The Stockscores Approach
Stockscores.com Perspectives for the week ending February 20, 2011
In this week's issue:
Live Alerts
Those who would like to join me in the Live Alerts chat room can do so this coming week from Tuesday to Friday (the markets are closed on Monday). I provide my entry and exit signals for day trades in this room, it is a great way to learn about how to day trade with the Stockscores Approach. The fee for participating in the chat next week will be $119 plus tax. To sign up, first log in to Stockscores, then click on this link, https://www.stockscores.com/cart.asp?caction=add&prodid=2200
Stockscores Live Classes
I am teaching two StockSchool classes this spring. Vancouver March 13 and 14 and Calgary May 1 and 2. For information or to register, go here. If you have attended one of my paid live classes in the past and would like to attend again, you can do so for $995. Email me if you have an interest in this.
We are also planning an Advanced Trading Class for those interested in making a career out of stock trading. Let me know with an email if you have an interest in that and I will make sure you get updates once we have more details.
The Stockscores Approach
The Stockscores Approach is different than conventional investment approaches in a number of ways. This week, I thought I would highlight these differences but, more importantly, explain why I do things differently. After all, different is only good if it is better.
With the Stockscores Approach, Information Does Not Matter
Information moves stocks, there is no doubt in my mind about that. If a company enjoys a dramatic improvement in their business we should expect the stock to go up in price to account for that difference as soon as investors have the information. But that is where the problem arises; most people do not get that information when it is still useful.
The stock market is not fair. Some people get information before the general public. Those who know a lot about an industry or a company have an advantage; they can often predict significant fundamental change before most people. So, if a company discovers the cure for cancer you can expect to see its stock price jump before the official release of news. Those with access to better information act on it and price in that information before most of us get a chance.
For that reason, I strongly encourage investors to not make trading decisions based on information. Unless you are an industry insider, the information you are likely to receive as an average investor is already priced in to the stock.
This is an idea that I think causes investors the most difficulty. Why would we buy something that we know nothing about? Because there is a better way, that is next.
With the Stockscores Approach, the Market Tells Us What To Do
Rather than listen to people, I suggest listening to their actions. When you study market activity you are considering the collective opinion of all investors.
What happens when the people who follow a company very closely and really know more about that company than anyone else get new information? They act on it and if that new information makes the stock worth a lot more than it is currently trading for, we see the stock behave abnormally.
We can find stocks that have a greater potential to go in to an upward trend by looking for stocks that are trading with abnormal price and volume activity out of a period of normal trading.
Don't take my word for it. Take a look at the charts of stocks that have enjoyed market beating trends and you will see that time and again these trends start with abnormal activity.
With the Stockscores Approach, Risk is Not Managed with Diversification
The conventional approach to mitigating risk is to diversify in to asset classes that are uncorrelated. If your oil stock goes down, perhaps your airline stock goes up and they balance each other out over the long term.
The problem with this approach is that the market tends to have major corrective events where all asset classes move together. We have just gone through one of these events; no matter what stocks you held you felt the pain of financial losses. In the recent market collapse, everything went down together, the only safe place to be was in US cash or government treasuries. Five years of gains evaporated in weeks.
The market made a similar although not as widespread correction in March of 2000. Overbought markets corrected quickly and dramatically, wiping out many fortunes in a short period of time. Diversification did little to save the equity investor.
I believe the best way to manage risk is to limit losses. Investors should have a lower boundary on every stock that they own. If the stock price closes below that floor, sell it. With this approach, it is important to put that support price at a sensible place; a sell order should only be triggered if the stock has a greater probability of going lower than higher. The StockSchool Pro course teaches how to do this.
With the Stockscores Approach, Overcoming Emotion is Recognized as the Greatest Challenge
Investing is supposed to be a rational process of analyzing stocks and evaluating trading opportunities. The reality is that most people can learn to be good analysts in a month. What can take years is learning how to overcome emotion. Investors lose money because they fail to manage their emotions and, as a result, they make foolish decisions with their investment capital. The best trading strategies will fail in the hands of an emotional investor.
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I like to go through stocks that have made gains. The gains have to stand out, more than what we would expect given normal market conditions. I want to see signs that investors have found something to be excited about.
There are always stocks that have strong days or weeks, but to catch the stock that will go in to long term up trends, we must eliminate those that are already well in to their up trends. I focus on stocks that appear to be starting up trends.
To catch long term up trends in their early stages requires you look at long term stock charts. Want to hold stocks for a few weeks or months? Look at daily charts. Want to hold stocks for months or years? Look at weekly charts.
Here are two stocks that have good weekly charts this week.
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1. FICO
FICO has been building an ascending triangle pattern since July of 2009. This week, it breaks through resistance at $26 and traded abnormal volume. Support now at $24.95.
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2. INWK
INWK has been in a sideways trading pattern for over two years, unable to get through $8 but also finding support at $5. This week, the stock broke out through $8 on volume that is higher than expected. Support now at $6.95.
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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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