Stock Recommendations Blog

We recommend a top-down approach to stock investing. In light of that, we designed a four-step process that you should go through when initiating new positions.

STEP 1: Market

What to do: Use the NYSE Bullish Percent, Option Stock Bullish Percent, OTC Bullish Percent, High-Low Index, Ten Week, and other indicators to determine if you play offense or defense.

STEP 2: Sector

What to do: Determine which sectors suggest offense (and what their respective field position is)—those in a column of Xs on their sector bullish percent chart. It is best to stay with sectors that are bullish and below 50 percent. Determine how a sector is doing relative to the S&P 500. Ideally, you want to invest in sectors that are outperforming the SPX (those that are in a column of Xs on their RS chart).

STEP 3: Fundamentals

What to do: Create and maintain an inventory of stocks to work from. Use any number of sources available to determine which stocks are fundamentally sound. In this step you are pinpointing which specific stock to buy.

STEP 4: Technicals

What to do: Review fundamentally sound stocks on a technical basis to cull those controlled by demand, those that demonstrate the best technical picture. This will narrow your fundamental inventory down to those issues with the best probability of moving higher. In this step you are determining when to buy a specific stock.

In summary, try to follow this four-step checklist when initiating new positions. By paying attention to the stock trading and the sector risks (opportunities), and then coupling the fundamentals with the technicals, your odds of success should increase. Not every trade will work out, but this gives you a definable game plan, something most investors don’t have. Stick to the plan, make your decision, then manage the outcome.

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Some believe that it isn’t possible to predict how stocks will change in price while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly.

Here are the important things to grasp about this subject:

1.
At the most fundamental level, supply and demand in the market determine stock price.

2.
Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.

3.
Theoretically earnings are what affect investors’ valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors’ sentiments, attitudes, and expectations that ultimately affect stock prices.

4.
There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.
Buying Stocks

You’ve now learned what a stock is and a little bit about the principles behind the stock market, but how do you actually go about buying stocks? Thankfully you don’t have to go down into the trading pit yelling and screaming your order.

There are two main ways to purchase stock:

1.
Using a Brokerage The most common method to buy stocks is to use a brokerage.

Brokerages come in two different flavors.

Full-service brokerages offer you (supposedly) expert advice and can manage your account but also charge a lot.

Discount brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the Internet came the explosion of online discount brokers. Because of them nearly anybody can now afford to invest in the market. We’ve actually got a whole separate tutorial on brokers and online stock trading , and you can check it out here.

2.
DRIPs & DIPs Dividend Reinvestment Plans (DRIPs) and Direct Investment Plans (DIPs) are plans with which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals.

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