Investors in LinkedIn Corp. (NYSE: LNKD) recently had one of those days we all dream about.
On Feb. 6, shares of the big-cap business social networking player soared 10.7%. In a single session, it returned five times as much money as the Standard & Poor’s 500 Index has all year.
And on the very same day, Yelp Inc. (NYSE: YELP) investors also witnessed an “amazing” performance – shares of the business review website fell some 21.5%.
However, there’s a tool you can use – one that many investors know little about – to turn these choppy markets into huge profits.
It’s perfect for today’s markets…
Still a Bull
On the surface, here’s what happened Feb. 6: LinkedIn reported a great quarter, while Yelp reported a mediocre one.
But there’s much more here than meets the eye.
This one-day snapshot perfectly illustrates the volatility we’ve seen in the stock market over the last several months. And we’ll be dealing with this choppiness for the foreseeable future.
As I’ve been saying, I still believe we are in the midst of a generational bull market for U.S. stocks.
And I haven’t seen anything in the last several months to make me change my view. In fact, after surveying some key economic trends, I’m still very bullish about the U.S. economy and the tech sector.
Let’s start with the one thing that affects every working American – jobs. In January, employers topped forecasts by adding 257,000 new jobs.
That’s part of a major trend. Just two weeks ago, the federal government revised upward the hiring numbers for November and December, making 2014 the best year for job growth in 15 years.
This comes on top of robust auto sales. With total sales of new cars and light-duty trucks hitting 16.5 million units, in 2014 automakers just had their best year since 2006.
For tech investors, there’s even better news. Tech and healthcare (including the biopharma companies we look at here) firms are crushing on earnings.
According to Thomson Reuters, 88% of firms in those two sectors have beaten earnings forecast so far this season. That compares with about 72% for all other industries.
So, more people are working and buying cars than in years – and companies are raking in the cash
But the market so turbulent.
The Great Energy Debate
It boils down to a giant economics debate.
On the one hand, there’s a group of investors who think falling energy prices will help stimulate the entire economy.
With crude oil prices down50% since last summer, everything from tourism and construction to manufacturing and electronics will benefit from cheap energy.
On the other side of the debate is a group whose members believe the rising value of the dollar trumps all. The thinking is this: Higher dollars means fewer U.S. exports and less growth for firms with foreign sales.
Against this backdrop of this debate, the stocks of companies whose earnings beat Wall Street’s forecasts rally. And those that miss – sometimes by just a penny a share – sell off on heavy volume.
This is the kind of climate that makes many retail investors nervous.
But they don’t need to be.
The Perfect Tool
There is a tool tailor-made to turn choppy markets to your advantage. I call it the “Cowboy Split,” and if employed properly it can really juice your returns
Simply stated, you can earn more money in a turbulent market like this with “split entries.” (Because we’re often talking about Silicon Valley firms here, I jokingly refer to this as the Cowboy Split – a great way to play the “New West.”)
Here’s how it works. Instead of buying your standard amount of a tech stock – for instance, 2% of your trading capital “bankroll” – you divide your entries into at least two tranches.
Let me give you an example. Say you want to invest in a company we’ll call Ultimate Tech Inc. at $50 a share. It has a good chart, has great financials and is in a growth sector.
With the Cowboy Split, you start by investing half of your standard stock purchase at the current market price. In this case, 100 shares would cost you $5,000, but you cut that in half, starting with $2,500.
As soon as that market order fills, you put in what’s known as a “lowball limit order.” Basically, that’s an order to purchase shares when they fall to a specified price.
Usually, I set my Cowboy Split at a 20% discount from my original entry price. That’s good general number for filling the second half of your Cowboy Split, but use your best judgment in each individual case.
In this case, you’d buy a second round of Ultimate Tech at $40 a share.
When the stock falls to that price, your order automatically fills and you now have an average cost of $45, a 10% discount from your original order.
The beauty of a move like this is that once the stock starts to rebound you have baked extra profits into your portfolio.
It works like this: Let’s say Ultimate rallies all the way to $60. Based on your average price of $45, you have cumulative gains of 25%. Your original order has gains of 16.6%.
But your second half has earned twice as much – 33.3%.
In today’s market, I regularly employ the Cowboy Split. And over the long haul, it’s turned out rather well.
I’ll give you an example from my premium trading service, Radical Technology Profits. In fairness to my paid subscribers, I can’t reveal the name of the semiconductor stock.
But I can tell you that we made our first one-half entry in July. Our lowball limit order filled during mid-October’s sell-off at a nearly 25% discount.
For months later, overall, we’re up 50%. But the second half of the Cowboy Split is up nearly 69%.
That’s an annualized run rate of 207%.
The Power of Profits
Thus, the Cowboy Split is a powerful investing tool. It’s an excellent way to keep you from staying on the sidelines and potentially missing big money moves.
Think of it as playing both offense and defense at the same time.
You’re on offense when you make your opening bid. You defend against getting stopped out by buying more of a stock at a discount, which also increases your overall profits.
And if the stock takes off and the lowball limit order never fills, that’s fine. When the stock has enough gains, you simply cancel the second order and look for the next big winner.
In the meantime, you’ve set yourself up to make money no matter what happens.
That’s the whole point of the Cowboy Split system. You make money in both stable markets and the kind of volatile ones we have today.
It reinforces the prime rule of tech-stock investing – no matter how bad things look, never be out of the market.
Editor’s Note: Have you used the Cowboy Split? How are you doing on those stocks? Let us know in the comments below. We love hearing from you.
- Strategic Tech Investor: This Is the Bull Market Your Kids Will Be Talking About.