Posts Tagged ‘Pick’
Stock Trading – How To Pick Stocks For Stock Trading
Posted by admin in Preferred Stock on January 1st, 2010
I have found that the best stocks for stock trading and day trading are the stocks that make up the S&P 500. The reason for this is that the large Mutual Funds and large Institutional Buyers concentrate on these stocks in their never ending quest to beat the S&P 500. These stocks generally have strong relative strength and absolute performance to the S&P 500 Index. Of these stocks, I like to concentrate on those that are in the Nasdaq 100 Composite Index. It is the Nasdaq stocks that I like to trade the most because of their volatility of the stocks in the Nasdaq 100, I concentrate on those stocks that I that I like to refer to as “trading where the action is” stocks. These are stocks that show tremendous volume in the number of shares being traded during the day, at least 15 million shares and preferably 20 million shares and more. My real preference is share volume of 30 million plus per day.
In addition, the stocks must have a large daily stock trading range, which is the difference between the high price and low price of that stock for the previous trading day, and a lot of volatility. I look for a trading range of at least $2.00 per share, but I really prefer those that are more volatile and have a daily travelling range of $3.00 to $6.00 and more.
The reason for this is that I trade both sides of the market, both the long side and the short side on an intra-day basis. I have no interest in whether the stock closed in positive, or negative territory the previous day, just as long as the volume and price action are there.
All I want is the price action, high volume and the volatility. If I have these three ingredients, I know that the major players are very active in that stock and they are either increasing, or decreasing their weighting in that stock. Adding to and contributing to the price and volume action are what I call the “accelerators”, which are the momentum players, the program traders and the hedge funds who are trying to jump in ahead of the mutual funds and front run the stock, either up, or down. This is when the action really heats up and you will see “climatic volume” where each stock trade is occurring in less than a second. I have seen this many times every day. It happens all of the time.
One thing that may not be apparent to you on the surface is that what I have done when I pick stocks for stock trading is that I have used the major players as my research department. The money flow is very visible because most institutions are on the same page in terms of what they are buying and selling. This shows up in the price action, the volatility, and volume for the stocks in play. It is awfully hard for a herd of elephants to hide their foot prints in the sand.
Now with a potential list of stocks to trade. I then load those stocks into my “stock trading” watch list . In addition to that watch list I have another watch list that contains every stock in the Nasdaq 100. When the market opens I spend the first 5 minutes or so, observing the volume, price action, and direction of the stocks in both watch lists.
I am looking for certain patterns to develop and if I see a pattern that I like to day trade, I will pull the trigger and take the trade, either on the long side or the short side based on what the stock (price action and volume) tell me, what I see the market makers doing on the Level II screen, and provided the stock is trading in line with the chart of the Nasdaq 100.
I always have a fairly tight protective stop in place to protect me in case I am wrong and took the trade too soon. I may attempt that trade 2 or 3 times before I get the right entry, each time taking a small lose. But when I get the right entry, there is a lot of money to be made, especially when you are in the right stock.
One of the things I like to do is to stay with the same stock, as long as it satisfies my stock trading requirements. I may trade the same stock all week as along as it is performing for me and I am making good profitable trades with it. One of the benefits in doing this is that you really get to know the stock well, and how it trades.
To recap, in my opinion the best stocks for stock trading are those stocks with very high velocity and high volume, high volatility and a good intra-day travelling range. When you have these characteristics, you know the large institutions and the “accelerators” are involved in the stock.
For stock trading, you will need a direct access day trading account from a stock trading broker that offers direct access stock trading software. This is an absolute must have for day trading. The software will have Level II, charts, technical indicators, etc. Direct access means that your buy and sell orders are sent directly to the market by you without using a middle man to place the orders for you..
The first thing you need to do before you even attempt stock trading, and this is even if you do have some experience, is to take a good day trading course so that you really understand how the business of stock trading works, what patterns to look for, how the markets work and how everything fits together. It will be the best investment you ever make. If you don’t eductae yourself – you have better than a 90% chance of failing.
* the words stock trading and day trading are interchangeable.
