Essentials Of Stock Selections
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.