Q&A With Kirk

One of the many benefits of being a member is the ability to participate in a monthly Q&A session. My focus in these sessions are to specifically address questions commonly asked and which I think others would enjoy and find my responses helpful. Since I'm away on vacation this week, I thought it would be a good time to give non-members a sense of what these Q&A sessions provide. Hopefully you will find it as helpful as members have. Enjoy!

Laura asks: Looking at your crystal ball, what do you think will cause the bull market in the U.S. to end?

Kirk answers: My view is that we'll see a large scale meltdown in emerging markets (like China, Brazil, & Russia). The emerging markets are looking a lot like 1998 when Russia and then Asian emerging markets blew up. The difference between now and then is that these markets are far more powerful than many U.S. investors understand. In fact, the only reason why the market tumbled so fast earlier this year is that the U.S. is so vulnerable. While those markets rebounded very quickly (as did in the U.S.), I think when they do ultimately crack for real, it will have huge negative ramifications. Anyone who took time to listen to first quarter conference calls already understands that corporate America is basing the majority of their growth expectations this year from their international divisions. If that were to abruptly change, investors would not be willing to pay these prices for stocks and the current M&A wave would stop, if not quickly reverse. Even lower rates by the Federal Reserve will not be effective if growth reverses course in these markets. Investors also have been chasing performance overseas, so they will also get burned and that will also weigh heavily on our economy.

Rebecca asks: I remember reading in your archives that one of your favorite economic indicators was ECRI's weekly leading index though I haven't see you talk about it lately. My understanding is that it touched another high recently. How does this consolidate with your view of the market?

Kirk answers: I still think the ECRI is good at what they do and their observations are correct. That said, I think those who think that the ups and downs in the business cycle are dead and the Fed can permanently prevent a U.S. recession are kidding themselves. At the end of the day, you have to ask yourself how the growth in the U.S. economy is being generated. For example, anyone who looked at the article I linked to this week that showed a chart of the total credit market debt as a percentage of U.S. GDP has to be concerned about the foundation of our economy. Look at it this way. If you basically gave me free money on easy credit, I would have no problem making everyone think that I'm wildly rich beyond belief. I could buy cars, homes, take vacations, etc. and on the surface I would look like a complete financial success. But, if all that was illusionary and cheap money and excessive credit were the only two drivers, when those factors disappear (and they will) everything will have to revalued. It's only a matter of time, so while everyone goes with the idea the "don't worry, be happy" mentality, eventually the bill will come due. Economic cycles will still occur and that aggressive leveraged risks around the world are being taken on the idea that laws of nature do not apply anymore and that history will not repeat. I may be dumb, but I'm not that dumb to believe that can be true. I'm just not smart enough to know exactly when it will happen.

Howie asks: I'm new to technical analysis and I've taken up your recommendation to read a few of your recommended books. However, do you know of software that will seek out technical patterns for you so I can have real-life examples to work with?

Kirk answers: Technical analysis is much more an art of interpretation than a precise science. Sometimes patterns may look the same, but still offer hints that they're like to fail or do quite well. Experience and the ability to adjust the criteria a little based on market conditions makes a huge difference in technical analysis. Like everything in the market, hard and fast rules don't work in the real world.

With that said, there are software programs available that can help train your eye. For example, Thomas Buklowski's Patternz software can be useful as a learning tool (along with his very excellent website) and it is free. In addition, if you utilize Worden's Telechart, an add on program like TCScan+ can be useful as well. As your skills become more advanced, you can also develop personal criteria formulas into Telechart that will allow you to scan for stocks meeting specific technicals. I believe there is also a chart pattern recognition plug-in for MetaStock as well that has received great reviews in Stocks & Commodities' annual reader poll.

Tom asks: In the January Q&A you said that "if I had to personally train someone to invest who has never bought and sold one single stock, I would first require them to only short stocks for the first year of investing." Why are you so adamant about this for a
newbie?

Kirk answers: I made that statement primarily to drive a point that one of the key skill sets to learn is to avoid trading bias. Something I struggle with as well. When an investor has only one bias, they tend to only see the market from one perspective. Ideally, you want to approach the market from several angles, not just one. Two months ago I also posted a very interesting snippet where another trader offered a unique approach to the learning process that you may find helpful.

Ben asks: Can you tell me where on the internet I can find the total daily new lows on the NYSE so I can follow
Cabot's Two-second Indicator?

Kirk answers: Just pull up Barchart. New highs and lows for the NYSE, Nasdaq, AMEX, and OTCBB are provided. As you know, I also like the market momentum section which shows the percentage of stocks trading above their moving averages.

Tom asks: My goal is to achieve $225,000 of trading gains before taxes and commissions per year. On that basis, working
backwards I calculate that I need to earn $4,685/week or $937/day to achieve the $225K goal. Given that I want to work with 25% of my total capital of $200K, that would give me a maximum $50,000 in a position size. Assuming I put 100% of the $50K to work each day, I would need to find a trade every day that would net me $937/$50,000 = 1.875% return. Are finding these kind of trades on a consistent basis feasible? How difficult is it? Does my rationale and "working backwards" to get to this result make any sense? Am I forgetting something?

Kirk answers: There's nothing wrong with laying out a plan of attack as you have so you can identify your goals and know
what you need to do in order to hit them. I've engaged in the same kind of planning myself throughout my trading career. The problem, as you'll discover eventually, is that unless you've developed a very unique and highly profitable system that delivers exceptionally good returns in various different types of markets, consistency in earnings will always be an issue. Trading is unlike any other career in the aspect as you'll find that the bulk of your money will come from 10% of your time. This is one of the reasons why I recommend that traders keep two things in mind: 1) make their financial situation as strong as possible (i.e. low overhead, no debt, lots of savings), and 2) develop alternative streams of income to offset the frequent bouts of underperformance. A 1.875% return per day (20% per month) is extremely aggressive. I've only seen a few traders in my life come close to that and even they suffer periods of very large draw downs primarily due to the aggressiveness of the strategies they employ. I'm not saying it can't be done, because anything is possible. I frequently come across traders who claim even better gains that what your objectives are, but generally I find that their system is one that works well in only certain kinds of markets.

