two down the road.)

WHEN TO BUY? My strategy will be to buy two or three airline stocks on any $10 per barrel decline in the oil price.
I would not argue with anyone who picked a different trigger price. But develop your strategy and then execute it when the dip in oil prices comes. There may be multiple, smaller, false moves - but if/when a serious decline in oil comes, it may have the potential to change your financial life, and you don't want to miss it.

WHEN TO EXIT? Once again, I teach my students to always go into a trade with a strategy. In this case, because of the volatility of oil and airlines, I would pick an exit point that would limit my losses to 5 to 10%.

This is not investing for widows, orphans, and people who like to hold onto stocks where they are showing a loss!
If you venture into these waters, the profits could be serious -- but you certainly want to go in with a very well defined plan and the discipline to execute your plan.

(Note: On the date of this blog, the price of oil was $127.21 - a record high close.)

Stock Market Competition Winners

LESSON FOUR

LESSON FOUR

The results are in and Canyonville Christian Academy (that's us) swept 1st, 2nd, 3rd, and 4th places in the spring 2008 Oregon Stock Market Game. Nearly 300 teams were entered in this competition sponsored by the Securities Traders Association of Portland, Oregon Council on Economic Education, Portland State University, et al.

1. Canyonville Christian Academy $182,881
2. Canyonville Christian Academy 168,814
3. Canyonville Christian Academy 141,882
4. Canyonville Christian Academy 141,301
5. McLoughlin High School 122,019
6. Canyonville Christian Academy 120,580
7. Jesuit High School 117,027
8. St. Mary's Academy 116,583
9. Crow High School 113,515
10. McLoughlin High School 113,497

In the 10-week, on-line, stock picking competition, each team begins with a hypothetical $100,000 cash position. Trades are real-time, short selling and margin trades are part of the game, and no stocks under $5 are allowed.

Note: The winning entries by CCA all made 40% to 80% in just over two months -- approximately two to four times what any other school was able to achieve in this difficult market. This is CCA's 16th win in the past 17 games we've entered -- a streak that dates back to 1996 and includes every kind of bull, bear, and doldrum market.. (The game is contested twice each school year - fall and spring.)

Now, to learn something from this year's spring game:

In the early days this year's contest (February and early March), the stock market was in free fall largely precipitated by the sub-prime credit problems. What I teach my students is to UNDERSTAND THE DIRECTION OF THE MARKET AND GO WITH IT.

When the market is on its way from 14,165 (Oct. 9, 2008) to 11,740 (March 10, 2008) - a sickening 2,400/17% plunge - the best place to be is hiding in cave with minimal exposure to stocks. Of course,
in a stock game, the object is not to preserve your capital. In a game you must be out there trying to hit home runs. So my advice to my students is to find stocks that are crashing - and sell the farm short.
(I also teach the kids that in real life short selling is inappropriate for most investors most of the time. But that's a topic for another blog.)

A corollary to the above rule ("understand the direction...") is the farther the market goes in one direction, the more careful you must become. The turns in the market are sometimes quick and provide massive dangers and opportunities. After the 11,740 low, the next day the market was up 417 points (March 11)
and has since moved up more than 1,000 Dow points.

Among the stocks that students picked for short selling during the down market were (with their 52-week ranges): Pulte Home (42 to 8), ETrade (26 to 2) and Ascent Solar (26 to 6).

How do we know what the direction of the stock market is? I merely have the students look at a graph from Barrons, Wall Street Journal or online. Most times the direction is clear from the picture presented by the graph. If the market direction is confused, then you get to choose. A more conservative investor or trader might consider the sidelines while someone who is more aggressive and willing to take risk would probably lean more towards being in the market.

But fighting the trend can cost you serious losses, or cause you to miss serious opportunities. And if you are ever in a stock picking competition, swimming against the current will probably land you somewhere in the middle of the final standings - or worse.

What's happened since 2000?

How the students are doing spring 2008?

LESSON NUMBER THREE

In the past few day Sirius Satellite Radio (SIRI) fell below its 52-week low of 2.51 - and I recommended that it be SOLD if this happened. (I exited my entire position at just below 2.50 for a loss of about 5%.)

This is in keeping with the investing strategy that I teach in my stock market course -- avoid big losses on any single transaction.

One way of looking at this is think of it as buying insurance. When you sell, you are buying insurance against any further decline in the stock. In the worst case scenario, should your house burn down (or your stock go into a tainspin) - the most you can lose is the expense of your insurance premium (or, in the case of a stock, a 5% loss.)

NOTE: In class, and in my personal investing, I use the 5% loss limit. I arrived at this figure by experimenting over time and it is easy to compute. However, I would not argue with an investor who selected another level - as long as it was under 10%.

Now for today's lesson: One of the most frustrating things that happens to investors is to sell a stock and then be sitting on the sidelines when the stock takes off. (Not long ago I sold Apple at 72 and then watched it go to over 200.) When most people take a loss (hopefully a small loss), it is human nature to be reluctant to get back in. "It's unlucky." "I don't understand the stock." "It's not behaving right."

WRONG!

To win at anything, you have to be willing to do what the herd doesn't do and to fight your natural instincts. When one takes a small loss, it often means nothing more than your timing wasn't perfect.

My experience and study shows that after a small loss, the best thing you can do is put the stock symbol up on your bulletin board/white board with a "buy-in" price. Your insurance policy (selling with a small loss) protected you from a major disaster, now it's time to get back in. For me, the buy-in price is 5% above the most recent low.

