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We want you to get the maximum benefit from our market sections. Some of you are new to, or haven’t had a lot of experience with, investing &/or trading in stocks, bonds or currencies. The information herein should help you decipher the “market talk” that is used by brokers, professional investors, & HSL. It’s not as difficult as it may first appear to be, especially with some step-by-step guidance.
We purposely make our recommendations as detailed & specific as possible. We provide unhedged advice. This allows you, if you so desire, to simply give your broker the exact wording we use so that s/he is able to execute your trades without further instructions from you. If s/he can’t, you have the wrong broker. However, it is far more desirable if you also understand the instructions/advices given.
Specific HSL recommendations are presented in seven main sections: 1) Actions to take—in a Nutshell; 2) Currencies; 3) (Back to the) Futures; 4) Gold; 5) HSL Investment Box; 6) US Market; & 7) World Markets Analysis.
1) Actions to take—in a Nutshell is custom-made for those who want a quick global overview & 6 specific recommendations—in 1 minute or less! Also serves as a handy review.
2) Currencies include both fundamental & technical factors & analysis covering the world’s major currencies. Specific currency & cross-rate guidelines are included.
3) (Back to the) Futures covers specific futures trade recommendations in the S&P 500, Canadian-$, euro, £, Swiss Franc, Yen, US$ Index, T-Bonds, Crude Oil, Gold, Silver & Corn. Non-futures trading subscribers also find it most useful as a guideline for fine-tuning cash trades/investments.
4) Gold includes fundamental & technical analysis about the precious metals. Specific stock recommendations are presented.
5) The HSL Investment Box provides the recommended percentages for asset allocation. The categories are: Bonds, Cash, Currencies, Futures, Precious Metals, Stocks & Rare Coins. In addition to individual country & region weightings, a range of percentages for each category is included. By using percentages, the Box can be used by every investor, regardless of portfolio size. This is true for all of the advice & recommendations given in HSL. Most of the Investment Box is self-explanatory. You simply allocate your assets to the various groups in the recommended percentages.
However, have you ever considered that whenever you make an investment decision concerning a stock or bond, that you are also making a currency decision? Afterall, the security you choose has to be denominated in something! Even gold stocks! You can fine-tune your currency percentages each time you buy or sell a stock or bond. If you know you are underweighted in the US$, select a stock or bond denominated in the US$. Overexposed in US$? Don’t rollover the next US$ time deposit that matures, buy a German bond! This is as much an art as a science. Have fun with it! Don’t be put off by any lower interest rates in the stronger currencies. Preserving purchasing power is usually the paramount consideration. Just ask anyone holding only the US$ from 1985 to 1995!
6) US Market covers commentary & analysis on both fundamental & technical factors influencing the US stock market. The HSL US Model Portfolio is included with specific buy/sell/stop price levels for all existing positions, mutual fund alternatives & new recommendations.
7) World Markets Analysis covers the world’s major stock markets. In addition to overall stock index analysis, the HSL World (ex-US) Model Portfolio includes specific buy/sell/stop price levels for all existing positions, mutual fund alternatives & new recommendations.
Note: All existing positions are HOLDS unless specific instructions to “buy more” or “add” or “sell ½,” etc., are given in the stop/comments columns.
Please realize that it takes time to build a balanced, diversified portfolio at desirable prices while exposing your original capital to only minimal risk. Over time you will build a portfolio of “performers” & it will increasingly look like our model portfolios.
Now let’s review some of the “basics” before going through some specific examples of how to get the most out of HSL recommendations.
There are two classes of orders: day & open. The day order is good for that trading day only. It automatically expires at the end of each trading session. The open order remains “active” until your order is executed or you cancel the order. Another name for the open order is the GTC (Good-Til-Cancelled) order.
A price order instructs your broker to buy or sell at the specified price (or better). Examples: (1) “Buy 300 shares of ASA at 43”; (2) “Sell 400 shares of Heineken at 300.” With a price order, you don’t know if your order will be executed (“filled”). However, if it is executed, it will be at your specified price or at a better price. E.g., you instruct your broker: “Buy 200 shares of Wal-mart at 46.” If Wal-mart is trading at 45 when your order reaches the NYSE (New York Stock Exchange) trading floor, your order will be “filled” at 45.
