FINANCIAL FOCUS
Taking Stock
In this installation of Financial Focus, we will discuss the topic of “Stock Selection” in the U.S. economy. As always, we will provide some education and commentary for the inexperienced and/or uninformed.
As we often mention, and have covered in our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), stock selection is just as, if not more, important than any indicator, chart, or astrological effect.
In our publication we cover stock selection sources including Investor’s Business Daily, among many publications, as well as strategies such as momentum (trend following), contrarian, and value. There are also many parameters for finding different equities like fundamentals (P/E’s, sales outlook, etc.), interest rate sensitive, hedges, ETF’s and Inverse ETFs, seasonality, repeating chart patterns, dividends, options activity, implied volatility, and more.
To expand on that information, there are some additional strategies for day, or short-term, traders to consider. For momentum traders, one popular bullish selection strategy is to focus on the best performing stock(s) in the strongest performing sector. The premise is that these stocks are the main reason the sector is showing strength in the first place, and will be the last to fall should the sector weaken. The same concept exists in bearish conditions with choosing the worst stock(s) in the weakest sectors for the inverse reason. Remember to include volume in your analysis to assist in gauging the true “strength” of the move.
Another strategy to consider is slightly different than the above. During uptrends, there are always pullbacks due to profit-taking, machine trading, and temporary emotional news reactions. When this occurs, some equities within a sector may experience larger declines than others. Focusing on the “least” affected by the reversal equity can be a wise choice, as the strongest stocks in the strongest sectors generally “lead” when the uptrend continuation occurs. This is also true in reverse, as the weakest stocks in a downtrend reversal, will normally accelerate their decline when the downtrend continues.
Furthermore, momentum traders and algorithms often provide additional price action when sectors are reaching 52-week highs or lows. Indexes and/or sectors are generally correlated with each other, meaning strong volume and price action within the index and/or industry your stock is contained, the more likely the leading stocks will move in the same direction. This is a very highly efficient short-term trading technique.
An additional trading/investment strategy for all time frames is often used immediately after a company upgrades or downgrades itself. Such an announcement can occur at any moment, however it is common on the date of a company’s earnings report. Analysts often upgrade and downgrade stocks, sometimes without changing price targets, but it is much more significant when the report comes from within. Earnings reports consist of two categories: the first is the earning per share sales report for the previous quarter (lagging information), and the second is the “outlook” or “guidance” they provide for the upcoming quarter or two. That information is much more important and is “leading” information for future expectations that are generally more reliable.
Repeating some previously noted protocols, regardless of which strategy you choose, be cautious to avoid trading during an earnings announcement, only choose 1 stock per sector/asset class, and make sure the stock price is not extended (unless trading in a short-term counter-trend manner).
For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN, where we provide periodic updates on a variety of topics.