Good luck and good trading,
The Maverick
Larry Schade
How to pick large cap growth stocks
Posted by admin in Common Stock on December 14th, 2009
Around 2003, value investors were lamenting that large cap, blue chip stocks such as Wal-Mart, Coca-Cola, and Home Depot, were extremely overvalued, while at the same time, momentum investors were buying shares like crazy. Today, large organizations are more profitable, pay larger dividends and engage in stock repurchase programs; however their common stocks have fallen in some cases more than sixty percent. So, on what grounds should investors pick large cap growth stocks?
Overvalued stocks may be corrected either through a decline of the share price or through the equity price standing still until the intrinsic value equals the market value. So, one way to pick large cap stocks is to consider that as more capital and cash flow builds up behind overvalued shares, value investors have the opportunity to buy giant US companies at prices that haven’t been available ever before.
Growth investors invest in rapidly growing companies with considerable revenues and profits. The idea is to receive a high rate of return on investment from the increasing share price.
Normally, growth stocks generate substantially higher returns than other type of stocks, but, at the same time, the risk of investing in a growth stock is also higher compared to others.
Although, investing in growth stocks differs from industry to industry and firm to firm, there are common factors that investors focus on. These involve, but are not limited to:
Historical and projected growth rate: large cap growth stocks are attractive when they expose a growth rate of 10%+ over the past five years. In regards to projected growth rate, large companies typically achieve a growth rate between 5% – 7%.
Return on equity (ROE): large cap growth companies typically have a higher ROE than then industry average over a five-year period. This implies that these companies are profitable and produce earnings from the money shareholders have invested.
Earnings per share (EPS): Pre-tax margins should top the past five-year average and the industry average. This means that the firm translates sales into earnings and controls its costs efficiently.
Projected share price: based on the business models and market positioning of the company firm, analysts estimate the projected share price in five years. Projections should exceed the estimated industry average in order for the stocks to be attractive.
In conclusion, investing in large cap growth stocks implies investing in firms that expose above-average growth, but trade at expensive share prices. However, trading at a high price hoping for a high growth is risky because if the growth rate is below expectations, the hare price will decline sharply.
Pick Stocks Like Market Super Gurus
Posted by admin in Preferred Stock on November 16th, 2009
I believe the best way to beat the market is to learn from Professionals (Market Gurus) who have done so time after time. That is why one can consider following a stock picking criteria based on one of the recognized strategies of well known stock market professionals.
This time I will elaborate on one of the most recognized modern investing Gurus on Wall Street – Martin Zweig and his time proven stock picking strategy.
Introduction
Martin Zweig was born in 1942 in Cleveland, Ohio. He took his first degree at the University of Pennsylvania’s Wharton School of Finance, then an M.B.A. at the University of Miami, studying by night and working as a stock-broker by day. He completed his formal education in 1969, with a Ph.D. in finance at Michigan State University. Shortly after completing his Ph.D., Zweig invented the puts/call ratio, a well-known market indicator.
Zweig’s most famous quotes:
“I measure what’s going on, and I adapt to it. I try to get my ego out of the way. The market is smarter than I am so I bend.”
“To me, the “tape” is the final arbiter of any investment decision. I have a cardinal rule: Never fight the tape!”
“People somehow think you must buy at the bottom and sell at the top to be successful in the market. That’s nonsense. The idea is to buy when the probability is greatest that the market is going to advance.”
Between 1970 and 1972, Martin Zweig wrote several articles for Barron’s magazine. In each, he made a successful prediction for the coming direction of the market.
The resulting public demand led him to begin small-scale publishing of The Zweig Forecast, a market letter. After he advertised The Zweig Forecast in Barron’s, it took off.
The Zweig Forecast was the top market advisory for the 15 year period between 1980 and 1995. Zweig Forecast delivered a 16 percent per annum compounding return, the highest risk-adjusted return of any market advisory service during that time.
According to the AAII (American Association of Independent Investors), out of more than 50 stock-screens it operates, the Martin Zweig Stock Screen has been its top performer in the last eight years – up more than 1,700 percent between 1998 and 2006.
In short Martin Zweig’s basic stock market strategy is to be fully invested in the market when market conditions are positive and to sell stocks when conditions become negative. Risk minimization and loss limitation are a crucial part of Zweig’s investment style. His book, “Winning On Wall Street” describes how Zweig determines whether to be in the market or not.