My suggestion is for you to develop some goals (as you have) and then slowly work toward those. In a previous Q&A I talked about how Tiger Woods' father trained him by setting the par high enough so that he could build confidence and become something great. My fear with your approach is that you've set the standards so high, than you've left yourself very little room to fail and to develop your strategy. There will also be times you'll need to take a step back, need time off for personal reasons, and few traders take that into account when making these goals. I'm a big believer that you should always set your goals high and to strive for the best. And the same time, be patient enough to let your system and approach develop into something that will become a rewarding career for you. Many traders enter this game with too high expectations and are
easily frustrated. I don't want that to happen to you.

Doren asks: I was going through your long term model portfolio and I am planning to build a long term model myself. Lately I have been reading a lot about ETFs and I wanted your opinion about ETF's based on fundamental indexes. It's basically a John Bogle vs Jeremy Siegel debate as evident from this article. It seems so far the results are mixed but I am little partial toward the fundamental ETF of Jeremy Siegel.
What is your opinion about these 2 types of investment styles and which one do you prefer?

Kirk answers: Thank you for your very thoughtful question about this very interesting topic. Moreover, congratulations that you're going to develop a portfolio of this nature. I think that's super smart. My gut tells me that history will prove both Bogle and Siegel correct. I suspect that WisdomTree's offerings will do quite well, perhaps even outperform the cap-targeted index funds, but that overhead costs will swell which will negate their outperformance eventually. Overall, I think Bogle is sincere and his heart and motivation is in the right place. Siegal, on the other hand, is far more greedy based on what I've learned about his compensation package at WisdomTree. I think that if I had to side with one of these guys, I'd go with Bogle every day of the week and twice on Sunday.

Dan asks: Can you develop a good screen for stocks trading below $10 per share? I'd like to find some cheap stocks to buy. Thanks.

Kirk answers: While many of my screens will eliminate low-liquidity stocks or those trading under $5 per share, I do not typically try to screen for low-priced stocks (under $10) as key criteria. In my view, focusing on price in this manner will tend to create screens that will prove inconsistent results. Please remember that value and the actual price the stock is trading at are not the same. I've seen my fair share of undervalued stocks trading well over $100 per share while many overvalued stocks trade below $10 dollars. In my experience, the best value-focused screens do not focus on price.

Sam asks: I see you have the multiple monitors, alas I cannot utilize that process as I have a mild form of ADD of which if I receive too much visual input...I fog and tune out. Suggestions?

Kirk answers: I'm lucky that I don't have ADD because I think a multiple monitor setup could create an environment where that easily occurs. There's nothing wrong with keeping it simple and focused, especially if you have difficulty in this area. For what it is worth, I did some of my best trading on one very small 17-inch monitor and that didn't handicap me in the least.

Dennis asks: I am currently working a full time job and traveling some. Is it possible to learn some of your techniques for trading/investing and not have to be at my computer all day? Can I learn to trade effectively with stops or other tools that will work for me or do I need to become a full time trader to be profitable?

Kirk answers: One of the reasons why I've dedicated so much time on lazy portfolios this year is to help those who desire a much more "part-time" approach. These can serve you very well and don't require a lot of time. You can, also adopt a more part-time trading approach, but your time frame and the amount of time you put in will require different strategies and investment vehicle selection. For example, part-time traders are often better off trading ETFs rather than individual stocks, just for the very reason that they offer a little bit better balance and exposure and you don't have news-risk as associated with individual stocks. All in all, your question goes to the heart of something I say all of the time - build your strategy based on what you can afford to do with your time and energy and that will be the best strategy for you.

Richard asks: I note that you are using quotetracker...any reason this is favored over say RealTick? Why the use of a different data feed for quotes?

Kirk answers: Familiarity. Real-tick may very be the better platform from what I know about it, but I've used QT for a long time now so I'm very comfortable with it. I neither have the time or motivation to go out and learn new software unless I have to. IQFeed is a backup quote provider only. IB and Scottade do go down at times and I like having another quote feed that I can rely on. IQFeed has never failed. It also helps supply real-time quotes to other software programs I use.

Chris asks: Like you, I've sit on the sidelines for longer than I should have this year. The people who seem to be making the most are those who have a reckless disregard of the risks and that has the situation for some time now as you know. Since you've been around the block a few more years than I have, I have to ask - is this typical of bull markets?

Kirk answers: No matter how much we try, none of us are impartial observers of the market, including me. I remember the late 90s where everything seemed to have no risk, even though the warning signs and the naysayers were everywhere. Back then I was a little less wiser, but far more aggressive and I made quite a bit of money during that time. I also had less to lose and my trading reflected that. I suspect the same is happening now for a lot of people. Recently, I've been receiving email from new traders who can't imagine why I'm not up at least 100% so far this year. That speaks volumes.

Unfortunately, we also know the flip side of that coin. One-way, we go up every day markets, are dangerous animals and ultimately end up with people getting hurt who don't trade with constant appreciation of the risks they are taking. We all lose that from time to time, especially during the good times, but wise traders know that with both the good and the bad, nothing ever lasts. I wish that were not the case and that bull markets never die. If you've achieved great gains recently and you're new to trading, congratulations to you. Now, go put some of that cash away for a rainy day!

Kevin asks: Do you know much about investing clubs? I was thinking about getting some friends and family to commit to
contributing monthly to an ETF collection, Ala Richard Jenkins "investing w/just $100 for a year or two. What are your thoughts?

Kirk answers: I think they can be great learning tools, especially for beginners, if you have some experienced members in the group who are willing to share their time and help. Like everything else, it all depends on the composition of the group.

