Welcome!
Welcome to Absolute Capital Return! I am so excited to have you join me on this very special endeavor.
The stock market in 2015 so far has been a story of up-and-down action without a lot of overall progress. For most of the year, the S&P 500 has traded between 1,900 and 2,100, a roughly 10.5% range thanks to the late-summer correction. Overall, the index is down slightly for the year through the middle of November.
If you just look at that -1.4% number, you might think it’s been a relatively calm year, but the truth is that there has been a lot of churning below the surface. You’re joining us at a great time because we’ve refined our strategy to go after a steady stream of winning trades that produce solid returns with acceptable risk.
Many of these are stocks that are already trading well, and are technically and fundamentally positioned to move higher over the coming one to three months. Others are flashing strong signs that they have put in a bottom and are moving higher. This type of set-up opened up to us more after the correction. We will invest in a steady diet of these set-ups, usually averaging about one to three a week, depending on market conditions and the opportunities that come our way.
Our trading strategy is just one part of this guide I’ve put together to help get you started. I’ll give you an overview of the service, the website and how we’ll build our wealth together. I’ve divided the guide into five sections:
- The components of your Absolute Capital Return membership
- The types of trades we look for
- Getting started with the Buy List
- Suggestions on allocation
- How to dive right in!
Step 1: Components of Your Membership
1. Monthly Issues: On the first Friday of each month, you’ll receive a Monthly Issue from me in which we’ll discuss the current state of our Buy List, news surrounding our trades, market analysis, answers to your questions, and so much more.
2. Weekly Updates: Every Friday, I’ll send you a Weekly Update that will allow us to stay in touch between issues. I’ll recap some of the big news stories of the week, update you on trades, talk about the market and our strategy, and anything else you need to know.
3. Update Center: I post to this section on the website regularly. This is where you can find everything you need to know about the latest news surrounding our Absolute Capital Return companies and what’s going on in the market, as well as my social media posts—all in one convenient location.
4. Trade Alerts: Since we are opportunistic traders, I send you Trade Alerts whenever it’s time to for us to buy or sell. I also send special updates if there is any important news you need to know about the market or anything else. I never want you in the dark about anything! You can view the most recent Trade Alerts in the scrolling bar at the top of the Absolute Capital Return homepage under Alerts.
5. Special Reports: These are research reports my team and I prepare for you beyond our trading recommendations. I want to help you become a better investor, and these reports are specially designed to help you make informed decisions.
6. Live Chat Events: These are special live webinar events I will hold from time to time that are a great opportunity for us to talk in much more detail about our current strategy, our trades, recent performance, and most importantly, they give me a chance to answer even more of your questions. These are only about 30 minutes, and I will always give you advance notice so you can make room in your schedule.
7. Direct Email Access: If you ever have a question about our stocks, the market or the service, please don’t hesitate to reach out to me and my customer service team. Send an email to service@absolutecapitalreturn.com any hour of the day or night! I may even refer to your question in a future Weekly Update, Monthly Issue or Live Chat Event to make sure everyone is on the same page.
Step 2: Our Trades
Now that you know how we’ll stay in touch, let’s talk about how we’ll make money together. Absolute Capital Return is a stock-trading service, so we aim to make our money within one to three months, even faster sometimes. My goal is to average two double-digit winners a month (or 24 a year). And when stocks take too long to ripen or the story changes on us, we rotate into better opportunities, selling at a smaller gain or cutting a loss.
We’ll take advantage of good trade opportunities whenever we can get them, but in general, you’ll find that many of our trades fall into the category of trend trading. In some ways, you could think of this as a “momentum” strategy, but I put that word in quotes because I’m not a fan of the way hedge fund marketing gurus have exploited the word. I’m also not a fan of the notion that momentum can sometimes mean “speculation.” That is not what we’re doing. We’re not blindly jumping on high-fliers hoping that they don’t collapse underneath us.
We’re looking for established trends to ride as far as we can. On those terms, any stock whose price is rising and whose technicals are strong has momentum. With the benchmarks swinging from week to week, the forces pushing a stock higher have to be strong enough to swim against the changing tides. Otherwise, we’re simply exposed to the waves that ebb and flow, leaving stocks drifting in circles.
Most of the time, our trades will fall into two types of set-ups: 1) stocks at or near recent highs, which we will most often want to buy on brief pullbacks or consolidations before the next move up, and 2) stocks that are coming off of a recent bottom. Let me be clear that we will not try to pick exact bottoms. Instead, we are waiting for confirmation that the downtrend has reversed before we make our move. We may not pick many exact tops either if we take profits as an uptrend shows signs of fizzling.
