Stock Sailing
Stockscores.com Perspectives for the week ending May 14, 2006
In this week's issue:
Metaphorically, the stock market is like sailing. There are all these sailboats floating on the water each of varying size and with different sails. Individually, they are each capable of moving but they all depend on the same thing to really get them going.
Wind.
Wind in the sails is what makes the boats really move, most of them moving with the wind. Some will tack in to the wind and fight against its direction but the fastest movement will be in the boats that are going with it.
I use this example to stress the importance of understanding that all stocks are affected by the general direction of the market. Every stock has some correlation to the general market movement. This correlation is referred to as the Beta of the stock. Stocks with a Beta of one will move at the same pace as the overall market index. A stock with a Beta of two moves twice as fast. If the Beta is negative one, then the stock moves exactly opposite of the market index.
Just as sailing is easier when you are going with the wind, investing in the stock market is most profitable when you have the market on your side. As investors, we tend to focus on analyzing individual stocks but it is probably more important to analyze the market in general and figure out where it is going.
Remember the bull market of 1999? I knew many people who were experts on stocks then. Some were lawyers, home makers, loggers or dentists by profession, but in the greatest technology boom in history all of these people cast their career choice aside because they had found a new occupation - stock trader.
Two years later, these self proclaimed experts were out of a job.
When you are investing with the market you tend to look like a genius. When you fight against it you put yourself on the path to homelessness.
In the last year, the easiest place to make money in the market has been in the TSX Venture market. This hot sector has grown rapidly and stocks with questionable fundamentals have done well because a strong wind was in their sails. The "smartest" investors" have been playing these stocks.
The very knowledgeable investor focused on technology stocks has not faired that well in the last year. This sector has underperformed and there have been great disappointments and monetary losses.
If you want to be a good investor you have to be willing to jump from sector to sector, moving off the band wagon before the crowd does and jumping on the next one as it starts to pull away. That means a weekly look at the market sectors and market indexes to see where the wind is blowing strongest. This simple first step will help you look smart, even if you have little idea of what separates a good stock from a lousy one.
What do you look for when looking at a market index? I suggest focusing on sectors that are breaking out to two year highs. Rising bottoms on the chart indicate optimism in that sector. Abnormal volume accompanying a move to higher prices is sign of accumulation by large investors. If the market sector you are looking at has falling tops and is moving to new lows you have a sector that is going to be a tough one to sail in. Leave it alone.
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The hottest market in North American continues to be the TSX Venture market. This week, I ran the Stockscores Simple market scan on this market. This strategy seeks stocks that have good Stockscores indicators and are moving through technical resistance. From the list of candidates I look for stocks that are breaking out from good chart patterns as defined by the Stockscores Approach.
The Market Scan revealed 12 candidates and one stock had what I wanted; a break from an optimistic price consolidation period through resistance with abnormal price and volume activity.
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1. V.MGD
V.MGD makes a genuine break with very strong volume to new highs after trending sideways at $0.08. The break through $0.10 resistance is significant because the stock has not traded above that price, indicating that significant change in fundamentals is underway. So long as the stock can hold above support at $0.07 I think the stock is likely to go higher from here.
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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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