Look for Your Opportunity to Get Back on the Money Horse

Look for Your Opportunity to Get Back on the Money Horse
by George Leong, B. Comm.

With optimism towards the economy rising, we have seen buying return to the stock markets and specifically the growth areas of technology and small companies. The small-cap Russell 2000 has rebounded, and it is showing decent technical strength at this point.  After being down over eight percent, small-cap stocks have been on a revival, trending higher. They are currently up close to six percent this year, trailing only the NASDAQ, but ahead of the DOW and S&P 500.

My feeling is that small-cap stocks will continue to outperform in the longer term. The historical statistics reflect this. The key for you as an investor or trader is to monitor a group of small-cap stocks that you like and wait to pick up or add to a position should the stock decline significantly. Markets have not had a major decline in some time, so look for opportunities to buy should a dip surface.

Heading towards the mid-point of the year, stock markets have a bullish bias and are trading on major news. We are seeing some selling occurring after upward moves in the market. This makes it difficult to trade due to the downside risk of profit-taking. The key is to look for opportunities to buy on market dips and profit from a subsequent bounce, as long as the recent breakout levels hold.

We continue to see stocks in major selling after reporting negative news. This can sometimes provide an opportunity to buy for a quick trade. In technical terms, when a stock sells off, it hits what we call an oversold condition. When a period of selling happens or if stock plummets after news, as a trader, you want to watch for the selling overhand to dissipate and then buy on weakness.

This strategy of buying on major declines does not always pan out, but, as long as you ride out the winners and sell the losers, you should have good success. This is a strategy that I use. Each morning, I scan the market data, searching for stocks that have been sold off. I evaluate the stock and, as long as I do not see a major shift or deterioration in fundamentals, I place the stock on my radar and decide on whether to place a buy order at a limit price that I want. Be extra careful with thinly traded stocks, where the bid-ask spread could be large. Also the trading volume should be relatively high.

The key to trading is to minimize losses and capitalize on the winners. If you do this, the key to success is to closely monitor your positions and make sure you are always on top of the situation. Take the emotion out of trading by using a mechanical selling system in which you set a sell order on the downside at a predetermined price. This will help protect against major downside losses, although it sometimes fails. When stocks move higher, you should adjust your stop higher. When you record major gains, take some profits off the table. Remember the key is capital preservation, so you can always have cash to trade.