Albert asks: Some of your stock screens are in alpha order while others are not. Those not in alpha order, are they in relative strength or other momentum order?

Kirk answers: Where you see a non-alphabetical listing, it basically signals that the results are achieved by a formula that monitors all of my favorite stock screens. There are stocks, for example, that may be new and hot to the system, but the stock screen machine is built to ferret out and sort those to a much more manageable research list to work from.

Dave asks: I really enjoy your daily updates and link to other sites. Your zeal for the markets and time spent on research does come through. I have been trading for over 40 years and have a practical question for you: Have you become so engrossed in having a great site (which it is) to the detriment of your own trading? Trading, as you well know, requires absolute attention to trading and I wonder if distractions are getting in your way. I have gone thru similar bouts of "inattention." May not be your case, just an observation.

Kirk answers: First, thank you for saying that. I'm glad you (and others) enjoy the website. Without any measure of doubt, you are correct that the website does take away valuable time and energy that I could allocate elsewhere, especially to trading. In the beginning, the Kirk Report was built upon sharing things in a way that didn't take a whole lot of time, but it has since become far more than that. To offset that, I've dedicated a tremendous amount of resources and energy recently to making sure my management of the website itself is done more efficiently. We are in the process of upgrading just about every tool I use that manages the website which will ultimately save me valuable time.

With that said, my goals aren't all about the bottom line. If I no longer enjoyed or believed that it was a distinct privilege to share the journey in order to help others, I wouldn't do it. My wife and I have both delayed our financial goals a little so that we can devote more time and energy now, especially while we're still young, to the things that are more important to us.

Frank asks: Your approach is very different than some. As I understand it your thinking is something like: "There are a lot of potential big problems with the market;moreover the risk-reward ratio needs to be right; the advice of don't lose money is important; the prudent-cautious approach is to hold cash when the market is oversold- in the somewhat near future it's very likely the market will move to very oversold-and you'll be in a great position to buy;and in the unlikely event that doesn't happen for some time-you've stayed with your approach (important) and, at the worst, you preserve your capital. Your short term trading is a mirror of your cautiousness-you keep doing it since you have a 75% or so win rate." Is this fairly correct?

Kirk answers: Yes, that's correct. I only put long-term money to work long-term in extreme oversold conditions. Even the recent meltdown didn't afford that opportunity so I remain quite patient. Overall, a good quick paragraph summation.

Ron asks: I started a "fake portfolio" eight months ago. No trading was done; it is just a buy and hold portfolio. While the total gain for eight months is now up to +53%, there were big declines (and comebacks) of some of the stocks along the way. For example, NGA, which is up 153% now, had a -50% drop at one point. In contrast my "real" trading portfolio is only up +4% so far this year, and I stayed on the sidelines for most of the recent big gains. I make it a habit to keep my losses small (less than -8%). If the fake portfolio was in real money, I would have sold off all of the stocks long ago (to limit my losses) and I would have missed out on the huge gains. I would never let a stock drop 50% or 61% or even 23% in real life. Do you have any suggestions or ideas about how to be able to limit potential losses and still be able to keep the potential long term gains?

Kirk answers: There's certainly a big difference between what you call "fake portfolios" and a portfolio backed with real money on the line. When real money is on the line, so is emotion and emotion always makes the game more challenging. Anyone who has paper traded for awhile and then made the transition into trading with real money has a great understanding of the difference, unless, of course, you don't care about losing money and/or your financial situation is such that you're financially secure without the money you put in the market.

Nevertheless, risk management (keeping your losses small when you're wrong) will serve you well if you are a trader, but not as a true long-term investor. Long-term investors (i.e. those with multi-year time horizons say 5 years or more) have the power of time on their side and if they've done their homework, short-term price fluctuations shouldn't be the only factor worthy of consideration. When I wear my long-term investment hat on, I use stops differently than I do as a trade stocks. For one thing, I have far wider stops and frankly they're based on just more than a set percentage level (like -8%) after I buy it. In essence, here's a simple three-step question process to use: 1) Are the reasons I first purchased the stock still valid?, 2) Knowing what I know now would I still buy the stock today if I didn't already own it?, and 3) Is this stock the best place for my long-term investment dollar? If I answer all three of these questions in the affirmative, I will hold the stock as long as I'm confident that I'm not being biased (which the second question will help if I'm answering it honestly). As you know, pride is an awful emotion in investing, as it is with trading, and over the years I've become pretty good at knowing when my emotions are clouding my judgment. However, if you're not so good at that, then deferring to set percentage stops is a good default position even as a long-term investor. This again shows the importance of customizing your strategy to your skills and weaknesses. We all must know our limitations and invest/trade around them. As for "limiting" potential losses and "still be able to keep potential long-term gains," there are option strategies you can use to help mitigate this problem but they can also introduce new problems for you as well so you'll have to research them carefully to understand the pros and cons to their use.

Steve asks: Like you I've been a poor market-timer of late. I thought that February's drop was a harbinger of bad things to come which certainly has come. How do you not let it frustrate you?

Kirk answers: As the saying goes, lost opportunity is easier made up than losses. If looking back you would have made the same decision back then under those same set of circumstances, you can't be too hard on yourself no matter what the end result has been. Sometimes smart decisions don't pay off in the market. Part of having a mature approach to trading and investing is having the understanding that you're going to make a a lot of good decisions that won't pay off the way you want. That's why they call it investing and trading, instead of winning. It's part of the game, so don't let it frustrate you. Otherwise, if you're prone to frustration, being a lazy portfolio investor who doesn't do any kind of market-timing is a better approach. In my view, life is too short to spend it in frustration. Learn to control it or it will be your master.

Eric asks: The 200-day moving average has been on a buy signal since mid-August 2006, when the S&P 500 stood around
1,285 and even the bulls were not envisioning as bullish a nine months as we've actually experienced. Does the 200 day moving average or moving averages work?

