Get Some Protection
Stockscores.com Perspectives for the week ending May 6, 2005
In this week's issue:
Drive a car, you put on your seatbet.
Ride a motorcycle, you put on your helmet.
Play soccer, you wear shin pads.
In our society, protecting ourself has become part of everyday life. One of the few exceptions to this, however, is in how we invest.
Most investors don't protect themselves when they buy and sell stocks.
There are a number of failings that we should be aware of. First, most investors don't really know how to analyze and trade stocks. Investors fall in to two groups. Some entrust their money to someone else, while others make their own decisions..
No matter which group you fall in to, understanding how the stock market works is important if you are going to invest. No one cares more about your money than you, so even if you have someone making your market decisions for you, it is important to understand what is going on. If not, only you are to blame for any failings.
If you want to make your own decisions, make sure you know what you are doing. Despite the incredible importance of saving for retirement, very few people take the time to learn how to save for retirement. In many cases, they trust biased sources and follow the rules of the crowd. This may work when the markets are strong, but a weak market is a much different situation that usually costs uneducated investors a lot of money.
So, the first way to protect your self is with knowledge. Go out and get it, the stock market is too cruel to play it on a whim.
The next form of protection that I think everyone should use are loss limits. Most investors buy stocks with a view to making money. We plan and hope that we will be profitable when we buy a stock. However, very few investors plan to lose their money. Yet, it is planning to lose that sets those who succeed apart from those who fail.
The stock market is too complex for anyone to make the right decisions all of the time. Losing money on stocks is part of making money in stocks. It is a probability game, but with better odds than those found in Vegas.
Where the stock market differs from the blackjack tables is in how a loss can be disproportionate to a win. When you play blackjack, you either lose what you bet, or you win what you bet. Sometimes, you can win one and a half times what you bet.
However, in the stock market, your losses can be a multiple of your gains, or your gains can be a multiple of your losses. Good investors may gain 3 or 4 times what they lose when they are wrong. Sadly, most investors suffer lopsided losses relative to their gains. As a result, even a great stock picker can still fail to make money simply because their losses outweigh their gains.
The solution is very simple. Limit losses, let profits run. Plan the point where you will take a loss and stick to it. When you have a winner, let it continue to win. Applying this kind of protection makes more sense than putting on a life jacket before you go white water rafting. Protect yourself.
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Stocks go up in price because investors are willing to pay more. Investors tend to buy companies that they are optimistic about, so it is important to measure whether investors are generally optimistic or pessimistic about a company. Stock charts can provide many clues about the mood of the market. For example, rising bottoms on a stock chart indicate greater enthusiasm among buyers than sellers.
The Sentiment Stockscore considers these kinds of chart pattern factors, and provides an indication of whether investors are showing optimism or pessimism. I have found that stocks that have a Sentiment Stockscore moving through 60 and rising tend to continue to rise as investor optimism carries them along.
The Sentiment Crossover Market Scan seeks stocks that have their Sentiment Stockscore crossing in to the 60 and greater zone after a lengthy period below 60. If this occurs, and the stock does not have significant overhead resistance, then there is a good potential for a future uptrend. By limiting downside potential with a stop loss point just below a short term support price, investors can better manage risk while leaving the potential for price gains.
This strategy is good for identifying longer term trades that do not require constant monitoring. The criteria are relatively simple, and a regular check of positions for an exit signal may only take a few minutes.
I ran this Market Scan just on Nasdaq stocks, and found one good candidate:
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1. NSTK
NSTK is moving out of a period of falling tops in to some rising bottoms, indicating that pessimism is turning to optimism. It is a Pharmaceutical stock, one of the few sectors that is doing well in this market. I think the stock has decent potential to go higher from here provided it can hold above support at $9.75.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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