Can’t hold this back

Friday, 25 August 2017
Melbourne, Australia
By Kris Sayce

  • Green tide
  • Underwhelmed
  • Finally…
  • The ‘war stories’ most traders keep secret

Stay tuned next week.

It could be the biggest event of the year.

It involves our most popular, mysterious, and controversial investment guru — Phillip J Anderson.

I assure you, you won’t want to miss what we have in store. It’s all scheduled for next Tuesday. Look out for more details.

Until then…

Markets

Overnight, the Dow Jones Industrial Average closed down 28.69 points, or 0.13%.

The S&P 500 fell 5.07 points, or 0.21%.

In Europe, the Euro Stoxx 50 index ended the day up 6.1 points, or 0.18%. Meanwhile, the FTSE 100 gained 0.33%, and Germany’s DAX index added 0.05%.

In Asian markets, Japan’s Nikkei 225 index is currently up 114.55 points, or 0.59%. China’s CSI 300 is up 0.99%.

In Australia, the S&P/ASX 200 is up 4.72 points, or 0.08%.

On the commodities markets, West Texas Intermediate crude oil is US$47.76 per barrel. Brent crude is US$52.41 per barrel.

Gold is trading for US$1,287.14 (AU$1,629.01) per troy ounce. Silver is US$16.98 (AU$21.48) per troy ounce.

The Aussie dollar is worth 79.02 US cents.

Green tide

Doing their best King Canute impersonation, Liberal politicians in New South Wales think they can hold back the tide.

But this isn’t a ‘blue tide’ of ocean water surging forth. This is a ‘green tide’…a green tide of the finest medical marijuana money can buy.

And try as they might, just like an ocean tide, the New South Welshmen (and women) politicians won’t be able to stop it.

Website, leafly.com reports on the story:

Access to cannabis for people with terminal illnesses and chronic pain was delayed last week when the New South Wales (NSW) state government blocked a law that would have decriminalized possession of marijuana for those suffering from serious medical conditions.

The legislation, which would have decriminalized possession of up to 15 grams of cannabis in cases where it was being used to treat chronic pain, was introduced by the opposition Labor party and blocked by the majority Liberal Legislative Assembly. Despite the fact that the proposed law grew out of the recommendations of a bipartisan parliamentary inquiry into the use of cannabis for medical purposes, no partisanship was present when it was voted down.

Holding back the surge of the ‘green tide’, is the equivalent of the Aussie banks trying to hold back the surge of bitcoin and other cryptocurrencies.

Give ‘em a gold star for trying. But give them a thump on the head for trying to deny an unstoppable trend.

(Ed note: Comparing marijuana with cryptos isn’t so crazy. The crypto PotCoin, claims that it provides ‘Banking for the cannabis industry’! Who’d have thunk it? Incidentally, it’s up 2,923% since 2014.)

If 2016 was all about Brexit and Donald J Trump, in our view, 2017 is all about cryptocurrencies and marijuana legalisation.

The difference is, while it was hard to know how to profit from the Brexit and Trump trades because there were few things directly related to either, there are many more opportunities to profit from the crypto and pot trades.

Of course, we won’t claim that it’s easy to make money from these — we’re talking about cryptos and pot here, remember. But we do claim that the opportunities are much, much wider.

We know, because our old pal, Sam Volkering, has been all over both subjects. If he’s not knee-deep in the ‘devil’s lettuce’ (a ridiculous, but apparently widespread, alternative name for cannabis), he’s up to his proverbial eyeballs in cryptos.

Makes you wonder how the poor bloke can ever get anything done, under such inundation.

But he does. It was Sam’s enthusiasm for the huge opportunities in the ‘pot stock’ sector, which recently convinced me to jump on a plane and fly to London, just to interview him about the huge opportunities.

To find out exactly what Sam had to say, and the opportunities involved, go here and check it out now.

Underwhelmed

Is there no end to Amazon.com Inc’s [NASDAQ:AMZN] ingenuity and innovation? It’s astounding. And naturally, the media is agog with the possibilities.

Step inside as we share the latest news from the company that we can only describe as the Eighth Wonder of the Modern World. From Bloomberg:

Sorry, supermarkets: Amazon just confirmed that your worst nightmares are about to come true.

Ever since the e-commerce giant announced in June that it had agreed to buy US supermarket chain Whole Foods Market, speculation had been in overdrive about how their combined powers could shake up the grocery industry…

On Thursday, investors achieved some clarity about the online behemoth’s strategy: Amazon announced that it would start cutting prices at Whole Foods from next week on, making an immediate move to solve a problem that has plagued the grocer for ages: Its prices are simply uncompetitive now that it is far from the only organics game in town. US rivals such as Wal-Mart and Target are all in the organics business now, and shoppers have noticed.