But here’s the key: There’s a lot of money to be made in between. We may not get in right at the bottom, but if we get in well ahead of the top, that’s all we need.
At its simplest, the trends we’re looking for are a factor of price action and volume. Volume is very important. If the price is moving higher but the number of shares changing hands is flat or declining, it’s a pretty good indicator that the move will fade. We want to see the volume climb to a climax and then recede, giving us a signal that it’s time to exit.
Price and volume naturally fluctuate from day to day. I tend to search the last 10 trading days for patterns: Are the buy days (accumulation days) becoming more frequent and robust in terms of share turnover? Do the retreats reflect more traders selling out than the rallies imply accumulation throughout the market?
We want to see smaller volume on the days when our stocks close down, which tells us that the urge to sell is less than the demand for owning shares. As more shares are bought into portfolios and not being redistributed on the open market on the sell days, supply naturally tightens, forcing those who still want the stock to bid up the price. Net accumulation is a beautiful thing.
In general, I want the good days to demonstrate higher-than-average volume over my screening period. As long as the price is still at a level that can give us enough profit to make the trade worthwhile, that kind of volume pattern is a key factor in deciding to strike.
I also watch the moving averages as an indication of the established trend as well as near-term support and resistance. When the price action breaks above the 9-day trend, for example, it’s a signal that the stock is riding a real updraft. As the divergence widens, the move becomes stronger – momentum is rising. With the right volume to confirm the trend, the stock has the potential to become a moneymaker for us. I also closely watch the 50- and 200-day moving averages to gauge a stock’s strength.
This kind of chart-oriented perspective increases the odds that our typical trade will end in the green because we’re profiting from what we know is already happening. We may not hit a home run every time, but I know from experience that taking what the market is giving you produces a high batting average. Consistency is the key to making money in a capricious environment like this one, and focusing on established trends gives us exactly that.
Trading Mechanics
I will always send you a Trade Alert via email and text message whenever it is time to buy or sell a position. If you haven’t already, I highly recommend you sign up for my text message service here. It’s a valuable part of your membership, and I know many of your fellow members have told me they love to receive the alerts that way.
In each alert, I’ll state my specific advice, including whether it’s a buy or sell, the company and ticker symbol, as well as the buy limit for the new positions.
There are times where we will use limit orders for our buys and sells. A limit order is an order placed with your broker to buy or sell a set number of shares at a specific price or better. We will use these when I want to protect us on the price if a stock is thinly traded or is moving quickly and we want to be ready to move if it hits our desired price. With a limit order, your trade will automatically execute when the stock moves back down to our buy price or up to our sell price.
If I include the language “set a limit order to buy X,” then I strongly encourage you to do so, as this will help ensure that you can participate in my buy or sell recommendation at the right price.
Step 3: Get Started with the Buy List
The Buy List page will be one of the most important resources to you, both as you get started in Absolute Capital Return and as you continue with the service, so I want to make sure you’re familiar with all of the information there and how to use it.
Every trade I recommend is posted on the Buy List page. You will find the ticker symbol, name, industry, buy date (when we bought the stock), buy price (what we paid for it), my recommended buy under price, current price, the current return, and notes for each stock.
You’ll also notice a little arrow pointing down next to each column header. You can click on this arrow to sort the data by the column you click on, either “down” or “up.” For example, if you click on the Buy Date column, the stocks within that category will sort from newest to oldest (with the arrow pointing down) or oldest to newest (arrow pointing up). For columns with a number, like Current Return, you can sort from biggest to smallest and vice versa. And for columns with text, like Investment, you can sort alphabetically from A to Z or Z to A.
One of the most important columns is the Buy Under price, which is the maximum I recommend you pay for a stock (or occasionally an ETF). Some of our stocks move above our buy limit rather quickly, others take a little bit longer, and others can move back and forth. If a stock is above our buy limit, I encourage you to stay disciplined and not chase it. I pick these limits using technical analysis, trading patterns, news flow, the macro environment, and potential upside. As you know, our goal is double-digit profits, and buying a stock that is above our buy limit may make that harder for you in some cases. It also may expose you to more risk than you would like.
Because we target a one- to three-month holding period, I don’t raise buy limits very often. Instead, we direct our cash into new opportunities. However, if we see real strength in price action and 10%+ potential still exists from a higher limit, I may raise our buy limit from time to time. Otherwise, I recommend you wait for the next opportunity, which will come quickly.
