Understanding Information
Stockscores.com Perspectives for the week ending November 3, 2014
In this week's issue:
In This Week's Issue:
- Stockscores Canadian Tour
- Stockscores' Market Minutes Video - Trading Fears You Must Avoid
- Stockscores Trader Training - Understanding Information
- Stock Features of the Week - Large Cap Strength
Stockscores Canadian Tour
For these upcoming presentations, I plan to walk through the processes I use to find longer term position trades, medium term swing trades and short term day trades. But first, I will highlight the one simple thing that starts almost all market beating trends. Capital preservation should be the number one goal of all traders so I will show how I manage risk. Finally, I will show our new Stockscores Education Center and how you use it to become a better trader. Hope to see at one of these upcoming events:
Toronto - Nov 8 and 10
Ottawa - Nov 11
Montreal - Nov 12
Edmonton - Nov 15
Calgary - Nov 17 and 18
Vancouver - Nov 19
Surrey - Nov 20
Webinar - Nov 25
For details and to register for one of these free events, Click Here.
Stockscores Market Minutes Video - Trading Fears You Must Avoid
There are some big fears that hurt trader performance. This week, Tyler discusses how to overcome these fears, plus his regular weekly market analysis.
Click here to watch
Trader Training - Understanding Information
In theory, information should make the stock market's world go round. Information about companies and their ability to make money in the future is what should determine share price. As the market learns of new information, price is adjusted up and down to reflect the value of that information.
This implies that investors should focus their analysis on information so they can predict where share prices should go in the future.
While this makes good sense, I have found it to be extremely rare that investors who use information are able to consistently beat the stock market. With smaller retail investors (you and I) in particular, the use of information for making investing decisions is more destructive than it is beneficial. Here are ten reasons why:
1. Information is Usually Already Priced In - most investors use publicly available information. That means it is widely known and available to anyone considering the stock. If information is available to a large number of investors then we should expect that the market will have priced that information in to the stock. Therefore, the information has not value to us.
2. Information Usually Comes with a Bias - as a general rule, people do what they are financially motivated to do. If someone is encouraging you to purchase a stock, there is a good chance that they have some financial motivation to do so. Before you trust the information you receive, understand the financial motivation. If you find the reason, you will often usually find that there is a strong bias in the information being provided to you.
3. Trading on Truly Insider Information is Illegal - there are few risk free trades in the stock market, but trading on significant, inside information is one. You stand to make a lot of money buying stock in a company that will be acquired by another at a premium tomorrow. If you have that information and act on it, you are trading on inside information and that can land you in jail.
4. Gathering Good Private Information is Expensive and Time Consuming - there are investors who are able to uncover information that is not priced in to a stock but is not considered inside information. This private information is valuable because it can lead to market beating returns. However, gathering private information typically requires significant resources, knowledge and time. For small investors, it is not feasible to do this kind of work across a broad range of stocks.
5. Information Causes You to Ignore the Market's Message - when you have an understanding of a company's story, there is a tendency to fall in love with that story and ignore new information that goes against your outlook for the stock. This leads the committed shareholder to hang on to a losing position, allowing the loser to bog down the performance of the overall portfolio.
6. You May Not Have All of the Information You Need - the market tends to focus on two or three key information points that affect the price investors are willing to pay for it. An investor who does a thorough fundamental analysis of the stock may still have an incomplete understanding of the company's business. If missing one of the key points, this investor can make a gross error in valuing the stock.
7. The Market May Not Be Trading On Fundamentals - in theory, stock price is based on the present value of future earnings expectations. In practice, there are often very non fundamental influences on share price. A large investor that has a liquidity crisis may be forced to unload a large position with little regard for price. Often, the laws of supply and demand affect share price even though theory tells us that they should not have an influence.
8. Your Interpretation May Not Be the Same as The Market's - Our mood affects how we judge information and the same can be said for the market in general. Your fundamental analysis may be correct in an optimistic environment, but if the market is in a pessimistic mood, the investment can lead to losses. Even the market is wrong, it is right.
9. There Is No Standard for What Information is Worth - There are many formulas for determining what a company's share price should. Many fundamental analysts look for stocks to trade at a certain multiple of their earnings with that multiple to be based on growth. However, there are great variations in accounting methods that can have a profound effect on how earnings are reported. More importantly, there is no rule that a company should trade at a certain multiple of earnings, that target multiple is just an opinion.
10. We Tend to Focus On Information That is Easy to Get - we often looks for the easiest way to achieve a goal. With information, there is a tendency to focus on the information that is front of us. Rather than work to find something to disprove our thesis on a stock, we instead look for information to strengthen our thesis. In doing so, we present our own biased outlook for our investment decisions that can often be very incomplete and wrong.
Ultimately, I look at the market's interpretation of all available information when I look at a chart of price and volume. It shows not only every bit of information detail but also what the market thinks of it.
Back To Top
The small cap stocks are getting better, at least those outside of the commodity sectors but they still have some more work to do until they start to show good chart patterns. Right now, the area of the market that has recovered the best from the correction are the stocks that suffered the least - the higher priced stocks with stronger liquidity. Here are a few Position Trade candidates for your consideration. I found these using the Stockscores Simple Weekly Market Scan.Back To Top
1. IBKR
IBKR started its show of strength a couple of months ago but that upward surge was tempered by the correction, which took prices back down to support. Support was never broken and with the recovery in the overall stock market, the stock is now moving to multi-year highs again.
Back To Top
2. PVTB
PVTB has been a strong performer over the past couple of years but has trended sideways for most of 2014. It is now breaking through resistance and looks like it can continue the long term upward trend toward the $45 all-time high range.
Back To Top
3. RDN
RDN has sat below $15 resistance for seven years but last week it finally broke through that price threshold and looks like it is ready to start a market beating trend.
Back To Top
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.
Back To Top
|