Kirk answers: Yes, I think as a simple timing system based on moving averages can be effective. The problem is that most people who use them (including yours truly) try to outsmart these indicators. Please see this previous post about moving averages I made last September.

Yvonne asks: I will be buying a new trading computer soon. I know you have given us your setups and I intend to follow what you have done but to a lesser degree. Are you completely happy with everything you have or would you change something now that you have been using it for awhile.

Kirk answers: I'm pretty happy with everything. The biggest negatives are the heat caused from my 7 screens especially in the summer (I've installed a portable air conditioner in the room to help this year) and my reliance on the Windows platform. Quite frankly, Vista scares the hell out of me. I know very tech savvy people who hate it and have been forced to the Apple platform. I'm very resistant to change. I just want things to work and be reliable, fast, safe and secure. Apparently that is too much to ask from the Microsoft wizards.

Bruce asks: What are you doing when you set price alerts. Is this based on price, or price and volume? Are they set around chart patterns, i.e., double bottom, cup & handle, etc.? What do you mean "conservatively set"?

Kirk answers: I look at a lot of stocks every day and while I do a fairly good job of staying on top of my favorites, price alerts serve as a back-up mechanism to make sure I'm paying attention. In general, there are three types of alerts I set: 1) Attractive Price Alert: this is a price where I think the stock offers a favorable risk versus reward setup, 2) Technical Alert: a price is hit that confirms a patterns I've identified (like a breakout from consolidation or a bounce from a moving average), 3) Wake Me Up Alert: I set alerts on stocks I delete from my primary watchlist. For example, if I think a stock is good but I can't make a good argument that it can be bought in the near-term, I'll set a price alert both above and below it to serve as notification that it is time for me to take another look at it (both Telechart & Quotetracker make this easy to do). A classic example is a stock in a terrible downtrend that I think could be attractive as a buy, so I set a alert at a level which would tell me that the downtrend has been broken. Another example is when I set alerts for stocks moving in consolidation trading ranges so I know when they've finally broken above or below those ranges. When I set conservative alerts, it means that I'm setting those alerts that could trigger a buy much lower than previously. When I'm not being as selective, those alerts can be triggered more frequently because they're closer to the average true range of the stock. I modify those alerts according to my view of the risks versus reward big picture we are trading into. For example, in very oversold conditions (yes those do happen occasionally) my price alerts will be set so that I receive an average of 20 to 30 alert trigger per day versus severely overbought conditions where it would be highly unusual for me to see any price alerts whatsoever.

Cyrus asks: In your trading notes you say there is plenty of room to the downside but can you explain how you would handle this?

Kirk answers: I think you can see how I am handling this by knowing that I'm rarely holding overnight positions and that I'm in a very heavy cash position both within my trading and also within my retirement accounts. When the top occurs, I be able to share other strategies at that time that I think will be helpful but we're not there yet.

Paul asks: Given your reliance on market technicals, how do you explain being sidelined for virtually the entire recent
rally.

Kirk answers: For good or for ill, I'm not a strict technician. Sometimes I wish I were as it would make things a lot easier at times. Those of us who've been trying to outsmart the tape versus just going with the flow have been significantly underperforming. It happens. I've seen markets like this in the past and have been on the wrong side of the market. It isn't fun. But it also comes with the territory. All of us have to expect that there will be times that our strategies will not work as well as we want or expect them to. The key is to recognize that and to move into capital preservation mode until one of two things happen: 1) your patience runs out and you're forced to adopt a different strategy, 2) you stay passive and focused on capital preservation (i.e. sitting in cash) until the market is more receptive to your approach. Recently, I've been deferring to the latter while trying to cherry pick trades just to stay in the game until I think it is time to be more aggressive. That's the discipline.

David asks: What is the track record of pre-market futures in predicting the market close? Do positive pre-markets tend to correctly predict an up day, and vice versa? On individual stocks vs. the indexes?

Kirk answers: Several years ago I had quite a bit of data on this, but I don't keep close track right now (though I probably should) because I do not use index-based strategies (like trading the DIA, SPY, or QQQQ for daily profits). The answer to your question back then is that it depended on how the market traded past the first hour of trading. For example, if the premarket futures were positive and the market traded higher at 10:30AM than at the open, then they did a fairly good job of predicting a trend day with a positive close. But, three factors additional factors (like the percentage gains, overall trading volume, and whether there was a gap involved at the open) often provided some tells to how the market would close as well. Gaps really muddy the tracking data because there was a period recently where the bulk of the market's gains were created through the gaps. Like every thing else, rarely will one simple thing (just premarket futures both positive or negative) tell you a sure-fire way to make money. You have to track and study the data religiously to have a firm control over it. For my purpose, I use premarket futures as a temperature gauge only instead of a crystal ball. They help tell me the market's mood, but the price following the open must confirm it. In addition, how the market responds to the economic data due out after the opening bell is far more important to determine how we close than the premarket futures which is why in my premarket post I usually cited any economic reports that I think may shift sentiment intraday. From a trading point of view, I could care less about the economic reports, but I care more about how investors react to them. I've long ago given up trying to be an economist or someone who thinks the market is tied to the hip to the economy over short periods of time. Perception is what matters the most, especially over the short-term.

George asks: When I use the screen machine's ticker search, I noticed that screens where the stock has been disqualified also show up. Should this happen?

Kirk answers: Thank you for bringing that to my attention. Since receiving this email, we have modified the ticker search so that disqualified results are eliminated from the ticker search results. In other words, to find a stock in a particular favorite screen, it has to be currently present in the total screen results. If the stock is disqualified, the ticker search will not bring up that screen anymore.

Todd asks: A bit ago you mentioned something about the possibility of adding Versant (VSNT ) to your retirement portfolio. Two questions... 1) Why Versant and 2) what other stocks would you consider?

