The Less You Know, the More You Make in the Stock Market
Stockscores Foundation for the week ending November 25, 2024
In this week's issue:
In This Week’s Issue:
- Market Outlook – Upward Momentum Continues
- This Week’s Market Minutes video – You Must Know This About Trading Hot Stocks
- Trader Training – The Less You Know, the More You Make in the Stock Market
- Strategy – Strong Gainers
Black Friday Special This Week
Get $500 off the Investor or Active Trader course by using the following discount codes at checkout from https://www.stockscores.com/trader-training/
- Investor – 500ITA24
- Active Trader – 500ATA24
Market Outlook – Upward Momentum Continues
The upward momentum in the stock market continued this past week after a pullback following the US Election Rally. What we are seeing now is a broadening of the strength as more small cap stocks participate in the bull trend. I think the best opportunities are in lower priced stocks which have lagged the large cap group over the past two years. That makes it a great time to be a trader.
While Gold has been very strong, I think it is risky for a pullback as investors may be motivated to take profits. Oil is starting to improve but is still stuck in a trading range. US Retail stocks are showing optimism.
This Week’s Market Minutes Video – You Must Know This About Trading Hot Stocks
Hot stocks are those that make big gains in a short amount of time. They can be very profitable if you know how to trade them and this week, I provide some insight. Then, I provide my comments on the overall stock, commodity, currency and interest rate market and then the trade of the week on PDYN.
Click Here to Watch This Weeks' video on YouTube
https://youtu.be/hhviuoqPiVo
Commentary – The Less You Know, the More You Make in the Stock Market
This will likely come as a surprise to many of my readers but, yes, knowing too much about the stocks that you buy can be very damaging to your performance in the stock market. I say this from experience, most of my worst trades came from knowing too much.
To understand why, you have to first understand why stock prices change. Information moves the market. A company that has an improving business and captures the interest of stock market buyers will see its stock rise in price. A negative outlook for the business by investors will send prices down.
So, information is key, which seems to conflict with my assertion that knowledge about what companies are doing will hurt your performance.
The reason is relatively simple. It is not the information that investors already have that moves stock prices. What is already known is already priced into the stock. The future movement of stock prices depends on the future flow of information to investors.
A biotech company that develops a new drug to treat a disease will see its stock price go up to reflect the success of that drug. Once the information is known by investors, there is no value to using that information since the stock price reflects what is already known. Publicly available information has no value and can actually be destructive.
The only information that is useful to an investor is that which is not publicly known. If you know that the biotech company is going to announce the successful development of their new drug in two weeks, you have the ability to buy the stock now and enjoy the gains when the rest of the market learn of this new information.
So, inside information has value. Unfortunately, trading on inside information is illegal for most people (not those in the US Congress or Senate). Still, there are many investors who act on privileged information to make decisions in the market, a fact that I will show is very important.
There are some people who can use their expertise in an industry and combine it with public information to make good guesses about what the future for a company is likely to be. These people typically work at or advise large institutional investment firms who place large investments in the stocks that they like.
The key for the rest of us is to do what the inside and large investors are doing. They have better information or expertise that gives them an advantage. If we do what they do, we can beat the stock market.
How do we know what they are doing? By watching market activity. A stock that comes alive with abnormal price gains with strong volume typically does so because motivated buyers are acting on new information that is not yet widely known.
The proof of this can be seen in the way that many stocks trade before big news announcements. Often, stocks will move up for days or weeks before big news because those with better information price in the information before it is made public.
So, we can say that publicly available information has little value (unless you have a lot of expertise) and that investors need to trade on private information or follow those that have it, but how is knowledge destructive?
Knowing too much about a company can make you attached to it. Just as new information can push a stock higher, it can also push a stock lower if the information is negative. What often happens to investors is they hold on to a stock as it moves down in price because they see no reason for it to go down because there is no publicly available information to justify the move. The selling pressure may be motivated by those who have better information and are pricing in the negative turn before most investors know what is happening.
Consider this example. You buy a stock that has a new treatment for lung cancer that has had good results in Phase 2 trials. The stock has done well and is well liked by the stock market. Despite the positive story, the stock drops 10% one day on strong volume. You choose to ignore the negative signal from the market and hang on, confident that what you know will make the stock rebound and continue higher. The next day, the stock drops about 8% and you buy more, telling yourself that you are getting the stock on sale as fools sell. This cycle of denial continues for a few more days until the company announces that their drug has been rejected by the FDA. Now the stock gaps down another 25%. You are suffering a major loss because you fell in love with the company story and ignored the market’s message.
Information is great if you have some that most people don’t. Few of us are in that position but we are all able to look at market activity and see what people are doing with their money. Trading activity never lies.
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This week, I ran a Market Scan for stocks up more than 20% today, with at least 5000 trades and a Bullish candle. This found 19 stocks, here are two that I think have good potential
1. KULRKULR had a very strong day today and is hitting resistance at $0.80, making it likely that it will pullback in the next few days. I think the opportunity on this stock will come on the break of the pullback so watch the 30 minute chart for such a move.
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2. UAVSUAVS came alive with strong volume today, breaking up from a rising bottom. The stock is still fighting against a long term downward trend but the rising bottom indicates the trend is starting to turn. Support at $3, resistance between $15 and $20.
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