Taking Profits

We’ve done well in this rising market environment, and it’s time to set some stop-loss orders below some of our positions. I hope the market continues pushing these stocks higher so we can ratchet up the stop-loss levels to dial in even greater profits.

Take a look to the left. Our debt collector is up 9.3% after rising 14% last week. We’re setting an initial stop-loss at +8%. The first quarter is best for debt collection companies, and this one is finally in the black for us. It has not done as well as I’d hoped, however, and I’m not confident enough in the company’s performance to hold it through the turbulence that I see coming soon.

Our computer security stock rose 10% last week after reporting a strong first quarter, and is now up 30.2%. We’re setting an initial stop-loss at +30%. Here, too, I’m a little disappointed because I was aiming for a 50% gain over the past year. However, 30% is not bad.

The firm’s computer security business is good, but the anti-virus market is maturing, and perhaps even declining. Consumers doubt the need for such software with its excessive false alarms, dubious claims of protection, and a general sense of crying wolf. Few people have actually been affected by a virus, and in any event routine data backups and careful email screening are about all the protection anybody needs. More damage is done by ordinary computer problems than by supposed viruses, particularly among PC users. See my earlier rants on Microsoft for background. Finally, anti-virus programs are highly disruptive, often blocking innocent and useful software from performing tasks. Anybody who’s suffered through Norton Anti-Productivity knows what I mean.

Too, the migration from the PC to the internet will eliminate the need for each user to own his or her personal copy of protective software. Attachments at online email services, for instance, are already scanned by anti-virus software without the consumer ever needing to buy or care about it.

That’s what we’re doing with two individual positions. Now, let’s look at the larger market.

The market has moved dramatically higher since bottoming in early March. The S&P; 500 closed March 5 at 1,374. It closed last Friday at 1,494 for a gain of nearly 9% in less than two months. The Dow closed March 5 at 12,050 and last Friday at 13,121 for roughly the same gain.

We’ve ridden the rising tide. Our individual stock positions are up solidly, and our permanent portfolios have performed as intended. Since March 5, Double the Dow and Maximum Midcap are up 18% and 19% respectively. That makes sense: the returns are double what the market did, which is the goal of the strategies.

This pace will surely slow down.

The calendar turns to May this week, and summer looms. Longtime subscribers know that seasonal factors are important to me. I tend to buy in autumn and get defensive heading into summer, then look for bargains when prices fall.

That doesn’t always work. Last year, I was wrong. I thought we’d see a dramatic fall over summer; instead, a decline happened in May and June, only to see a strong surge higher starting in July. Our hedge position in QID lost money, and we failed to buy as many cheap names as we should have.

This year, I feel queasy again as I look to the summer months. I see oil prices playing a role. It’s unclear whether the world has reached “peak oil” yet, but oil has become harder to locate and harder to extract. That will keep prices high, even if Earth has enough oil to last another 100 years. By the way, our oil service company has done well (+51%) and will continue doing well because it supplies the services needed for extraction, precisely the reason we own it.

Here’s what would drive the market higher:

  • Continued strong earnings, against expectations.
  • The Federal Reserve lowering interest rates.

Here’s what would drive the market lower:

  • Earnings that finally slow down, and by more than feared.
  • The Federal Reserve raising interest rates to fight inflation.

Not too mysterious, is it? I would add another wildcard to the mix, and that’s the geopolitical curve ball. You never know when terrorists will strike, a pandemic will break out, or leverage in the global credit market will finally wreak havoc. This list is ever-present, though, and focusing on it too much leads to excessive fear and limited profits. We’ve done well over the years by knowing when to ignore the list, which is almost always.

Here’s my take.

I think we’re in for a little more upside, but that we’ll be heading lower in the medium term. The best way to relax is to set stop-loss orders on individual positions so that they stop out at good prices when a downdraft ensues.

That’s what we’re doing, as described above.

Another handy tool to keep close by is a list of stocks you’re watching for cheaper prices. When the sale comes, you want to be ready.

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