Kirk answers: While not in the screen machine right now, VSNT was showing up there pretty consistently for many months ahead of the recent run and my research confirmed why it was showing up there. I currently own this stock for my retirement portfolio. As for other stocks, see my "safety first & then potential" screen along with "good minds think alike." Both are very good and I watch both very closely for retirement stock ideas.

Jeffrey asks: I am trying to figure out if there is an optimal mix of the stocks from your trading screens to create a model portfolio. Looking at the performance stats as of last Friday, I found that the Most Popular screen was up +5.68% and the Consistent Performers screen was up +5.49%. However, to cut the list of stocks from 40-50 into something more manageable, I looked at the returns of only those stocks that were listed in both the Most Popular and the Consistent Performers. There were seven (AAPL, RS, BWLD, CLB, MTW, GRP, MFW). That goosed the returns to +5.73%. But the real interesting part was when I filtered only those stocks that were in the Most Popular, Consistent Performers, and Hot New screens. Only AAPL, RS, BWLD, and CLB survived. The returns for this group jumped to +8.80%. Now two weeks does not a trend make, but I thought you might find this interesting. By the way, how often are stocks added/deleted to the screens I mentioned?

Kirk answers: I'm not really surprised by those results and I think you'll discover other interesting findings with more time and screens (as I have). I am planning quite a few posts to illustrate some of these findings, as you might imagine, but I'm waiting until two things occur: 1) the full build-out phase for the screen machine is complete (i.e. all of my top favorite screens are added) and 2) market conditions settle down/more time has passed so we have more data to work with. In the bull market we've seen, everyone and every screen looks smart. But the better screens will do well even when the market isn't going up every day.

Randy asks: There are so many stocks in your "back up the truck" folder. What do you think of have a new folder called, "eye ball popping stocks" where you put just one or two stocks to look at? Stocks that are prime for doing something very soon?

Kirk answers: As time permits, I do try to pick out stocks that I think deserve your attention. Two examples this past week alone were Varian Semiconductor (VSEA) and Aeropostale (ARO). When I get the videos up and running, we'll also be taking a closer look at many frequent visitors to my screens which I think you and others will enjoy as part of the offerings I'm planning for later this year.

Roger asks: Can you say what part of your decision making is based on analysis and what part gut feeling? George Soros has said analysis and experience informed his decisions but what he did came mostly from the gut.

Kirk answers: Soros and others who say they make decisions based on the gut are not making gambling hunches. Rather, they've done their research so that their gut, combined with their experience and intelligence, will lead them to make a specific decision. If I don't "feel" that a trade is going to work out, I don't make it. The times I've gotten into trouble the most in the past is when I haven't listened or fully trusted that inner voice.

Jon asks: I want to know which of your tools you use to alert you to a volume increase for a stock that you are interested in. For example your recent trade with VDSI happened right after the open, as many do. With so many stocks you are watching, what do you use to zero in so quickly?

Kirk answers: Most, if not every trade I've made recently, has been among the stocks I've specifically targeted ahead of the opening bell. Every morning my goal is to find a handful of stocks that I think could potentially provide a nice situation. This is easier said than done at times, which explains why I haven't been trading all that much. As you can expect, I like to see premarket interest in the stock and a catalyst (like an earnings report) which I've determined that will propel the stock higher within a strong technical setup (like trending up to the top of a trend channel, for example). Esignal's pre-market scan is helpful, along with quotetracker combined with my trade-ideas scanner. All of these I use to get ready for the trading day and to monitor my watchlist.

Wade asks: I think everyone has to determine what "style" of trading they are best suited for based on experience and time committed to the market (computer screen). I work full time and know I have no business trying to trade short term. That being said what is your advice for trend or swing trading which seems to suit me best?

Kirk answers: First, you already know that I completely agree with your statement. Everyone has to develop a strategy that takes the time they can spend into full account. What I typically tell those who desire to trade but you can't do it full time is to develop "end-of-day" trading systems use weekly charts (versus daily) and concentrate holdings in less volatile instruments (like ETFs for example) instead of stocks.

Lynn asks: What stocks would you recommend (long term) in regard to the current oil situation? (Russia, Iran, Venezuela, Africa, OPEC, refinery problems, China stockpiling, peak-oil, etc.)

Kirk answers: I can't provide recommendations, but my favorite screens have identified the following stocks that you'll want to consider in this sector: WNR, VLO, TSO, ALJ, PCZ, FTO, HOC, TPP, SE, CLB, LUFK, TESO, DWSN, DRQ, SLB, GRP, NOV, OII, GMRK, OMNI, PGS, CAM, BJS, BTJ, HP, EVEP, UNT, RIG, ARD, and PTEN. The stocks I would start looking at first are GMRK, NOV, and RIG. The danger short-term is that supply disruptions that speculators are counting on will not occur (i.e. a bad hurricane season for example) and the recent performance of these stocks indicate some of these price moves have been in anticipation of that. Long-term investors will want to be patient for the inevitable dips that we've seen and will continue to see from the sector.

Terry asks: What do you think about stock trading systems that teach traders to take small weekly gains such as 1% per week (and then repeat each week)? Obviously, a lot of small gains compounded over a year can add up, but it seems to me that there isn't much room for error.

Kirk answers: I think those kind of trading systems aren't for me. That requires such a high level of concentration, dedication, and focus that it would make trading a real grind and not a pleasurable experience. Those who implement these systems, even those which are very profitable, tend to have a huge churn rate for that reason as the stress levels are quite high. That said, I think everyone should probably spend some time learning about these kinds of systems if for no other reason than to understand how these short-term traders affect the market and the methods they use to find inefficiencies in price throughout the day. Some of you also may enjoy the process, but many years ago I spent 6 months developing a short-term system like that and while it was profitable, I didn't enjoy the experience. To have long-term success in anything, I think you have to really enjoy what you're doing. Being successful at something and enjoying it are entirely two different things.

Randy asks: Sorry for a second question, Do you think it would be wise to stay in National Oilwell Varco (NOV) for awhile. It keeps going up. I keep pulling out because of fear then I get back in it a day late.

