There are so many crosscurrents in the U.S.
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
As an example, shares of
Assured Guaranty (
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
) of those funds, but most of the time, they will trade at par or
at a slight discount. But occasionally a
will start to trade at an increasingly large discount to
, 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
on websites like fundsdata.com. A recent screen showed that funds
Equus Total Return (
Central Securities Corp. (
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
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
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.
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