Kurtis Hemmerling Kurtis Hemmerling is a personal finance enthusiast that has been putting his passion into writing since 1998. His goal is to demystify the investment world to benefit the readership of Money Crashers.
Some analysts claim that they are able to time the stock market and only invest during bull markets. The premise is simple: Buy stocks when the aggregate market is climbing and sell at the onset of a bear market.
In theory, you can maximize gains and virtually eliminate losses.
But is this possible? Do such strategies exist?
An Example of Market Timing
The conglomeration of publicly traded companies is often represented by a smaller cross-section of stocks called an index. For our example, we will use the well-known Standard and Poor’s 500 index, or S&P 500. This index is focused on large American companies and is typically used to gauge the stock market in general.
When you see a stock heading towards a 52-week high, what is your initial reaction? Do you think that the stock is hitting powerful resistance and you should sell? Or is the stock about to rally with high momentum?
This is a difficult and highly debated issue with many theories and analysis supporting different views.
A 52-week high is simply the highest price at which shares have traded over the past year. Numerically, this reference point holds no special value, but on a psychological level, it has a profound impact on investors and can greatly influence the share price.
One of the most difficult decisions investors have to make is when to take profits and when to cut losses short. Some traders will prematurely sell as a stock rises while others will hang onto their shares far too long as prices plummet.
How can you prevent from making the latter mistake? The trailing stop-loss order is one tool that can help you trade with discipline.
Let’s look at what the trailing stop-loss is, how it works, and the pros and cons of using it.
Trailing Stop-Loss Order
The trailing stop-loss order is actually a combination of two concepts. There is the “trailing” component and the “stop-loss” order.
Not to knock the popular mutual fund screening filters, but it seems a little deceptive to suggest that one can simply check off boxes for “low risk” and “high performance” to find investment opportunities that will reliably beat the odds in the stock market with minimal risk.
If lowering risk and attaining high rewards were as simple as ticking two boxes, why wouldn’t everyone do it? What incentive would there be to pick high risk and low reward stocks? And who would need the investing genius of Warren Buffett, the Joseph Piotroski F-Score system that gained 138.8% in 2010, or the likes of William O’Neil with his high-growth CAN SLIM methodology?
With thousands of dividend-paying blue chip stocks in the market, how can you figure out which ones are wise investments? Do you know what to look for to judge whether or not a company can sustain dividends?
When it comes to high-growth companies that don’t pay dividends, can you determine if their growth strategy is exceeding their budgets?
One smart method for evaluating the health of a dividend-paying company or a growth stock is to analyze its free cash flow.
Do you own shares of stock in a publicly traded company? You might think that your only trading options are to either buy or sell these shares, but when you factor in financial derivatives, the number of investing strategies available to you increases drastically.
One such strategy, known as the covered call option, allows you to create additional income, boost dividends, and hedge against a falling market.
A logical investor might assume that the best performing stocks are massive, cash-rich companies that have been in existence for decades. A reasoning mind tells us that smaller companies (i.e. small and micro-cap stocks) present a higher risk with less padding to fall on during economic crises. Others might argue that small stocks might be a suitable investment, but only if they are high-growth companies that are aggressively increasing net profits annually. But most might agree that small companies with low growth potential that trade close to their intrinsic value do not present valuable investments.
But does historical and empirical data back up this intuitive response or does it lead us in another direction? The answer is somewhat surprising, and the research behind the answer brings us to the Three Factor Model.
As a blue chip investor, you know how important it is to do your research. And you also know how much data is available. Even well-trained investors can find it overwhelming.
If dividends are your priority, then you can’t just look at the size and frequency of a company’s recent payments. You also need to look at the dividend payout ratio when you’re analyzing stocks. Otherwise, you could end up buying shares of a sinking ship that is cleverly masked with unsustainable high-yield dividends.
Stocks go up in price for a number of reasons: a favorable news report, an entire sector rising, the appearance of undervaluation based on historical fundamental data, or trading by technical analysts based on bullish price and volume patterns.
For a stock to sustain a steep price increase, it should be expected to experience high revenue and earnings growth. But is expected growth alone enough to decide if a company represents a good valuation? Of course not. One also needs to look at the stock price to determine if it represents a strong valuation relative to the company’s expected growth.
With thousands of publicly traded companies to choose from, you may wonder how you can single out a handful of stocks that have the potential for significant capital gains. Many methods for picking stocks exist, from Warren Buffett’s value investing mentality to the Joseph Piotroski F-Score method.
One particularly useful strategy for detecting high-growth stocks uses the acronym CAN SLIM. What is this approach? How profitable is it and who invented this unique stock trading system?
While it may be tempting to throw yourself into the dramatic highs and lows of investing in the stock market in search of instant gratification, it’s not necessarily the most profitable choice. Warren Buffet has spent his career watching investors pounce on “hot” companies, only to flounder when the market takes a plunge. All the while, he’s been steadily accumulating wealth by taking an entirely different approach.
The American Association of Individual Investors tracks 63 separate stock picking strategies that include a mix of growth, value, momentum, changes in earnings estimates, and insider buying. By the end of December 2010, the winning strategy for the year was from Joseph Piotroski with a 138.8% stock market gain over 12 months. You can see the rankings for yourself on the AAII scoreboards.
What is his system and how can you pick similar stocks? Read on…
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