Kirk answers: NOV is currently found in two of my favorite screens which is always good sign. Based on my research, I think the stock is still very cheap (about 50% undervalued) on a longer than 1-year time frame if current profit trends continue and oil prices remain firm.

Ken asks: I am finding your screens very useful, but I have an ongoing problem with risk aversion these days and the only way that I feel comfortable with a basket of stocks in place is to hedge them in some way. I don't like to hedge with the indexes because I always overtrade them and usually with mediocre timing. I haven't had much luck assembling a group of shorts as a hedge but I was wondering if you had done any work on screens for shorts. Thank you for any thoughts you have on this.

Kirk answers: I'm glad you're finding the screens useful. They'll hopefully become even more so as the market offers better risk/reward situations. I do have some short-sell screens, but I find it very difficult to share them for a host of reasons. I have, however, talked about my favorite short strategy in this previous post.

Thomas asks: I noticed that your timing indicator doesn't change very often. Is this by design, or do you intend to incorporate it more as the upgrades to the members' only website are complete?

Kirk answers: The indicator is designed to help members understand where I stand at any given moment. I hope that it will prove useful as conditions change, but as you know, they haven't been changing very much of late. My graphics designer also has created a new format for me to use so I hope to have that up and running soon. Look for a future post about this soon.

Juliet asks: How about Brocade (BRCD) up to its earnings report May 31? Will it nudge the average target price of $11 around then?

Kirk answers: It has a good chance in my view (about 60/40 in favor) of a positive move. I need more than that for a trade, but that's my opinion.

Tim asks: How often are the screens updated in the stock screen machine?

Kirk answers: The screens are run at different times (some are updated only monthly, while others bi-monthly, and others are weekly. The date next to the screen shows you when the last update was provided. The filters (consistent performers, most
popular, etc.) are updated whenever a new screen or update is added to the system.

Chrys asks: I am curious if you utilize any breakout tools that measure the thrust of the price breakout. I'm not talking about a program that will announce "up 1 point in the last 2 minutes" but something more user adjustable such as being able to specify a minimum percent change in the next so and so time frame. I'm not exactly sure how you set your alarms but they seem to be mostly set to price breakouts and not momentum oriented am I correct?

Kirk answers: My real-time Trade-Ideas scanner monitors my watchlist for specific situations, including momentum factors like volume breakouts, new highs & lows, 3% up/down for the day, deviation breakouts/breakdowns, average true range, crossing of opening highs/lows, moving average crossovers, consolidation breakdowns, and some candlestick patterns. But, since I'm not a day-trader, these factors are set quite high and are used to help me keep track of any significant movement beyond the typical percentages. When I get the videos up and running at the website, I would like to enable members to see how this tool works and how I use it.

Hongqin asks: After nearly a half year of being a member to your website, I have learned a lot of things about the market from you. I set up a mini long term portfolio and it works very well. The market is going up, the result is good. However I still have some problems. I still feel sometimes the market jumps up and down without reason. How you can understand it?

Kirk answers: Thank you for saying that. The lazy portfolio approaches I've previously shared can be quite helpful. As for understanding the ups and down and the reasons behind those moves, it is an ongoing, never-ending process. Experience helps at times to understand the important things (like investor perception and the need to chase performance), but if you're looking to obtain a level where the market never confuses you, I think you'll ultimately be frustrated. The market confuses all investors at times, even those who claim otherwise. Egos prevent many professionals from confessing their confusion, but it is part of the game. If we knew and understood everything at all times, the market certainly wouldn't be as interesting. That's part of the fun.

Woody asks: How important a factor is insider trading in your decision to buy or sell a stock?

Kirk answers: At least two of my favorite screens utilize insider activity as a criteria, so I do think it is something that can be useful in stock selection. But, I would never buy a stock because of insider buying nor sell a stock because of insider selling. This activity only helps confirm other factors. It shouldn't be the only factor.

Donald asks: If 60% or more of all trades are automated with computerized programs, what if anything can a "day" trader do to recognize disguised "dark pool" trading volume?

Kirk answers: As you might expect, I'm quite concerned with this issue due to the numerous links I've provided in recent months about this topic. The answer is that Wall Street will continue to maintain a substantial advantage against the "little guy" traders and technology advancements only increase the opportunity and motivation to do so. There's a lot of trades going on that none of us see or can take advantage of and it isn't fair or healthy for the market. I expect this to get even worse in the years to come.

Ian asks: Have you any observations to share on using the worden backscanner for testing and refining your scans?

Kirk answers: I've played around with the program some, but truthfully I haven't dedicate the time and resources to making it a really useful tool. As you know, it takes years to really learn many of these software programs well enough to take full advantage of their potential and I'm just at the initial stages. Sorry.

Dick asks: Both Buffett and Bogle are on record with the same prediction of 7% average annual returns for the years immediately ahead. At tonight's close, the Dow is up 8.1% and I can get 5.4% on a 6 or 12 month CD. Why shouldn't i sell my Dow or equivalent broad market index and lock in my +8% return and then invest the proceeds in a short term CD (or long term if i think the Fed will lower rates)? That way i guarantee myself close to an 11% return for 2007, a lot better than Bogle/Buffet's +7% and sharply better than the flat market returns for the Dow in 2004 and 2005. With the market so overbought and super-extended, is it possible that the traditional "buy and hold" approach may not serve the long term investor's best interests?

Kirk answers: I like the way you think. A bird in a hand is better than two in a bush, as my Mom likes to say. You have to think that at some point more investors will be asking themselves the same exact question. The problem is, however, that the real rate of inflation (not the numbers reported by our government which have been cooked up to look better than they are) is tracking much higher than many of us realize. That along with weakness in the dollar makes for a tough investment call. But, at the end of the day, we all have to decide if the risk is worth the reward. You know where I stand on this issue by monitoring how little I've been trading.

