Trading Lesson of the Week

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You Should Focus on Alpha Stocks

In This Week’s Issue:

  • Market Outlook – A Tale of Two (Three?) Markets
  • This Week’s Market Minutes video –  - NVDA vs GME – Don’t Make these Mistaks
  • Trader Training – You Should Focus on Alpha Stocks
  • Strategy – Stockscores Simple Weekly


Market Outlook – A Tale of Two (Three?) Markets

If you look at the major market indexes, you would thing we have a very hot stock market. In fact, most stocks are not participating in the gains that the indexes display. The S&P 500 and Nasdaq 100 are market weighted indexes, which means stocks like NVDA and AAPL have a much bigger effect on the index than most of the companies that make up these indexes. Large cap tech is strong while most of the market is languishing.

There is a third group of stocks that are worth considering. Alpha stocks are those that trade with abnormal volume and strong liquidity. The list of these stocks is changing every day but, for the short term trader, it is these stocks that can offer outsize gains, sometimes extremely so. For example, as I write this MBIO is up about 500% for the day on very strong volume. Trading stocks like this is the best way to profit in this market, particularly for the trader who lacks the capital to trade size on less volatile large cap stocks.


This Week’s Market Minutes Video – NVDA vs GME – Don’t Make These Mistakes

GameStop and Nvidia are two of the most actively traded stocks in the market but are very different situations. Despite their differences, they both highlight mistakes you must avoid when trading or investing in them. This week, I highlight some important trading tactics and then provide my analysis of the overall markets and the trade of the week on LGVN.

Click here to watch this week's video


Commentary – You Should Focus on Alpha Stocks

Except for the large cap tech stocks, most have been sliding lower for a number of months and, while we are starting to see stability and buying opportunities, the overall market is still far from enjoying an upward trend.

How do you make money buying stocks in a market like this?

Before I answer that question, I know many will ask why we not just short sell stocks and benefit from the market weakness. There are a few issues to consider.

Short selling is effective when the market is trending lower. However, it is also quite capital intensive. For a trader with a significant amount of trading capital, shorting makes sense. However, stocks that go down with the market usually go down at a pace similar to the overall market. That means making outsized profits is not that likely because individuals stocks will not be as volatile to the downside as a hot stock can be to the upside. You might see a stock go from $100 to $80 over a few months but there will also be stocks that go from $2 to $8 in a few weeks, if they are in play.

This leads to what should be the focus for buying in a weak stock market. You have to focus on Alpha stocks.

These are stocks that are trading on their own story. There is news or a rumor that has a significant effect on the market’s perception of company fundamentals. A crowd gathers and chases the stock higher, causing huge gains in a relatively short time. Each week, there are 5 to 20 of these stocks, even when the overall market is trending lower.

What has to be understood, however, is that these moves are usually quite short term. Check the charts of MBIO, NDRA or CAN and you will see stocks that made big gains today despite having been in downward trends in the recent past.

How do you find these stocks? You have to look for stocks trading with volume that is much higher than normal, strong liquidity and which surprise the market with strength. Return to the charts of MBIO, NDRA or CAN and you will these things started the upward trends.

Almost all hot stocks start their market beating trends with abnormal activity but not all abnormal activity leads to market beating trends. When I find a stock that is trading abnormally, I go through a process of evaluating the chart to identify the time to enter. I want to make sure that potential reward outweighs the downside risk. I never chase stocks that are well into their trend. We have to buy when they just start to break from low volatility, not well into the trend when the crowd is chasing them higher.

These trades tend to be shorter term because the crowd quickly moves from what hot story to the next. For longer term trades, the overall trend of the market is more important. So, in this market, we need to be more short term oriented. We can start to look for longer term trades when the market’s trend turns higher.

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