Market Lab Report - Premarket Pulse 12/21/15
Major averages got clocked Friday on massive, quadruple witching volume. All now sit under major resistance points.
If you look at charts of the Russell 2000, S&P Mid-Cap 400, and NYSE Composite you will see that the market has really been in a bear market since summer time. While we let members know when a stock with strong fundamentals and technicals is flashing a pocket pivot or buyable gap up, many such stocks fail to make much progress in this environment. Meanwhile, since the NASDAQ-100, an index of big cap names, has been leading the way, these types of names have outperformed the smaller ones.
While we acknowledge some of our members prefer to trade in smaller names, such names come with heightened risk in these markets which have been unable to sustain an uptrend.
As a general rule, stocks rarely buck trends when markets are heading lower, especially when markets sell off by taking the trap door down as they have done numerous times this year. This is especially true of smaller cap names. Thus, buying even high quality pocket pivots every time a stock appears strong and briefly pops to the upside can be futile in such an environment. That said, it takes a little more thought to discern which stocks have the potential for a solid, sustainable move and which don't.
Thus, going forward, we will guide members toward the stocks we believe present the best opportunities overall, rather than sending out reports on stocks of all shapes and sizes, even if they make it through our rigorous filters.
Our mission is to always add value to our members' investment process. Thus, the rigorous nature of our quality control process in stock selection will be elevated further to minimize the failure rate during these challenging times.
In terms of risk control, the pocket pivot stocks that have made it through our filters had minimal losses provided one bought closer to the stock's key moving average, often its 10-day moving average, on a constructive pullback. A sell stop could then be placed just under that moving average in context with the overall chart. For example, if the stock drops below the moving average by any amount or at most 1%, you would sell it. This way, even should the number of losses remain large in this challenging environment, if the losses are kept to 2% or less, then all it would take is one stock that makes an 8-10% move to neutralize 5 or more losses. For those with more risk tolerance, if the losses are kept to 4% or less, then it would take two stocks with 8-10% moves to neutralize 5 or more losses. Buying on constructive pullbacks is a strategy we have mentioned numerous times this year in addition to selling on strength in context with the stock's chart.
One is then more likely to keep a greater share of their profits even in a challenging year as this one.
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