In a comment to my last post, John W points out that DNA may not be a great buy-and-hold candidate:
Let’s say you get about 19 points in the next 5 years that takes it from today at 81 to 100. Thats about 20% which parses out to about 4% a year rough averaging - currently you can get 5.25% out of 6 month CDs
I’m not exactly sure where the 19 points in 5 years comes from (Genentech’s up about 300% in the last 5 years), but I agree with John’s conclusion. I think “buy-and-hope” is mostly a successful marketing phrase repeated at every opportunity by people who want you to give them your money.
I thought I was relatively clear that I was not recommending for anyone to run out and buy Genentech at the current level of 81, or any other stock at any level, based on anticipated increases in revenue or another fundamental measure. But I’m very grateful for observations such as John’s, because it helps to remind me of something I’ve said in past posts, which is that the market is an elephant and we are blind men, in that we can all look at the same picture and see it in completely different ways. I see a potential swing trade setup on a breakout, others see what they judge to be a low-reward candidate for a long-term position. That’s wonderful, because it’s what “makes a market,” and explains why some people are buying while others are selling.
I can honestly say that the concept of “5 years” when it comes to the stock market never crosses my mind. I can only think of two instances where I’d be in a stock for five years:
- I get into a swing trade which proceeds to go in the direction of my entry for five years straight without ever hitting my trailing stop, for a multi-thousand percent gain. I don’t think that’s possible, but here’s to hoping!
- I die with an open position, and my daughters don’t realize it for 5 years.
This really got me to thinking- if I had the patience to watch a stock over the years and stay in a position for months (I don’t), what would someone like me see in a stock like DNA? Of course I went directly to The Charts, and what I discovered was surprising.
Caution: This is total hindsight, and everything’s always easier and clearer in hindsight. But it was very educational for me, and hopefully some other folks will find it of use. I’ve tried to annotate each chart and describe what I see [tips hat to Michelle B.].
Let’s start back in 2003.
In the Spring of ‘03, Genentech had gone (yawn) nowhere for a solid year:
What I see in this chart is a long, long range with a top right at 20.00. I do see a hi-volume day in September which (surprise!) marks a near-term bottom. That’s more my speed. Anyway, back to the big picture.
On 5/19/03 we finally got a breakout:
A big gap up on huge volume. Not a day to trade, but a day to trade off of. Its high was 27.62, which would have triggered a long entry on the next day. On that entry, we would immediately begin trailing our stop. (I suppose this is the “imperial ‘we’”). We’re going to use more of a “Dave Landry”-type trailing stop, gradual and loosey-goosey, baby, allowing wiggle room for a longer trend to do its work.
That work continued for 11 months, ending with a bang on 4/26/04 with a shooting star on very high volume. This trend resulted in a 130% gain in 11 months, or about 140% annualized, (I hate “annualized” numbers, they’re misleading.. so I won’t use any more).
A reasonable trader, which I occasionally am, would have gotten out comfortably at least by the gap-closing failure to 59, or a 110% gain in 11 months.
From there, DNA fell into another sideways range for 9+ more months:
During this time, we’d be trading something (anything!) else, and waiting for a break of the range top around 55. BTW, note that big-volume day on 8/13/04. See how it cleanly marks a bottom? As I’ve said before, those bars can often act as support/resistance all by themselves. Love ‘em. Loooove ‘em.
We get a break of the big range, and a new trade entry, in March ‘05:
Getting long on that break would take you from just under 60 to over 90. A reasonable trailing stop would get triggered on the mid-September breakdown into the 80’s, for a net run of about 57-85, or a 50% gain in 5 months.
About a month later, another trade is triggered as the failure meets with strong buying and a classic “W” bottom is formed.
This trade runs up to 100 quickly, then fails back thru 94, the previous (September) high, and middle of a classic “M” top. Assuming an entry at 88 and a sale at 93, we’re stopped out for a gain of about 6 percent in 2 months.
After that stop, DNA dropped back into the 75-85 range, where it’s been going back and forth ever since:
The final analysis? With some intermediate swing-trading, we saw gains of 110%, 50% and 6% in trades where our money was exposed a total of 18 months. If we took no other trades, and kept our position size the same percentage of our account, those gains would have compounded on each other [(100% x 2.1 x 1.5 x 1.06)-100%)], for a total gain of just over 230% in 18 months of exposure since May ‘03, with an additional 24 months on the sidelines, twiddling our thumbs or whatever, but with no downside risk. Not bad action for a slow-moving $85 billion company, eh?
Could I duplicate that? Doubt it. I’m not that patient. (But after this little experiment, I think I might be adding some new “potentials” to the back of my play book.)
Could someone who can successfully manage trades that span months duplicate this? Absolutely.
This brings us back to today, and my last post. Due to politics and macroeconomics, a break above the current range (i.e. thru about 86) seems unlikely, but Genentech has Avastin, whose revenues will increase substantially, and if that’s enough to pop the chart back up, I’ll trade it. Another way to trade this, of course, would be a break down through the bottom of the range at 75. Either way, as always, wait for the break, grasshoppa, wait for the break.