In the case of SIRI, the closing low was 2.41 - so my buy point becomes 2.53, a 5% advance over the low. For my personal account, I bought SIRI on April 23 at 2.57 and the stock is now at 2.62.

The other stock of the satellite radio twosome -XM Satellite Radio (XMSR)- was suggested to readers
of this blog as a possible buy should it close under 10.60. It did, in fact, close below that figure (10.49) a few days ago. If it had been bought, you would now be holding XMSR at 11.56 for a 9.1% gain in three
trading days.

To repeat and expand on some important caveats from the prior blog:

A) These are speculative and volatile stocks. These are for agile investors who follow the market on a daily basis.

B) These stocks are involved in merger that is pending before the regulators. Should the merger blow up, the affect on the stocks could be significant. For this reason I would be reluctant to put more than
a small percentage of my investable funds in these stocks.

C) But from these levels, both stocks have enough upside potential (25 to 50%) to make them very interesting trades.

(Blog written after the market close on April 23.)

How much should you invest?

How to buy stock?

Why Buy Stocks?

Why Listen to Roger?

LESSON NUMBER TWO

A pair of stocks for your consideration:

Sirius Satellite Radio (SIRI)
XM Satellite Radio (XMSR)

I think a very good case can be made right here for a solid trading opportunity.

Both companies are in a prolonged start-up phase and have not yet turned a profit. However they are approaching profitability and continue to rapidly expand their customer base. Most importantly, they are involved in a pending merger which should strongly improve the prospects for future profitability.

Since April of 2007 here is their record:

low high percent gain

SIRI 2.69 3.24 20.4% Current price: 2.74
2.71 3.83 41.3
2.65 3.31 24.9
2.66 3.15 18.4

XMSR 10.48 11.98 14.3 Current price: 11.90
10.52 13.02 23.8
10.55 15.83 50.0
10.22 13.55 32.7
10.80 13.79 27.7

These are both stocks with a solid base or apparent price support level - and they have returned to that level several times over the past year.

Although some analysts put more stock in exact figures, I think they are more subjective and subject to hundreds of individual buying decisions that can have a wide variety of motivations. So I place my base points at 2.65 to 2.75 for SIRI and 10.20 to 10.60 for XMSR. (Note: The intraday 52-week lows for the stocks are 2.51 for SIRI and 9.62 for XMSR.)

BUY STRATEGY: SIRI is at, or very near, a buy point. If you can pick it up a dime cheaper, that
would be nice - but it is now close enough to base support area to be a buy.
XMSR needs to come down another 10 to 15% to be a good buy. It does have
some volitility and bears close watching.

SELL STRATEGY: Sell if either stock goes to a new low. This would indicate that the support level
is questionable and the stock could be a dangerous hold.

Should the stock bounce off its base, as it has done several times in the past 52-
weeks, the stock should be sold on any 10% decline. (Example: Should XMSR
go to 14.00, it should be sold before falling below 12.60, a decline of 1.40 or 10%) Of course,i t may be sold at a highier level, but the 10% decline rule would provide a mandatory exit point. .

To summarize the lesson that I try to convey in my investment course:

A) Always go into a stock purchase with a well defined strategy that has entry and exit points. (These go on a white-board that I can see from my office desk.)

B) When the reason for the buy is no longer in affect, why would you want to continue to hold the stock? (In this case, the stocks have well defined bases. Should either stock go below the base, the logic for holding it gone and the risk becomes significant.)

(This blog was written on April 7, 2008 and stock prices mentioned in the blog reflect that date.)

Lesson One

** A while back, I struck up a conversation in a doctor's office where the person shared with me that they had lost over $30,000 on a single stock purchase during the last year. Ouch!

** Once, while visiting a stock broker, I observed a prominent sign above his desk reminding him: DON'T FORGET THE EXIT POINT.

** At a more personal level, the single most important (and painful) lesson I've learned in investing is to
AVOID THE BIG LOSSES.

When I teach my investing course to high school students, one of the fundamental concepts that we focus on is that no matter how good you are at picking stocks - some of your ideas are just not going to work out. Your pool of information is always going to be imperfect and incomplete. There will always be emotional factors (greed and fear, for example) that will drive stock prices far above and below what reasonable valuations would indicate. To become a successful investor, I believe it is critical to learn how to keep your losses small when you are wrong about a stock.

EXAMPLES:

52-Week Low Since
High Feb. 20

Apple 202.96 119.15
Google 747.24 413.62
NYSE Euronext 102.38 56.46
Level 3 Communications 6.80 1.80

The first pair of stocks on the list are two of the biggest success stories in the stock market over the past couple of years - and may very well be excellent picks for the future. The last two stock are/were favorites of TV guru Jim Cramer.

The point here is that had you established a position in one of these stocks during 2007-8, your loss could have been as much as 40% to 70%+. And this is not the way you want to treat you savings.

If you are verturing into investing in individual stocks, go in with a plan that keeps your losses small on any single transaction. There are several ways of doing this and in future blogs I'll outline my strategy. But to get things started, let me throw out a couple of rules for your consideration:

1) Always write out your exit point for the down side for any stock you buy. This would be the price you would sell your shares should the stock price go to or below this level.

My exit prices are written on a white board that I can see from my office desk.

2) Never hold a stock that is more than 10% below your buy price.

More on both of these rules - with specific example - next time.

Stock Tips from Canyonville Christian Academy

This Blog is designed to give stock tips and news on CCA student stock market competitions.