The Categories
I also pay close attention to risk. First and foremost, I do that when screening for opportunities and eliminate stocks that are simply too risky. Our focus on stocks that are already trading well also reduces risk right off that bat.
In addition, I assign each trade a risk rating by placing it in a category to help you allocate your money. The categories are Conservative, Moderate, Aggressive, and Hedge. Plus, I provide a suggested allocation to that category. My current recommendation is:
- Conservative: 30%
- Moderate: 30%
- Aggressive: 30%
- Hedge: 10%
I always recommend keeping at least some cash on hand as part of your overall portfolio to be able to take advantage of new opportunities, and you are best able to decide how much that should be. We will also be consistently raising cash by selling out of positions.
Now let’s take a quick look at the categories.
Conservative: Stocks in the Conservative category are frequently companies with solid sales growth, margins and attractive valuation multiples. They’re often more established, bigger companies with a global presence and a long history of steady growth and improvement. That doesn’t mean we buy and hold them forever. We focus on the best-positioned stocks in the environment at the time, with fundamental and/or technical reasons to expect them to move higher over the next one to three months. Our goal with Conservative stocks is to boost returns while at the same time dampening overall volatility and risk.
Moderate: These stocks offer a higher growth profile than Conservative ones, and as a result you can expect to see a bit more “oomph” but also a bit more volatility from time to time. They also have slightly higher downside, though we still aim to protect our principle.
Aggressive: As you would expect, stocks in the Aggressive portion of the portfolio are those with high return potential but also higher risk. By nature, these are often fast-growing companies on the cutting edges of their respective industries. Sometimes that spells fast earnings growth; other times, companies in the aggressive pantheon may be marked by heady sales momentum, but little if any net income. Biotech stocks are a good example of the latter because research and development (R&D) and sales expenses may eat up every dollar generated (and then some), especially for companies in the earlier stages of development.
Hedge: The overall goal of a hedge is to help offset bumpiness in our other holdings in times of volatility. Hedging makes a lot of sense right now because there are plenty of crosscurrents that are one headline away from making investors nervous—the Federal Reserve, jobs, consumer spending, interest rates, oil prices, China, and more. With the major indexes holding near all-time highs, we turned earlier this year to a more targeted and tactile strategy for our hedging. We still want our hedges to benefit us on the downside, but we can also find ones that are solid moneymaking opportunities in and of themselves by focusing on the weakest areas of the market.
Step 4: Allocating Your Money
Some of the questions I get most often are related to allocation – how much to invest, how many stocks to own, how much to invest in each, and so on. These are important questions, so let me share a few thoughts with you as you get started.
First, there is no magic formula that applies to all of us. I know it would be easier if there were, but it’s important to remember that everybody’s situation is different. We all have different amounts to invest. We all have different risk tolerances. We have different time frames for when we’ll need our money and different purposes for it — a mortgage down payment, college tuition, retirement, a vacation home, day-to-day needs, and so on. With that in mind, I’d like to offer some guidelines for you to consider as you build your own portfolio.
One very good rule of thumb to keep in mind is that you always want to be more conservative with money you will need in the next few years. For most people, if they have a specific financial obligation coming up, they can’t afford to lose the money they need to pay for it. It’s a good idea to keep this kind of money in cash or cash-like investments such as savings accounts, money market funds, CDs and some conservative bonds.
Another excellent rule of thumb is to try to diversify, which is a way of saying, “Spread out your risk,” and “Don’t put all of your eggs in one basket.” You’ve probably heard the quote, “Put all your eggs in one basket — and watch that basket!” That’s not what you want to do when it comes to investing. Tempting as it is to bet big on a stock you really like, there is no danger greater than being too heavily weighted in one investment.
My general advice is to put no more than 5% of your investable dollars into any one stock, as this will help spread out your risk. From there, I would love to see you own at least two stocks in each of our categories (Conservative, Moderate, Aggressive, Hedge), especially if you’re following our allocation guidelines, but I understand many investors need to start with fewer stocks and build that number over time. If you have to start with a smaller number of stocks – even one is fine – you may also want to consider your risk tolerance as you make your first trades. For example, you could concentrate your first trades in our Conservative category, and then expand your allocation to the Moderate and Aggressive categories over time. Ultimately, for maximum diversification, I would recommend owning three to five stocks in each category plus our two hedges.
Most important of all, I always encourage you to invest in a way that makes you most comfortable. Ideally, you’ll be able to consistently reinvest your profits, which unlocks the magic of compounding, a simple but extremely powerful concept. Your money keeps earnings money, which in turn earns more money.
