Adjusting For Higher Risks

If it is true, as I have theorized, that the worst is behind us for this recent rapid market decline, then the natural question is what should be bought? Even if lower prices are still to come for the overall markets, there are sure to be good winners on the long side, but finding them is going to be more difficult. As risk awareness becomes greater, the market becomes more selective in deciding which stocks to reward with higher prices, which is why our stock selection criteria must also become more stringent.

What makes people want to buy a stock? There are many factors which people consider before purchasing a stock and while we primarily focus on the technicals, there is another group of participants whose focus is on the fundamentals of the company. I am not going to tell you that fundamentals really matter to me, because they don’t. I’m just looking for stocks that will go higher.

There is a large portion of investors who consider fundamentals to be the most important thing to consider before purchasing a stock. To me, the PE ratio is as valuable as the MACD or a moving average. By that I mean that by themselves, they are useless…that’s right, you read it correctly. The value of any market measurement is not in the literal interpretation, but in the correct assessment of determining when they will be considered important enough to a large group of participants to make a decision to buy or sell decision. If a widely followed indicator can be used to clue us to a potential move in a stock we cannot ignore it, that is common sense.

At the same time, we must also consider fundamental catalysts in the market if we are to going to be able to anticipate which stocks are the ones which investors will hold with greater confidence in a weaker market environment. Just as my technical analysis is kept simple, I believe the same approach should be used when considering fundamentals. You will definitely not find me talking to CFO’s, reading stacks of research or poring over annual reports.

To me the fundamental questions are simple. One, is the company selling more stuff (whatever the stuff is that they sell is irrelevant), that is, are revenues increasing? Second, are they making more money than they did in the same quarter last year? Third, are earnings accelerating at a pace which is better than analysts expected? When a company can stand up to all three of these questions, they are stocks that I think are worth considering, but not buying. Not at least until the technicals can confirm what the fundamental story is saying.

Each quarter I sift through all of the companies that show positive earnings surprises and then further filter that list by looking for increased sales and earnings from the same quarter in the year before. This fundamental screening is done manually. I then look at each of the stocks on a technical basis to look for evidence of a good technical pattern. Once I have compiled this list I also look for short interest information. (for more on how I use short interest look to the “popular posts” on the side and read the “short squeeze article”).

For the most recent quarter, updated through the close on March 2, there are sixty-six stocks which I feel are in a good fundamental and technical position to continue to move higher over the coming months. I would not buy these stocks today, but I do own a few of them currently. Instead, the stocks on this list are ones that I will pay very close attention to over the coming months because they show good fundamental and technical promise. I will not always mention the stocks or the fundamental reasons on this blog, this is a different strategy than pure technical trading. If you are interested in receiving the list of stocks along with the information shown in the picture above, I will email them to anyone who contributes financially to this blog by utilizing the “PAYPAL DONATE” button on the right hand side. I am not making any minimum and won’t answer any questions about “what’s the average donation, or minimum, etc.” Use your judgment in deciding how much to donate, but if I feel you are insulting me like the guy who recently donated $0.10, I will not send the list or any other acknowledgement. For those of you who donate, I thank you in advance. I view it as not just payment for this list of stocks, but also as appreciation for the work I do each day.