Why "Buy and Hold" is Dead -- and 3 Different Strategies to Try Today

By David Sterman,

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There are so many crosscurrents in the U.S. economy right now that the stock market has no idea where it wants to go. Every trading day, we get a new set of items to digest that sets a short-term trend for the market. As a result, investors should be holding a portfolio comprised of both long-term holdings and short-term plays affected by the market's near-tem gyrations.

Here's a look at my three favorite trading styles.

1.Watch the volume
Trading volume -- for a particular stock or the whole market -- is a key tell. Generally speaking, a stock that is selling down on average or larger-than-average volume should be of real concern. This tells me that an ample number of investors see problems coming. But any stock that is falling on lighter-than-usual volume could set up an attractive opportunity, because low volume indicates apathy rather than any real underlying problems.

Often times, a stock just moves out of the spotlight and few buyers are around to support it. This often happens after a stock has had nice run and is simply tired. I occasionally screen for stocks that have fallen more than -20% in the past three months on low volume. Investors can easily get daily volume figures on Yahoo! Finance. The main drawback to this approach is that shares may stay out of the spotlight even longer, meaning you'll need patience to see a rebound.

As an example, shares of Assured Guaranty ( AGO ) , a municipal bond insurer, saw its shares drift lower on decreasing volume in June. Trading volumes that month were roughly half of May's numbers, and shares lazily drifted toward their 52-week low as we moved into July. But the company posted stellar quarterly results Thursday evening, pushing shares up nearly +10% in Friday trading. It seems that sell-off was simply a result of apathy rather than a signal something was seriously wrong.

This also applies to the broader stock market. If the market is steadily falling on lighter-than-usual volume, then we're simply seeing buyer fatigue rather than a heavy amount of sellers. Conversely, rising volumes and sinking indexes are often a sign of more pain to come.

2. The closed-end fund gap
All closed-end mutual funds trade for a price that is distinct from the actual underlying values of the fund's holdings. On rare occasion, funds will trade at a slight premium to the Net Asset Value ( NAV ) of those funds, but most of the time, they will trade at par or at a slight discount. But occasionally a closed-end fund will start to trade at an increasingly large discount to NAV , which is more of a function of disinterest in the fund rather than any stress in the underlying portfolio. Investors can target funds selling at the sharpest discount to NAV , and make some nice short term gains before others notice the disconnect and bid the fund back up.

Investors can easily screen for funds trading at a sharp discounts to NAV on websites like fundsdata.com. A recent screen showed that funds like Equus Total Return ( EQS ) and Central Securities Corp. ( CET ) are trading at considerable discounts to their NAVs.

3. The Oversolds
This is a recap of a strategy I discussed at InvestingAnswers.com in early June when discussing Priceline.com (Nasdaq: PCLN) . That company's shares had plunged to around $185 but now flashed a clear buy signal. (Shares surged $50 on Wednesday and now approach $300, just two months later).

That buy signal: analyst sentiment. Hedge funds and mutual funds had just dumped shares aggressively, but an increasing number of analysts were coming out of the woodwork to say shares were oversold. Near the end of that article, I noted that "As the analyst chorus becomes more positive, the stock chart should soon follow."

My concluding paragraph sums up this strategy best:

"Wall Street pros often have a surprisingly simple approach that any individual investor can replicate. They find stocks that are farthest from their price targets, and then simply wait until the sellers have been flushed out of the stock. When they see the targeted stock moving sideways for several sessions, they pounce. Indeed, many of the same funds that sold Priceline.com back at $250 probably find shares more appealing now that they're close to $180, and they'll be looking to buy back in." Once again, investors can easily find average price targets on Yahoo! Finance in the Analyst Opinion section.

Action to Take --> These are just some of the many short-term and mid-term strategies that can be deployed. In a market like this, investors should be constantly trolling for new ideas and becoming familiar with various screening tools. Whether it's a stock trading off but on low volume, closed-end funds trading at sharp discounts to their NAVs, or stocks well below the average analyst price target, intriguing investment ideas can be found if you look for them.

-- David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and has made numerous media appearances over the years, primarily on CNBC and Bloomberg TV. David has a master's degree in management from Georgia Tech. Read More...

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing Basics
Referenced Stocks: AGO , CET , EQS , NAV , PCLN

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