[Crickets]

That it?

That’s all they’ve got.

That’s the grand plan — to cut prices!

For the last full financial year, Whole Foods Market Inc’s [NYSE:WFM] profit margin was 3.48%. The forecast for the 2017 financial year, is that the profit margin will plunge to 2.62%. That’s before the ingenious plan to cut prices.

As a point of reference, Woolworths Ltd’s [ASX:WOW] profit margin is 2.75%.

Call us stubborn. Accuse us of being King Canute if you like…that we’re standing, trying to push back against the Amazonian tide of Jeff Bezos. But we struggle to see how Whole Foods Market’s plan to cut prices will help with its profitability and market share.

Unless of course, Whole Foods plans to undercut other grocery retailers. If so, that’s fine. But then there’s the question of whether its current customers will still find it so cool to shop at a ‘discount’ grocery retailer.

We shall see. Regardless, despite this [cough] ground-breaking development, we remain short Amazon.com’s stock.

Finally…

Now over to guest essayist, Quant Trader founder, Jason McIntosh…

Cheers,
Kris


The ‘War Stories’ Most Traders Keep Secret
Jason McIntosh, Quant Trader

I’m going to start with a warning…

What you’re about to read isn’t standard. It contains material that often falls through the cracks.

You see, most people gladly talk about their big wins. This is true of just about every trader, adviser and fund manager I know. Their ‘war stories’ typically involve huge gains.

But that’s only part of the story…

What about the disasters?

Just think for a moment. How often do you hear people brag about a big loss?

Chances are, your answer is ‘rarely’.

You see, losses are an ‘inconvenient truth’ for many people. They’re happy to tell you about their triumphs. But their defeats are another matter entirely.

Last week, I wrote about the 20 best ASX 300 stocks of 2016/17. Quant Trader had big wins on 80% of them. This includes gains like: 71.9%, 107.4%, 94.1%, and 127.9%. You can read more here.

But what about the losses?

Well, this week, I’m going to tell you the rest of the story. You’re going to hear about the worst stocks on the ASX 300. And, yes, a few of them were in Quant Trader’s portfolio as well.

But, just like the winners, the losers have a story to tell. These ‘war stories’ are every bit as valuable as the successes. Trying to forget them is a mistake many people make.

The deplorables

Right, let’s get straight into it.

Here are the down-and-outs from the last financial year…

Stock

Code

2016/17 FY Loss

Quintis Ltd

QIN

-78.5%

Vita Group Ltd

VTG

-73.5%

Doray Minerals Ltd

DRM

-71.0%

The Reject Shop Ltd

TRS

-65.5%

Vocus Group Ltd

VOC

-60.5%

Syrah Resources Ltd

SYR

-54.6%

TPG Telecom Ltd

TPM

-50.5%

Magnis Resources Ltd

MNS

-48.8%

CSG Ltd

CSV

-47.9%

AWE Ltd

AWE

-47.0%

Source: marketindex.com.au/asx300, 30 June 2017

These stocks are portfolio killers. Owning a few of them (or investing heavily in any particular one) can be devastating. I’m sure more than a few people are sitting on big losses.

So, how many did Quant Trader identify as a buy?

The answer: eight.

That’s right. Quant Trader gave a buy signal on 80% of the 10 worst performers. These stocks were in the Overflow portfolio at some stage during last financial year.

Now, I know that doesn’t sound good. But don’t pass judgement just yet. You need to understand the whole story.

Check this out…

Company

Status

Entry

QT’s 2016/17 FY Loss

QT’s Overall Gain

Quintis Ltd

Closed

16/8/16

-32.0%

Vita Group Ltd

Closed

6/9/16

-29.6%

Doray Minerals Ltd

Closed

5/2/16

-27.7%

8.5%

The Reject Shop

Closed

12/8/16

-25.8%

Vocus Group Ltd

Closed

21/11/14

-6.3%

30.8%

Syrah Resources

Closed

4/1/16

-25.6%

12.4%

TPG Telecom Ltd

Closed

17/11/14

-20.9%

21.6%

Magnis Resources Ltd

Closed

No trade

CSG Ltd

Closed

No trade

AWE Ltd

Closed

20/7/16

-25.5%

These are the same stocks as before. But this time, the table shows the performance data that’s relevant to Quant Trader. (Incidentally, QIN, VTG, DRM, VOC, TPM, CSV and AWE were also profitable short trades).

Now, pay attention to the final two columns. These contain some key information. They tell you the impact of each trade on the portfolio last financial year, as well as the trade’s overall result.

Here’s an example: Quant Trader took a 27.7% hit on Doray Minerals during the financial year. But, when you consider the actual entry point in February 2016, the overall trade was up 8.5%.

