Trading Lesson of the Week

Check back weekly for another free trading lesson:

Alpha Stocks Have the Best Potential

In This Week’s Issue:

  • Market Outlook – Interest Rate Concerns
  • This Week’s Market Minutes video – Buy Stocks When These 3 Things Happen
  • Trader Training – Alpha Stocks Have the Best Potential
  • Strategy – Stocks to Watch for Swing Trades


Market Outlook – Interest Rate Concerns

2024 has started with a downdraft in the market as investors have shown a renewed concern about the future direction of interest rates. Some stronger than expected economic numbers have brought some selling pressure into the bond market, moving interest rates up and stocks down. The most interest sensitive group, the small cap stocks, have seen more selling pressure than the large cap stocks. I would like to see the downward trend that has been in place since the start of the year to be broken. Until then exercise caution with stocks in general and only consider Alpha stocks (making price gains with abnormal volume) for short term trading opportunities.


This Week’s Market Minutes video – Buy Stocks When these Three Things Happen

The best-performing stocks almost always start their strong price gains with three simple things. This week, I show you what those 3 things are, provide my analysis of the overall stock market, and show the day trade of the week on AUVI.

Click here to watch this week’s video


Trader Education – Alpha Stocks Have the Best Potential

An Alpha stock is one that moves up faster than the overall market, often very rapidly, making them ideal for traders looking to make fast profits. The name is not meant to reference Alpha dogs or males or fraternities, it comes from the correlation relationship between a stock and the overall market. Most stocks have some correlation to the market in general; this correlation is called the Beta of the stock. A stock that moves up 1% if the market moves up 1% is said to have a Beta of 1. If the stock moves up 2% for the same market move, the Beta is 2. You can find what the Beta of a stock is on many financial websites.

The other component of risk in a stock is the Alpha. This is the stocks movement that is independent of the overall market. If a stock with a Beta of 1 moves up 10% when the market moves up 1%, it has made an Alpha move of 9%, the amount that is more than expected based on its correlation to the overall market (this is a simplification but represents the general concept).

We want to find Alpha stocks because they give us the potential to beat the overall market. If you are happy with the market returns, then buy an index ETF or fund. If you want to beat the market, you have to trade Alpha.

Alpha stocks are characterized by stronger than normal price gains and volume that is abnormal. This typically shows up early in the upward trend and may last throughout the upward price trend. Alpha trends tend to be relatively short lived as the market buys the stock aggressively on improving fundamentals. We tend to get the best returns on Alpha stocks by day or swing trading them.

If you want to beat the market, focus on Alpha stocks. To do that, focus on the stocks that are making strong price gains with abnormally high volume. These are stocks that are in play and able to attract a crowd of buyers who will push the stock up sharply, often in ways that do not make sense. That is the power of the crowd.

In this way, you could call Alpha stocks those that go viral.

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