Q: If the breakout point is 20, should I go in and set a pre-programmed buy at $20.50 regardless of volume?
G: Yes. At the end of the day, you will know if the volume is sufficient for a bona fide breakout. Lately, however, we have been seeing breakouts occur on average to below-average volume but then a few days later they start showing better upside volume. Also, I have bought many breakouts showing heavy volume early in the trading day, but by the close the volume has dwindled and is not above-average for the day – if they hold up and show heavier volume some time in the next few days, I might end up holding them.
Q: If I have a stock that goes up 15+% from the breakout point, when do I sell it? Do I move my stop up to 5% from the top? You say on your report, the rules change. What are they?
G: If I have a stock that goes up 15% from the breakout point, I consider that I’m just getting started, and am thinking more in terms of where I want to add to my position, since the stock is initially showing me positive results. I am not worried if it comes back to where I bought it, because it may. I am more concerned with identifying and capitalizing on a potential big winner. Once a stock goes up 20% or more from a breakout point, unless it has done so in 2-3 weeks, one can consider taking a profit, either some portion (perhaps 1/2) or all of the position, and see if the stock sets up in another base. Often, stocks will break out, go up 20%, and then build another base, unless they show extreme power in the first 2-3 weeks. So by taking profits in this manner when you have a stock that goes up 20% in four weeks or more, you might gain the luxury of sitting back and letting the stock show you another proper buy point.
Q: How do you handle a whipsaw/shakeout, i.e. do you sometimes buy a stock back?
G: I do not concern myself with missing 2 or 3 points on a stock, so the difference between say 23 and 26 on a stock is meaningless to me, because I want the move from 29 to 60 and I want to be well-positioned and heavy into that sort of move should it occur. Some of my biggest winners panned out exactly this way. In 2004, I bought 100,000 AAPL around 36.50, then cut it back to 50,000 when it pulled in again. Then the stock took off through 42 on an earnings announcement and I bought back that 50,000 I sold and another 200,000 right there. The stock never really looked back from there.
Q: Reading the Gilmo Report I sometimes get what I call the “candy store syndrome”; so many candies to choose from, so which do I buy? Since there are so many great stocks that you feature, which do I buy if I can’t buy them all?
G: I actually trade in and out of 10-15 stocks in my concentrated portfolio, 20-30 in my diversified, and I do think it’s more a matter of letting the market tell you which is “the stock you have to own,” as I don’t consider it something I can determine beforehand. I tend to shift around a bit, but keep some core positions. right now biggest, “core” positions are VMW, MTL, SOHU, and CSIQ, and I just bought MTL and VMW back this morning off the open. It is possible I could sell anyone of these today or at some time in the next few days if they start acting improperly, so please keep that in mind.
You have to find the right buy points, and I don’t think it’s only “5 stocks you must own now” since there are a lot of interesting situations showing up right now (May 15, 2008 – Ed.). Most of the original breakouts are somewhat extended, but I will cover these stocks in my report when I think they are approaching proper entry points. Going forward I will do my best to give some insight into what I believe makes a stock a “must own” rather than try and pick a handful of “must owns,” since that can change very quickly. Our ultimate goal is not to spoon-feed you, but rather to empower you. So we don’t want to give you a fish, but rather teach you to fish.
Q: I will be out of the country for 5 days in June and 12 days in August and will not have access to a computer. Do you sell your holdings when you are on vacation?
G: I rarely go on vacation when I’m in the market, and if I do, I bring my traveling trading cockpit, which consists of two very powerful laptops. I often prefer to vacation in Hawaii since the market opens there at 4:30 a.m. or 3:30 a.m., depending on which time of the year I’m there, so I can trade until 10 or 11 a.m. and then hit the pool with my family!
Q: What happens when we get a market correction? Do you let your stops take you out as opposed to actively taking profit?
G: Initially, when taking positions, you are letting your stops take you out. Once you are starting to show profits, then you try to let your strong winners run while taking 20% profits on stocks that take longer than three weeks to move that far. If I’ve been making money for a while and the general market starts to give signs that it is correcting, I will generally just take my profits and go to cash.
Q: How do you feel about using covered calls in addition to your stock purchases?
G: I’ve never done it. When I buy stocks I am looking for strong, even explosive upside, so writing covered calls is just a limiting strategy with respect to my methodology since you may simply have your stock called away from you. For example, why write covered calls on a position when it was trading at 31? What would I write to get any meaningful premium given where the stock is now trading? The 35’s, the 40’s? It’s just not what I’m looking for in my quest for extreme performance. Covered call writing is only appropriate, in my view, for buy-and-hold investors holding stocks during a bear phase, or investors who hold dull stocks that rarely move out of a long-term trading range, such as Procter & Gamble (PG) for example, and who have little expectation that these stocks will move out of these trading ranges.
Q: Do you hold stocks going into earnings?
G: Usually I watch how the stock acts going into the close before earnings. Holding stocks into earnings is tricky, and can be dangerous, so there is no simple answer to the question. You have to consider where you are with the position, cushion-wise, and what you will do if the stock “lays an egg” with a bad or unsatisfactory earnings report and what type of damage you can tolerate in your portfolio.
Q: Gil, say one has 10 positions on, and we get a selloff, and some of the stocks are holding up while others are taking a beating. This is where I freeze up. Is it best to take some size off in stocks that are selling off with no support and leave the ones that are holding up alone?
G: If you are fully on margin and your stocks are all sticking straight up, you can consider backing off margin by cutting back on these positions. Stocks near support, or which seem to be acting better, you can try to hang on to. I try to remain fluid so I will cut back my positions, maintaining core positions in my favorite stocks, and “trimming” around the edges. But if the market continues to weaken I will continue to cut back. I am also not afraid to move back and forth as I cut back and then buy back portions of my positions that I sold. It’s always easier to think when you have cash or at least buying power in your back pocket and you are not up to your eyeballs in stock! Stocks are not real estate. You can sell them and buy them back with the click of a mouse! Use that liquidity to your advantage.
Q: How do you measure a distribution day?
G: I have always considered distributiion days to be more a function of what is happening to leading stocks, rather than the indexes, so all of these “rules” about adding and subtracting distribution days to me are somewhat arbitrary and confusing. I watch the action of my stocks and leading stocks in the market. If they are getting hit, and the indexes are down big on heavy volume, that is distribution, and what my own stocks do determines how I will handle my positions, not whether the indexes have a certain number of distribution days. I just watch my stocks, which are usually leaders in any bull phase, and if my stocks are getting hit along with the market. I don’t pay attention to all these rules about distribution days since I know what distribution looks like when it hits the market based on what is happening to my own stocks, and I can sniff out a top in the market this way.