The Hot Market

Posted by Tyler Bollhorn StockScores

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perspectives commentary

perspectives commentary

The easiest way to make money is to trade the hot market. This rule applies to stocks, commodities, currencies, real estate, collectibles – anything that is traded between people. To put your odds for success at their highest, you have to trade where the action is.

Think back to when you had your best success. Perhaps you made great profits trading Silver stocks a few years ago. Maybe you made a fortune flipping houses 7 years ago. It is possible that many of you banked cash by shorting stocks or buying volatility last summer. No matter when or where it happened, your best and most memorable success likely came when there was a boom in the market you were trading. You rode a strong trend.

If you revisit any of those trades, trying to re-live the feeling of easy money, you have probably felt frustrated. Formerly hot markets are not much fun when they have gone cold. How does it feel to trade Silver stocks now or to own a number of homes that you cannot sell? Lousy!

Assets are worth owning when their price is going up. This seems obvious but it is amazing how many investors I meet who own stocks because they were going up in the past, not because they are going up now. There are a lot of investors living in the past.

We have to live in the now but how do we know where the next hot trend will be? How can we find the hot market today?

I often talk about how I never know anything about the companies that I trade, that I only trade symbols, but that is a little bit of hyperbole. I do have an awareness of the types of companies that I trade; I want to know enough to be able to see trends in capital flows.

Each day, I do a Market Scan on Stockscores to see which stocks have moved up more than expected. This tool has a filter for Abnormal Price Gain, an important distinction from just looking for %gain. One stock could make a 3% gain but, if the stock is quite volatile, that gain could not be abnormal. A 3% gain for Microsoft is very different than a 3% gain for a penny stock.

To be able to compare gain on a level playing field, we have to consider the gain in consideration of the stock’s historical volatility. That is why we use the concept of statistically significant price gain. We want to find the stocks that are gaining more than we expect given how the stock normally trades.

When we scan the market for stocks that are making statistically significant gains, we will find stocks that are up more than expected but there is a greater message there. Some stocks will be up because they are part of a hot market. I pay attention to the company names and look for themes. If I see a number of stocks from the same sector moving up, I know that there is something going on in that market.

The market has been generally quiet in the past couple of months but there have been areas of the market that have done well. Shipping stocks had a run, Chinese companies did well for a few weeks and US retail stocks have done well for some time. Playing good charts in these strong sectors has paid off.

As you follow the stock market, maintain an awareness for the areas of the market that are showing a disproportionate amount of strength. If you hear a number of times about a sector of the market doing well, take notice. Follow the action and play the hot market. Doing so will have a significant effect on your performance.

perspectives strategy

The current market is somewhat trendless making it necessary to play stocks that are trading on their own story. In search of the Alpha factor, we look for stocks trading abnormally and breaking from good chart patterns.

I did a Market Scan for stocks making an abnormal day up with abnormal volume and trading at least 1000 times a day. This found 22 stocks, I inspected the charts and found the following had a good chart:

perspectives stocksthatmeet

1. XNPT: A good turnaround chart as this stock breaks from an ascending triangle chart pattern after recently breaking a downward trend line. With a stop at $4.25 you have a higher probability that the trade will work but a lower reward for risk ration. Raising the stop to $4.65 improves the reward for risk profile but at the expense of the probability of success. As long as you can handle the lower chance for success, I think the tighter stop is smarter.

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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.