Andrew asks: What's your current view on REITs? You're short call back in February was timely and motivated me to take some profits. Do you think the recent weakness will continue?

Kirk answers: Yes, I think this group will remain under pressure in the short-term. We reached a point earlier this year that the gains we've seen there simply couldn't be sustained.

Michael asks: You have shown a few "Would you buy this stock" charts including PEIX. The ones that you have shown you have demonstrated that the Balance of Power (BOP) indicator can be used to indicate that selling into an uptrend is taking place and that a top is near.
Have you found an indicator that assists in showing that a stock that is in a downtrend has accumulation going on and that a bottom is near?

Kirk answers: The BOP indicator (which is proprietary to Worden and included only in the TeleChart software) is useful for bottom situations as well especially if there are other factors (primarily non-technical) in place that would provide for a margin of safety in bottom picking. For example, stocks showing positive BOP buying and which have heavy insider buying, cheap valuations, and low analyst expectations can frequently be a source of good candidates. Unfortunately, I'm seeing a number of bottom picking situations where the positive BOP buying is being generated primarily because of takeover speculation and I have seen a high rate of error in those situations. Even though takeover mania is in full force, I wouldn't buy any stock solely upon the idea that it is a takeover candidate, even if indicators like BOP buying were present. You really need more than that.

Frank asks: Given your knowledge of TA, and the plethora of TA based systems out there (they can't ALL be good!) have you ever considered Forex trading?

Kirk answers: I'd love to learn more about Forex trading but like most things it comes down to priorities and time. I do think that with the surge of interest in that market that a lot of bad advice and systems are being sold to people and that concerns me quite a lot.

Greg asks: How do you draw trend channels? Does your software do it for you? If so, what do you use and what are some other, more accessible tools someone might use? Or is it more of an art where you've just trained yourself to draw them properly?

Kirk answers: Telechart allows you to draw and to save these trend lines. It does not do it automatically for you (i.e. I create the trend channels you see on the charts I provide). However, if you've never drawn trend channels before, one easy way to learn how to utilize them (especially in Telechart and many other software programs is to use a linear regression line indicator as a starting point. You then basically draw the trend channel that matches the regression line and more often than not your trend channel prove useful.

Dan asks: Can you quickly tell me why SPTN was dropped from the Back up the Truck screen?

Kirk answers: The results of that screen, especially since it is run weekly, will have some turnover. It attempts to find the
best situations it can under the circumstances, but just because a stock is dropped does not mean it should be necessary sold. These screens, after all, aren't a substitution for an investment strategy or trading system and shouldn't be used that way. It can only provide you a set of research ideas to focus on.

Brian asks: Based on your trading $ gains and % gains it looks like you frequently use a position size of $10,000. Is this the case, and if so why? What are your thoughts on scaling the initial position size based on the volatility of the stock (as measured by Average True Range or Standard Deviations)? Also, any thoughts on using these same volatility metrics to set the initial stop loss?

Kirk answers: Yes, I generally have been targeting the $10K to $15K position size. More than that makes it difficult for me to have the liquidity necessary to trade some of these stocks. Using ATR or average true ranges can be very helpful both in scaling in as well as in stop loss management. If I traded more, you'd see those being applied but that's not my strategy. But, rest assure, I think there is tremendous value in those approaches and I do monitor the ATR quite even though I don't scale into positions.

Steve asks: I firmly believe that most analysts and talking heads quoted on CNBC, the WSJ, Barrons, IBD, Fortune, Business Week and elsewhere are either promoting a stock they have a position in or they are disseminating disinformation to throw the masses off course. Are there any objective sources you rely on as part of your trading and investment decision making process?

Kirk answers: That's why I use stock screens as the foundation of my approach. They sift through all of the hype, promotion, and noise created by these people. Frankly, it is always a good sign to find a stock frequently among my screens that no one is talking about yet. Members would be smart to identify those stocks well below the radar screens. I really don't like it when stocks I like are being talked about by everyone else. A great case in point was U.S. Global Investors (GROW) a stock a liked a long time ago (I traded it way back in December of 2005 ahead of last year's huge rally). The momentum surge we saw last year put the stock on everyone's radar and its performance ever since has been quite unimpressive. Hopefully in time that will shake the nervous nellies out and we'll see a trade there again in what really is a pretty darn good stock.

Kevin asks: I have been following Rochester Medical (ROCM) for some time. Technically the stock is in poor condition however I am interested in your opinion of the fundamentals on this company looking out 6 months.

Kirk answers: The fundamentals there are still ok, but the sellers remain in absolute control of this stock so be careful in trying to time your entry. The buyers have moved onto stocks like Cryolife (CRY) which look as good technically as ROCM did a couple of months ago. Stocks like ROCM that fall this much usually take time to get back on their feet.

Nona asks: What was your thinking when you bought Chipotole Mexican Grill (CMG) in your retirement account given that, at the time your purchased it, it had no real track record?

Kirk answers: This stock was more than just an investment idea. Long before it became a traded stock, I looked into opening up a franchise (they weren't allowing it at the time). I've been looking for investments beyond the market and the idea came to me after finding a perfect location for a restaurant of this nature. So I looked into being an investor from that perspective and my interest in the company was far beyond technical and fundamental analysis I typically rely on.

El asks: What do you think about Trio-Tech (TRT)?

Kirk answers: I like it. It is pullback back with weakness in the semiconductor space, but this is a stock I'd like to buy on additional weakness.

David asks: Often one will hear or read something like the following: "the futures markets are predicting a 25% chance of a 1/4 point Fed Rate hike by March." What is the underlying calculations being performed to make these predictions?

Kirk answers: For monetary policy, the CBOT offers fed funds futures which gives you an idea where the market thinks interest rates are headed. I was able to find an interesting Q&A the Cleveland Fed created to answer questions about these futures. Hopefully that will help.

