Dare to be Different Stockscores.com Perspectives for the week ending May 3, 2009
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.
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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.
STRATEGY OF THE WEEK
I like abnormal activity in stocks. Where there is abnormal price and volume action there is usually something going on and it is something going on that leads to strong trends. But abnormal activity by itself is not sufficient to identify good trading opportunities. You need abnormal activity at the start of a trend out of a period where optimism was building. It also helps a lot if the overall market is trending upward.
We have that upward trending market right now so I am working hard to find the abnormal stocks that have good potential to move higher in the weeks to come. Using the Stockscores Market Scan tool, I filter with the Abnormal Activity Up strategy. I have found a number of great winners using this strategy over the past two months.
The strategy found 58 candidates this weekend; I picked a couple with charts that I like.
STOCKS THAT MEET THE FEATURED STRATEGY
1. FSIN has been trading sideways for four months after bottoming in November. Over the past two months, bottoms have been rising and volume has been building over the past week with Friday showing very strong volume as the stock broke to the upside. I bought it late in the day Friday and have support at $4.70.
2. NCOC breaks out from sideways trading after making a bottom early in March. Volume and price movement to the upside were both abnormal Friday so the market is excited about something. Support at $1.
Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.
Slowly, he began to learn how the market works, and more importantly, how to consistently make money from it. He realized that the stock market is not fair, and that a small group of people make most of the money while the general public suffers. Eventually, he found some of the key ingredients to success, and turned $30,000 in to half a million dollars in only 3 months. His career as a stock trader had finally flourished.
Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.
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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.