I’m sure many of you have seen this in action, especially with earned interest. If your savings account earns 3% interest on $100, that initial amount becomes $103 in a year’s time. That $103 earns 3% the next year to move up to $106.10. So both your interest and principal are earning interest.
Compounding works the same way with trading. It can be an effective way to turn even a modest investment into a real and life-changing sum. Taking those quick gains and rolling them back into the next trade gives you the potential to make solid profits in a short amount of time.
And speaking of trades, let’s talk some specifics to get you started.
Step 5: Which Trades Do I Buy First?
I always recommend you start with my most recent trades, as these are earliest in their cycle and usually represent the strongest upside opportunities on the Buy List at that moment. If you then have additional cash to invest, you have a couple of options. You can wait for new trades, which are never far away, so it won’t take long for you to put the rest of your money to work.
You can also look into other stocks trading under our buy limits, starting with the most recent and working your way back. Just to be clear, if a stock is listed as a hold (you’ll know this by the purple “Hold” tag next to it on the Buy List), I do not recommend putting any new money into it at that time.
Here are five trades – one from each of our categories and two Moderates – that are good candidates for new money as long as they are trading below our limits. You’ll notice that some have moved above their limits as our trades have done well in the stronger market, but you may well get an opportunity very soon on a pullback. And as I just mentioned, you can always wait for the next trade. I have several I’m watching closely and expect us to add very soon.
Top Trade #1: BAC (Conservative)
Watching the world’s biggest financial institutions bounce back from 2008-9 levels is a healthy sign for the market. I expect financials to continue to trade well, and we already own the stock that I believe is in the best position from a risk/reward standpoint. Bank of America (BAC) has rocketed 11% in the last three days, and with a lot of room left to run on the chart, I’m doing something we don’t often do here in Absolute Capital Return, and that’s recommend that you add to your position or establish a second position while we can.
Professionals routinely buy positions in multiple chunks, lowering their average cost as they add at cheaper prices. If we split our initial $17 cost here, we can cut the amount of heavy lifting BAC needs to break even in half. From there, if the action rides above $14.75 or so, we’re in the money overall even with the initial position underwater unless BAC crests above $17.
Although I like the way BAC has responded to positive developments at rival banks like JPMorgan Chase (JPM) and Deutsche Bank (DB), it’s going to be a lot easier to get to $14.75 than to $17. The faintest hints of resistance don’t show up on this chart now below $14.15 and the first ceiling we might have to grapple with is the 50-day line at $15.18. At that point, a double position would be in the money overall.
I don’t recommending this kind of “double down” strategy often, but BAC is in an extraordinary position: just a few days ago, this stock was flirting with a 40% decline off its December peak. As a result, the amount of room for a bounce is unusually vast.
Buy a second position in BAC on this pullback below $12.50. If you haven’t initiated a position in this stock, now is the time to do so. If you don’t have the available cash right now or feel a second position would overweight you too much in one stock, please feel free to wait for our next trade. We will track this position separately, but we’ll probably sell them both together. The company is as solid as it ever was, so it remains a Conservative play.
Top Trade #2: WYNN (Moderate)
Wall Street’s mood on companies that sell to China has improved considerably after the long lunar New Year break showed a lot of global investors that the world’s second-largest economy isn’t likely to lurch over a complete cliff all at once. We made good money on one of these names a few weeks ago in Qualcomm (QCOM), and now we have a chance to play some real strength in Wynn Resorts (WYNN).
Over the last few years, WYNN has actually been a disaster for shareholders, falling from $235 to a recent low just below $50 on the sense that efforts to expand into the once-hot Macau casino market had been an expensive waste of time. The company famously has the third-biggest revenue exposure to China in the S&P 500, so at least a bit of that haircut is probably justified.
But look at the chart over the last two weeks and you see a stock on the move. The most recent quarterly numbers that ignited the run were enough to mark a near-term bottom. I’ll talk more in Friday’s update about the prospect of the growth ramp ahead opening up again, but the stock has enjoyed a nice relief rally as investors saw the numbers weren’t a complete disaster.
I’ve been watching the bounce and wanted additional confirmation before we got in, and the last few days have given us that confirmation. The initial surge was more than a technical bounce, with WYNN finally making a real effort to test the long 200-day price trend for the first time since mid-2014. If it can hold that long line as support and break above it meaningfully, the chart is clear for a surprisingly long way.