Zweig’s Stock Picking Strategy
When picking stocks, Zweig goes strictly by the numbers. As he writes in his book, “If a company can show nice consistent earnings, I don’t care if it makes broomsticks or computer parts.” Zweig is focusing on three main criteria to fish out potential winners:
1) Strong historical sales and earnings growth.
2) Reasonably priced.
3) Strong price movement relative to the market.
Zweig is avoiding stocks that have recently disappointed the market, and he dislikes companies with high debt. While he does not want to overpay, Zweig is willing to pay more for strong stocks. According to Zweig, “buying on strength gives you an edge. You must pay a premium, but you increase the probability of being right.”
Long-term growth
Zweig prefers consistent sales and earnings growth, going back four or five years. He considers 15% annual earnings growth acceptable, but prefers more. For this screening criteria set average annual sales equal or greater than 15% and set earnings-per-share growth, measured over the past five years also equal or greater than 15%
Recent growth
Martin Zweig avoids stocks with decreasing growth rates. He prefers to see the most recent quarter’s year-over-year EPS (Earnings Per Share) growth rate in the same range as the long-term rate and even higher. However, Zweig is not dogmatic and is willing to reduce this requirement a little bit, depending on market conditions. In the stock screen set the most recent quarter’s year-over-year EPS growth to be at least 75% of the long-term growth rate and set the most-recent quarter’s year-over-year revenue growth be equal or greater than 85% of the long-term revenue growth rate.
Revenue Pace
In theory, earnings growth should track revenue growth. Revenues growing faster than earnings reflect declining profit margins, which is a signal that market conditions are becoming more competitive, but earnings growing faster than revenues say that the growth is coming from cost cutting rather than growing sales. If this is the case, the company will run out of steam to cut costs, and earnings growth will slow down. Zweig likes to see stocks with revenue and EPS long-term growth rates in the same range. To mimic those criteria, set screen so that long-term revenue must be equal or greater than 75% of earnings, and vice-versa.
Fair Price
Zweig does not want to overpay for a stock. Zweig uses price-to-earnings ratios to measure valuation. Zweig’s definition of overvalued depends on the market conditions. In his book, Zweig accepts fast-growing companies with price-to-earnings ratios with 50% higher than the market. In the stock screen set current P/E ratio to be equal or less than 50% S&P 500 Average current P/E Ratio
Don’t Buy Cheap
As much as Zweig doesn’t want to overpay, he also is avoiding stocks that are too cheap. Very low price-to-earnings ratios signal that investors are leaving and perhaps for a good reason.
Zweig advised to disregard stocks with P/Es below 5. For the stock screen set minimum current P/E ratio to be equal or greater than 5% or to be equal or greater than 40% of S&P 500 average current P/E ratio.
Winners
Relative strength measures a stock’s performance compared with the overall market over a specified timeframe. Zweig prefers stocks that are outperforming the market or performing at least as well as the market. Zweig does not mention a specific timeframe, but from his book, one would have guessed that six months could be the right measure. A 55 relative strength indicates a stock performing even with the market or slightly above. Set the stock screen’s 6-month Relative Strength to be equal or greater than 55.
Debt
The debt-equity ratio, which is long-term debt divided by shareholders’ equity, is the most-commonly used debt measure. Zero values signal no long-term debt, and the higher the ratio, the higher the debt. Zweig dislikes high-debt firms.
Since acceptable debt levels vary by industry, and in order not rule out companies with acceptable debt-equity the stock screening parameter shall be set for Debt to Equity ratio to be equal or less than Industry Average Debt to Equity ratio.
Market Surprises
Zweig rejects stocks that had recently disappointed the market by reporting earnings below forecasts. So, rule out stocks with recent negative earnings surprises.
Conclusion
When following any stock screening strategy, it is important to remember that the process is only a first step. Martin Zweig’s principles help to reveal a collection of companies exhibiting strong earnings and sales growth, reasonable price-earnings ratios relative to the overall stock universe, and strong relative price strength that can prove to be an interesting starting point. Zweig advises selling a stock if it drops roughly 15% below the purchase price. Otherwise, plan on holding these stocks for one year and then selling.
Stock Screening resources by herewith mentioned stock picking criteria can be found on my web site under Research section.