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Stockscores.com Perspectives
For the week ending May 9, 2004
In this week's issue:
How do you pick the stocks for your investment portfolio? Most people believe that it is smart to invest in the stock of good companies. It makes sense to buy into leaders like Wal Mart, Microsoft, General Motors or Home Depot. Why not buy established names that are dominant players in their industry?
However, over the last six months, Home Depot is down about 10%. One year ago, Microsoft was trading at almost the exact same price as it is now. General Motors? In three years down about 10%. Certainly buying the greatest retailer in the world would be a smart move. Try again; Walmart is lower than it was two years ago.
This begs the question, what is it that makes a stock good? Contrary to what you learn in Finance 101, well run businesses can have little to do with stock performance. Instead, the thing that makes a stock worth buying is really much simpler than most of would imagine.
Good stocks are the ones that are going to go up after we buy them.
I know you are all thanking me for this piece of intellectual insight, but sometimes the obvious needs to be said. To know what stocks we should buy, we first need to understand what makes people willing to pay more for stocks.
Generally speaking, stocks start to go up because the people closest to the company get motivated to buy them. Insiders, mutual funds, large investors; those with the best access to information are the first to accumulate stocks early in their up trends. Therefore, one of the things that make stocks go up is new and positive information. Unfortunately, most investors hear positive information about a company when it is no longer new. If you are waiting to hear about positive developments in a company's business through their news releases, you are probably going to be too late. The stock market often prices in new information before it is made public, making publicly available information more or less useless.
As stocks start to go in to up trends, it creates excitement among investors. Most of us do not talk about stocks that are going lower, we find interest in stocks that are doing well. Therefore, psychology has a lot to do with how we make investment decisions. Stocks that start to go up gather momentum as more and more investors get greedy and take an interest in the up trend. This is the law of upticks; the more a stock goes up, the more investors want to buy it.
This provides us with the two simple but important foundations of the Stockscores Approach to trading the stock market. First, the realization that the stock market is not fair, and we have to trust what the stock market is telling us about what the future news will be. Second, the fact that investor psychology has an important impact on how investors judge information, and trends tend to perpetuate because the mood of the market takes time to change.
Therefore, the stocks with the best chance to go higher, the stocks that investors will most likely want to pay more for in the future are the ones where insiders know about positive future developments before the rest of us, and, stocks that investors are optimistic about.
When insiders know good things are coming, they will tend to cause abnormal trading activity in a stock. This is what the Signal Stockscore looks for. If the stock is making abnormal moves to the upside, the Signal Stockscore will jump up above 80.
Stocks that have an optimistic investor audience will form chart patterns that demonstrate this optimism. The Sentiment Stockscore seeks these stocks out by giving them a Sentiment Stockscore of 60 or higher. A Sentiment Stockscore of 80 is not necessarily better than one with 60. What is important is that the Sentiment Stockscore be above 60 and preferably rising.
Often, the best performing stocks will leave us wondering why they are doing so well. They won't have the fundamentals to warrant their strong performance because the market does not look backward, it looks ahead. The stocks that will go up after you buy them have good news coming, and are creating optimism among the investment community. Use the Stockscores indicators to help you identify these stocks.Back To Top
Investors are indicating that they are confident in the value of a stock when that stock's price change is not very volatile. Significant fundamental change is often behind a big jump in price out of a period of low volatilty. I have found a good deal of success trading stocks that show abnormal activity out of periods of low price volatility.
As a result, I utilized the Stockscores.com Market Scan in a new way this week. Very simply, I sought stocks that had a volatility index in the previous day that was low, but was high today. I added in a filter for volume above average, and limited my search to stocks that traded at least 250 times on Friday. This scan generated some interesting trading opportunities that are outlined below:Back To Top
1. LOW
A series of falling tops on the chart of LOW show that investors in this stock have lost their enthusiasm for buying the stock. Support at $51 has held up for some time, but it was violated on Friday and it looks like LOW can go lower. Check it out if you are looking for short sell opportunities.
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2. EIX
An abnormal downward move from a falling top on the daily chart, it looks like the sellers are taking control of this stock after a lengthy period where the buyers have been winning. The Sentiment Stockscore has recently fallen below the critical 60 point, and volume jumped up on the breakdown indicating that there was some concern. I think this stock is a good candidate to go lower in the weeks to come, and is worth considering as a short sell.
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3. DRRA
The chart of DRRA has been showing pessimism (as shown by a Sentiment Stockscore of less than 60) since mid February, but Friday brought a strong round of selling pressure that may touch off further selling. The long term up trend has been violated, and I think this stock has good potential to move lower in the weeks to come, making it another stock worth considering for a short sell.
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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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