Take a few minutes to compare the two tables. You’ll see the worst performers did relatively little damage. These are good outcomes from potentially devastating situations.

Avoidable disasters

Charts are an excellent way to learn about trading. They let you see a trade in a way that words alone can’t do justice. This can really help bring a strategy to life.

I’m going to show you three charts. These will help you see how Quant Trader was able to avoid huge losses. Understanding this is one of the most important lessons in trading.

OK, let’s start at the top of the list.

Here’s a chart for Quintis — last financial year’s worst performer…



chart image

Source: Bloomberg
Click to enlarge


Quant Trader’s buy signal was at $1.69 on 16 August 2016. The trigger was an upward break in the share price. The exit stop for the trade was set at $1.27 — 24.9% below the entry.

Probability favours that a trend will continue. But it’s not a guarantee. QIN began to stall soon after Quant Trader’s entry. A routine correction quickly became a larger sell-off.

Quant Trader’s strategy in this type of situation is to cut the position. No one knows how long a decline will last. And Quant Trader doesn’t hang around to find out.

Many traders put off the decision to sell. They tell themselves that the shares will eventually come back. Sometimes they do. But it’s when they don’t that you need to worry.

Quant Trader gives a stock room to move — you can’t ride a trend without doing this. But you need a ‘line in the sand’…a point where you walk away and preserve capital.

Many traders don’t do this. Instead, they let a losing situation turn into a much worse outcome.

QIN lost 78.5% of its value last financial year. But this was completely avoidable. Having an exit strategy, and the discipline to follow it, could have made all the difference.

The next example is Vita Group Ltd [ASX:VTG].



chart image

Source: Bloomberg
Click to enlarge


VTG joins an unfortunate group of stocks. It’s one of the few companies to be on the best-performers list one year and worst-performers list the next.

Quant Trader had earlier success with VTG. The system rode a big uptrend to a 199% gain. You can see the exit point for that trade on the chart (QT initial exit).

Trailing stops are an excellent way to manage risk. They can keep you in winning trades longer, and get you out when the trend turns. But they don’t work with laser accuracy.

Have another look at the chart. You’ll notice Quant Trader initially exits at the bottom of a correction. The shares then race to a new high. This triggers a fresh buy signal.

But, unlike the previous trade, VTG doesn’t keep rising. The uptrend quickly ends and the shares head lower.

Many people form an attachment to their profitable stocks. This often causes them to keep holding long after the trend reverses. I’ve seen people give back huge profits this way.

The answer to this problem is to have a set of trading rules. This can help you defuse your emotions and make you a more decisive trader.

Quant Trader’s loss on this trade was 29.3%. But it was a good outcome. Remaining loyal to VTG would have seen the losses blow out to 73.5%.

The final stock is from outside the ASX 300. It recently made headlines when its shares fell 92% in a single day. And yes, this stock had been in Quant Trader’s Overflow portfolio.

Here’s the chart…



chart image

Source: Bloomberg
Click to enlarge


The stock’s name is Innate Immunotherapeutics Ltd [ASX:IIL]. It’s a biotech company that has been testing a drug for multiple sclerosis. I had shares in the company myself.

IIL was a triumph for some, but a disaster for many. It all depends on your trading plan.

Quant Trader’s strategy is to buy into strength. And that’s what it did here. The system’s entry was at 85 cents on 14 October 2016. It then rode the stock’s rise and fall over the next three months.

And that’s where this story ends…

Quant Trader exits with a profit. There was no holding in hope the stock would skyrocket again. The trend — and the trade — was over.

So, how did I go with IIL?

I made a 43% profit. The key to this was my exit strategy. It turned one of the worst stocks of 2016/17 into a solid outcome for my portfolio.

Many people try to forget their failures. But that’s a mistake. Don’t be afraid to reflect on your less successful trades. You can learn a lot from the ones that don’t work out.

Study the charts in this update carefully. You’ll see why cutting losses relatively early is so important. Getting this strategy right could dramatically improve your returns.

Until next week,
Jason

Editor’s note: Exit strategy is one of the most important decisions you’ll make. Yet, despite its importance, selling is an afterthought for many traders. This can be a costly mistake.

Quant Trader uses a unique strategy to manage selling. The system’s algorithms tailor exit levels to each stock. This helps cull poor performers, while keeping you in winning trades longer. Some of the strategy’s wins include: Blackmores [ASX:BKL] +353%, Vita Group [ASX:VTG] +199%, and HUB24 [ASX:HUB] +147%.

So, if you’re not sure when to sell…I strongly suggest you check out Quant Trader.

Try it. See if it makes sense to you. It could change the way you trade forever.

Quant Trader sources all images and charts.