A stop order is an order that becomes a market order once the specified price is reached. As with the price order, there is no guarantee that your order will be filled because your stop price may never be reached. Also, there is no guarantee that you will be filled at the specified stop price because the stop order becomes a market order just before being executed. Example: “Buy TNT at 2.90-stop.” Suppose TNT is currently trading at 2.75 (below our stop price of 2.90). We believe that if TNT can reach 2.90, it will go higher. We could monitor the price of TNT ourselves & should it reach 2.90, call our broker & instruct him/her to buy TNT “at the market.” With a stop order (in this case a “buy-stop” order, since we are buying, not selling), we can accomplish the same thing with no monitoring of the market. [Note: not all exchanges accept stop orders]. “Buy TNT at 2.90-stop” tells your broker that you want to buy TNT, if & only if, TNT reaches 2.90. Should TNT reach 2.90, the “stop” is “activated.” Your stop order then becomes a market order & you will be filled at the best available price.
The most common type of stop order is the “stop-loss” order. It’s also called a “protective stop.” A stop-loss order to sell (“sell-stop”) is placed below the current market price. E.g., you purchase H.J. Heinz at 18.50. You decide that if the price declines to 16, you want to sell it. You instruct your broker, “Sell Heinz at 16-stop.” Should the price of Heinz decline to 16, your stop-loss order will be activated & your Heinz stock will be sold immediately (“at the market”).
Many investors/traders get confused (and, unfortunately remain that way) about what type of order can or should be used in relation to the current price level of a security. Following is a graphic representation of price & stop orders in relation to buying & selling & the current price level. It would be wise to make a copy & refer to it when placing orders:
A type of stop order is the Stop-Close-Only (SCO) order. Example: “Buy Johnson & Johnson at 22.875-SCO.” An SCO order instructs your broker to buy or sell, if & only if, at the close of the trading session, the price is at or beyond your specified stop price. The advantage of the SCO order is that if a brief price move during the day exceeds your stop price (very possibly due to a news announcement or report) & thereafter retreats, your stop order won’t be filled. The disadvantage is that you will, in most instances, pay more than your specified stop price if your order is executed. Currently, only some futures exchanges will accept this type of order. Your broker may accept an SCO order from you on a “not-held” basis. That means a “best effort” will be made, but no guarantees are given nor implied. If your broker will not accept an SCO order, even on a “not-held” basis, then you have two choices: 1) Monitor the price near the close of the trading session; 2) Enter the market at the beginning of the next trading session. Most investors will find the latter option quite satisfactory.
Market & stop orders can be “limited” in relation to price. When a price limit is placed on an order to buy, for example, you know you won’t pay more than the limit price. Example: Buy 800 shares of General Motors at 50-stop, 51-limit. If GM reaches 50, your stop order becomes a market order & due to the 51 limit, you know you will pay no more than US$51/share.
We are now ready to examine in detail an actual recommendation made in the US Market section in HSL 556: “Buy Johnson & Johnson (JNJ) at 22.875-SCO; stop: 19.875-SCO.” The recommendation was made on July 8, 1994 (see circled area on chart for the price at the time.)
The recommendation is advising you to buy JNJ, if & only if, the stock closes at or above 22.875. If we think JNJ is going higher, why not buy now at 21.375, an even “better” price? Because we don’t know if JNJ will be able to exceed 22.875, should it rally to that price level. Note that in May, 1993 (A), November 1993 (B) & in January 1994 (C), JNJ was unable to rally above 22.875.
The “bears”, those who think the price will be going down, have been successful in stopping any rally at the 22.875 level, while the “bulls”, those who think the price will be going up, have stopped any decline at the 18 level (D) & (E). These are the key price levels to watch. If 22.875 is exceeded, it will be clear to the bears, or at least it should be, that they have “lost the war” and that it would be best to join the bullish victors. But until 22.875 is exceeded, the bears have every reason to expect that price will not be able to advance beyond that price level. Therefore, rather than trying to gain a few extra points by buying at 21.375 (& risk a decline to the 18 level or lower), we construct our trade so that we are in the winning camp as soon as possible after the war has been decided. This greatly increases our chance for a successful trade.