Buy WYNN below $80 for a new Moderate trade. The stock is trading above our limit at the moment, but any volatility next week could open up a new buying opportunity. Since WYNN remains exposed to the vagaries of the Chinese economy, there is certainly some risk involved, but a vast amount of it is already baked into the price action.
Top Trade #3: PYPL (Moderate)
PayPal (PYPL) has been on the move recently, bouncing harder and faster than the indexes. A little over a month ago, PYPL fell below $32, and I said at the time that it was on false contagion spreading from the banks to consumer payment stocks. Now it’s nearly 25% off the February 9 low of $31.64.
PYPL was always the diamond centerpiece of the EBAY proposition, which is why activist investors fought so hard to get the company cut out of what now looks like a moldering setting. Most of the real growth in the old company came from the online payments business and PYPL now has free rein to expand even into areas where its old corporate affiliation would have held it back.
The recent price action demonstrates the exaggerated volatility that made PYPL a little nerve-wracking on the downswing but generated equally forceful updrafts to compensate. While the timing on our initial buy wasn’t perfect – an increasingly hawkish Federal Reserve overwhelmed the strong trend we initially bought – the end-to-end downside has been relatively restrained.
Traders needed a little perspective and the patience to surf the waves, and I like the way those waves have been subtly rising over the last month, bringing the trading bottom and the amount of day-to-day downside we’ve had to tolerate up with them.
I mentioned recently that based on the building accumulation going on behind the scenes, PYPL is gathering strength for a good run. If demand for this stock continues, the price has to climb to compensate for the diminished supply of shares on the open market.
Buy PYPL if it pulls back below $35.76.
Top Trade #4: CF (Aggressive)
Materials stocks recently fell to two-year lows, but they have finally started to climb the strong dollar wall, opening up opportunities to ride the strongest names in the sector off the bottom. Fertilizer manufacturer CF Industries (CF) has priced in all the weakness investors can imagine and is now rallying, making it the most attractive play on the theme.
CF specializes in nitrogen-heavy fertilizers that tend to be the biggest factor in growing crops to harvest. Potassium has gotten a lot more attention on Wall Street, but this is the real foundation of the global breadbasket.
It’s also a close proxy on the price of natural gas, which accounts for 90% of the cost of manufacturing the key precursors to commercial agricultural nitrogen products. With gas prices still pointed straight down, there’s room for upside on the margins for companies like CF.
Even in the worst of the recent selling, CF held the January low of $26.10, giving technical traders a little confidence that the worst is over. Likewise, recent earnings numbers were far from great, but the company is clearly holding up better than what the bears were steeled to see.
Meanwhile, the stock is now rallying. CF fell to $26.10 on January 20 and successfully retested that low on February 11 (which also happened to be the recent low for the market), holding at a higher low of $26.29.
Buy CF up to $34.90. The recent action is very promising, and I like the odds of a break above the 50-day average, making this the strongest rally since the August correction. We’ll make CF an Aggressive trade, as the stock is a little small at $8 billion and the materials theme is still volatile.
Top Trade #5: UUP (Hedge)
Powershares DB US Dollar Bullish (UUP) works like a lot of the exchange- traded funds (ETFs) we’ve played in the past, but here the leverage is long the dollar. The stronger the dollar, the better this ETF does. The greenback is already back near 52- week highs against the rest of the world’s currencies taken as a group, and the Fed could push that situation into orbit.
The proposition here — and the upside potential — is clear. Buy UUP at $26.20 or below as our next hedge trade. As is always the case with our hedges, I recommend you make it no more than 5% of your total Absolute Capital Return portfolio.
Step 5: Let’s Dive In!
That was quick, wasn’t it? You’re now on the fast-track with your new Absolute Capital Return membership.
Before I set you loose, there is just one last housekeeping item that will help you get off to a smooth start.
If you haven’t already done so, please take a moment now to set up your Username and Password so that you can log into the Absolute Capital Return website. It only takes a couple of minutes to create your own personal login, and once you do you’ll have full access to all the features on the site.
All you need is your order confirmation number, which can be found on your order confirmation email. Then simply click here, enter your order confirmation number, choose your desired Username and Password, and hit submit. That’s all there is to it!
Now you are ready to get started making money with Absolute Capital Return! I urge you to spend some time getting acquainted with the subscriber-only website. If you can’t find what you’re looking for, please don’t hesitate to send me an email at service@absolutecapitalreturn.com.
Once again, welcome to Absolute Capital Return! Here’s to a fun and profitable wealth-building journey together!
Sincerely,
Hilary Kramer
Editor, Absolute Capital Return