Stock types to avoid - GYI and MRVL

LiveRocket is not a momentum stock picking strategy. I have closely followed 2 distinct trends: digital downloading and commodities. Using these trends as launching points, I have looked for the companies most likely to benefit from specific advantages

When it comes to the digital downloading, I have looked at the entire value chain. We got into AKAM in January when it was $20 (today it's $34). We have gone in and out of MRVL twice. We even bought GYI because of their advantage in digital imagery.

The purpose of this long post is that I'd like to show how you can use charts to understand when stocks are in what oenophiles might call a dumb period: when wine isn't ready to enjoy.

Getty Images (GYI) is a stock I bought last year after deciding to invest in the latest wave of the digital revolution. It was briefly part of the early LiveRocket portfolio. We were stopped out and I decided at the time not to re-enter because of future sales weakness. The CFO announced his retirement and shortly thereafter the company announced that it anticipated a slower growth.

I am not good at cutting and pasting charts in the blog, so here's a link to a 2 year chart for GYI
http://finance.yahoo.com/q/bc?s=GYI&t=2y
I watched them make their move from Dec 2004-February 2005 and bought in. When I started LiveRocket in November, we bought GYI. We were stopped out in early December. The stock has fallen ~30% since then. GYI continues to disappoint with poor earnings.

It's easy to see in hindsight that the stock had peaked around the time we exited. What isn't easy is making a decision in the middle of the peak. Look at this 6 month chart.
http://finance.yahoo.com/q/bc?s=GYI&t=6m&l=on&z=m&q=l&c=
In December and January, GYI retreated 3 times and then pushed its way back to $90. Only to fall back again.

At the time, I saw the advance to $95 in late November and then it pulled back. The seubsequent advance in early December brought it to a lower high and then the stock fell to a much lower low. The volume was also stronger on the down moves. To me, I was seeing negative sentiment.

Negative sentiment is an important factor, but I don't give it priority. If I did, I would have missed out on NTRI after it entered a massively negative period.
Instead, I start with fundamentals. I wasn't seeing GYI getting their images onto iPods or other devices. They were stuck in their traditional media outlets. So an important idea behind my original investment hypothesis was wrong. As if to prove my point, they were admitting to slowing sales. I NEVER INVEST IN A COMPANY WHERE SALES ARE SLOWING. Why would I want to climb aboard a sinking ship?
The fundamentals turned negative and so did the sentiment. We haven't looked back since.

GYI is a great example of a stock that peaked and dropped. It's an example of when to get out and stay out. In this case, my strategy was wait-and-see. I watched for 2 weeks for signs that the stock was consolidating after a big run up (which would look like a series of up-and-downs within a tight trading range). The signs pointed negative, so I stayed away.

MRVL is a great example of a stock in a tradingrange following a pullback. This is a 2 year chart with moving averages thrown in (50 day and 100 day)
http://finance.yahoo.com/q/ta?s=MRVL&t=2y&l=on&z=m&q=l&p=e50,e100&a=&c=
This is the 1 year.
http://finance.yahoo.com/q/ta?s=MRVL&t=1y&l=on&z=m&q=l&p=e50,e100&a=&c=
Notice that in December and again in January, MRVL stock price is above the moving averages. That can be a good thing - it can be a sign of a breakout.
That can also indicate that the stock is ahead of itself.

I thought it was breaking out. Instead, MRVL pulled back to its 50 dma.

Here's a tip. A lot of stocks actually like to hug the 50 dma. That's a neat thing to watch and be aware of if you are someone who is trying to time your entry. Waiting for a retreat to a 50 dma is generally a good strategy. It will not work on stocks that are on fire - like TIE. But very few stocks are on fire like that, so this is a good rule of thumb for timing entry. I am not someone who fixates on timing my entry. I did that with TIE - it was splitting and I thought that it would pullback a bit post split. Nope. I missed an entry near $30, and jumped in at $38. To me, a stock going up is a stock going up. If I'm overpaying 3%~5% because of my timing of entry - that is an acceptable loss to me. Conversely, I like buying on big pullbacks and underpaying (like WIRE).

Back to MRVL.
http://finance.yahoo.com/q/ta?s=MRVL&t=6m&l=on&z=m&q=l&p=e50,e100&a=&c=
Notice how the 50 dma and the 100 dma are converging.
Notice that the averages are flattening.

Follow this chain of events because when you are trading, you have limited information and must make decisions based on judgement calls.
The first time we bought MRVL we got in at $43 and were stopped out at $63. That was 10% from the high.
I interpreted the drop to a pullback after BRCM earnings pushed them up. I thought MRVL was reverting to it's 50 dma. I waited to see if there was a bottom appearing, there seemed to be one, so we got back in at $63.7. In essence, MRVL seemed to be taking a 15% hit after running up and showing strong earnings. I compared them to their peers and felt that the price was more than fair. Nothing seemed problematic.
Wrong. MRVL sank a further $10. It then entered a trading range where it has been bouncing between $55 and $60.
http://finance.yahoo.com/q/ta?s=MRVL&t=3m&l=on&z=m&q=l&p=e50,e100&a=&c=

I started looking at the company. Fundamentals were fine. The problem is that you can't tell when you are in a trading range until you are in one. Several times MRVL seemed to break out, only to pull back again.

From March 17th to April 1st, we see MRVL tri eto push up and then fall back.
However, I noticed a change in sentiment.
http://finance.yahoo.com/q/ta?s=MRVL&t=3m&l=on&z=m&q=l&p=e50,e100&a=m26-12-9&c=
The MACD shoes that the degree of negativity was dropping. So we continued to wait.
Indeed, as the MACD turned more positive in early April, MRVL again moved to $60 and back to its 50 dma.
Even though it fell back, the low this time was higher. And the high it hit was higher than the high in March (the last time it moved up).
Again, MRVL moved up in mid-April, hitting another near-term high that was higher than before.
So we have 3 moves up between late March and mid-April. Each one is hitting a progressively higher peak. From ~$57, then ~$60, then ~$61.
And then it crashed back to $55 again - a lower level than the previous low point. Lower by ~$2 or ~4%. Significant in my mind.
And now it is moving back.

The question is - are we in a prolonged trading channel or is it on the way up?
The first way to answer the question is: how much is MRVL specific and how much is semiconductor related.
http://finance.yahoo.com/q/ta?s=MRVL&t=3m&l=on&z=m&q=l&p=&a=&c=brcm
This chart compares BRCM and MRVL.
Both companies move up March 1st and then slide. MRVL slides even deeper on March 17th.
Also, MRVL has a unique move up March 25th.
Both companies return to synchronization starting March 29th - up, then down, then up again.

BINGO - BRCM had earnings on April 20th. That is the reason for the runup and drop off. MRVL hit a higher high and then a lower low because BRCM beat expectations by only 5%. Despite growing earnings 200%, they were downgraded by many companies.

My take on MRVL. The market is less negative. MRVL should perform quite well over the near future. The stock is going to rise moderately on pre-earnings excitement on May 18th. I think $55 is clearly the bottom and $60 remains the top - folks will come buying at $55 and start selling at $60. I don't want to be in stocks that are in a trading range, although it's a great way to make money: you buy when it drops and then sell when it goes up, making 5% each swing.