We also don’t want to have a rally over the pivotal 22.875 level intraday, have our order execu-ted, & then have JNJ close below 22.875. We would then be “in the market” due to a “false” breakout. Thus we use an inexpensive “insurance” policy, the SCO order. If JNJ can close above the critical 22.875 level, the probability of a “false” breakout is greatly diminished. In the actual trade, JNJ was purchased at 23.1875 at the close on July 21, 1994.
Now that we have maximized the probability for a successful trade, we must insure against the possibility of a price reversal against us. Our “safety net” is the stop-loss order. Again, our recommendation was: “Buy Johnson & Johnson (JNJ) at 22.875-SCO; stop: 19.875-SCO.” The “stop: 19.875-SCO” is the stop-loss part of the recommendation. It means that if JNJ closes at or below 19.875, we want to sell our JNJ shares.
There are two ways in which to handle the stop-loss order. If your broker accepts “contingency” orders, you can give your broker the stop-loss order at the time that you give him/her your original buy order, with the instructions that the stop-loss order is to be placed “contingent” upon the execution of the buy order. If your broker doesn’t accept contingency orders, or you prefer to place the stop-loss order after knowing you have made the purchase, then simply call your broker with the following instructions: “Sell Johnson & Johnson at 19.875-SCO, GTC.” It’s best to place your “protective” stop-loss orders as GTC (open) orders. Otherwise you will have to place the protective stop order for every trading session.
At times, to avoid being “stopped out” prematurely, we use a “2-day” SCO stop-loss order. That means we don’t want to liquidate our position unless the price closes for two consecutive days below our stop price (assuming we are “long” [have purchased the stock], as in the JNJ example). Most brokers will not take this type of order, as it is not a standard order. Therefore you must monitor the price of your stock. Should it close below the stop price, call in your stop order for the following day. If at the end of the next trading session the closing stock price is above the stop price, cancel your stop order. The only time you will have to monitor the stock price closely in regards to your stop-loss price is when the current price is near your stop price.
Let’s look at an example from the HSL World (ex-US) Model Portfolio, London section (HSL 561), we find the following recommendation: “Buy Burton Group at 90-stop; stop: 66.” The “90-stop” is a buy-stop order by definition because you are buying and using a stop order to do so. This tells you that the current price of Burton Group is below 90 because buy-stop orders must be placed above the current price level (see page 2). Thus the recommendation advises buying Burton Group, if & only if, the price closes at or above 90. Then you need to put your “safety net” in place with a stop-loss order. The recommended stop-loss is 66. If, once you purchase Burton Group, the price closes at or below 66, you will liquidate your position. Note that ALL stops in the HSL World (ex-US) Model Portfolio are 1-day Stop-Close-Only (SCO), unless otherwise noted.
Once a stock begins to move in our favour, we no longer want to have the same amount of capital at risk as we did when we first entered the trade. Therefore, we review the stop-loss price for each stock in the HSL World (ex-US) Model Portfolio & the HSL US Model Portfolio in every issue of HSL.
If a stock continues to advance, it is possible that the protective sell-stop price will be the same (“breakeven”) or even higher than the original purchase price. Example: From the France section: “You are long Bic at 590; raise stop to: 610.” Once a stop-loss order is above the purchase price, it is often referred to as a “profit-protecting” stop. It’s still the same old stop-loss order, but it “protects” part of the paper gain you have accumulated in the stock. Barring very unusual circumstances, if Bic declines from it’s current price to the stop-loss price and your position is liquidated, you will still realize approximately 20 points of gain from the investment.
We will, at times, recommend selling some of your position (often ½) at a specified price. Example: From the South Africa section: “You are long St. Helena Gold at 32.50; sell ½ at 47.50; stop: 27.50.” The “sell ½ at 47.50” advises you to liquidate part of your position (“take profits”) at 47.50. We often use a price level just below an area of possible “resistance” to any further advance at which to take partial profits or after a huge, fast runup in price.
This allows us to turn a paper gain into a real gain while still remaining in the market via the rest of our stock. We also recommend moving your stop-loss order on the remainder of your stock to at least breakeven once partial profits have been taken.
If, AT ANY TIME, you are not sure what a rec-ommendation is advising you to do—ASK US! We are ALWAYS happy to clarify. Advice/updates are extra. Return fax or e-mail numbers are greatly appreciated & will allow us to respond more quickly. May your investing & trading be profitable!