Jeffrey asks: Cisco reported (slightly) better than expected earnings and got whacked anyway. How can investors look at the fundamentals of a stock/company that "seems" to be a segment leader, well run, profitable and growing (albeit through M&A) and watch the stock get punished anyway because the .01 PS was not "enough" over the estimates? Is the stock market really horse racing?

Kirk answers: There's no requirement that the market be rational or anywhere close to being smart. The market is run by human beings which are controlled by their emotions and perceptions and prices swing with those factors. The better question to ask is whether the market's reaction to the news was correct? If you think they're wrong, then you've found a situation where there is a potential to make money.

Bing asks: Congratulations on the successful release of Stock Screen Machine, and thanks for the great job done! I think SSM captures a lot of market leaders and big gainers over the last few weeks. However, a couple of leaders that I've been following and that had positive comments from you before were not in SSM. For instance, MA, RIMM and GS. I wonder if you could shed some light on why they're not in, if it's something you don't like about them, or other way around.

Kirk answers: I appreciate the comments and they're widely shared among members who appreciate having access to the same screens I've developed over the years. It may be helpful to know that the screen machine is far from running at full capacity. There are quite a few more screens to be shared that will provide us with better filters to work with and they may very well include the stocks you named.

John asks: Please comment/explain the following: You will only trade a stock if it is on your watchlist. Your watchlists are formed primarily on fundamental rather than technical factors. After a stock is on your watchlist your trades are mainly technical in nature based on price/volume.

Kirk answers: Correct, I only trade stocks that I've been tracking for some time, enough so that I think I've developed a good "feel" for how it trades and why. My watchlists, however, are a bit more complex. Ideally, those on my primary watchlist have a blend of both very good technicals and fundamentals, though there are some rare exceptions to that rule for situations where I think a change for the better is imminent. Price and volume are key, but as you'll see when I do my video series later this year that there's quite a bit more to it.

Dick asks: How do you reconcile these two conventional wisdom viewpoints? First is the fact that bull markets are always followed by bear markets. This bull market is especially vulnerable since it is an aging 4 1/2 year old and the rubber band is stretched further than any time since the late 1920s. We're not talking about a correction but a full-fledged 20% retreat. Second, the big cap stocks have been out of favor for some 7 years. The past few months they have shown signs of reawakening. Usually, when an asset class has been "unloved" for a long time, when it finally returns to favor, it's for more than a brief interval. But since the large caps are the Dow, how can prospects for the Dow (and the market) be both bullish and bearish at the same time?

Kirk answers: You bring up two very important points. However, I personally don't like the view that because the bull market is aging that we're due for a correction. To me, that's very much like saying that because a stock has been going up so it is due to fall without have some reason for it to fall. Time-based arguments don't hold a lot of credibility in my view. While I don't like the market now, it isn't because I think the bull is old and tired. I don't like the market because I think there are hidden risks not fully appreciated by investors and that we're increasingly susceptible to a crash. It may not happen this year, next year, or even this decade, but the environment is ripe. That hasn't always been the case, but it is right now.

As for the big cap from small cap rotation, I think my post this week where I claimed that the U.S. market is a like a bad stock in a strong sector is the primary driver of the big cap rotation we're seeing. Big companies tend to have international growth and that's where the growth is. It is natural to see that expressed in higher stock prices and is one of the most powerful arguments the bulls currently have at their disposal. The problem is that I think those growth expectations are too high and that a collapse in overseas markets would harm us more than the market believes is possible. There's a "can't lose" perception that overseas markets are bulletproof and the rally from the lows this year only adds fuel to that perception. In reality, the market continues to lag the performance of other markets around the globe and will continue to do so. The problem happens is when those trends reverse, we're in for some very tough times give our fiscal irresponsibility at both the national and personal level.

Randy asks: I see a lot of puts on Dow Diamonds (DIA), thousands upon thousands. Is this because they think the market will go down and drag DIA with it? What's your opinion?

Kirk answers: There are a lot of people trying to time the top of this market and each time they cover, of course, we move higher. This is also one of the main reasons why I'm not joining that crowd in shorting because I think they're seriously outgunned in the short-term. While my perspective on the market still remains neutral with a bearish lean, I'm sitting in cash until the technicals show that this rally is done. I have no interest in trying to play the hero or impressing others by trying to get ahead of the turn that will eventually come.

Mark asks: I know you've talked about investing in water in the past. Would be curious to see what you thought of Claymore's new water ETF (ticker symbol CGW) mirroring S&P Global Water?

Kirk answers: I like it. I've been a long-term investor on the PowerShares Water Resource Portfolio (PHO) for lack of better options and the CGW looks like it could potentially be a better offering due to it composition. I'm tracking both now and after some time has passed I should have more comments to share. From my understanding, there area few other water plays in the works primarily since so many investors recognize the potential these firms have since water will be our most precious and unfortunately most scarce resource over the next century.

Norm asks: Would it be unreasonable to think that the market professionals try to make a lot of money the first four months of the year, then liquidate, take the summer off, and come back in the fall to work toward their big end of year bonuses? Hence the "Sell in May and go away" maxim? Statistically, it really works. Last year, buying the big caps near their summer lows would have led to an amazing return had one held until May of this year.

Kirk answers: No, I don't think that is unreasonable. In fact, I think this is why we tend to see a summer lull. As many of you already know, I always take my foot off the pedal between Mid-May to Mid-September. It is one of the privileges of trading on my own and one of the best perks of the job. Although I sacrifice not making as much money as others, being able to take time off to spend with family, friends, and enjoying golf are very important to me. Also, also someone who is married to a high school teacher, it is easy for us to adopt a summer-like schedule so we tend to take vacations, spend more time together, etc. during the summer. To say the least, we are extremely grateful to be able to do that in a world where there are so many others far less fortunate.

If you're not a member and enjoyed this Q&A, I recommend you consider becoming a member. The membership dues are $50 per year and includes Q&As like this along with tools like my stock screen machine.