In today’s world, the stock markets are too volatile for the traditional investor to buy a stock and leave it in a portfolio until retirement. Without constant monitoring, there is a risk of losing the entire investment.
Making money in the U.S. and Canadian stock markets requires that an investor constantly buy and sell company stocks.
Below are my 20 guidelines an investor should consider when trading in the stock markets;
- Stock Bell Curve. The rise and fall of stock prices over time resembles a bell curve for most companies. There is a price rise to a peak followed by a price decline over time. Indications of a stock price approaching its peak are smaller changes in price per trade. These curves can be extrapolated to predict the peak. When the curve height is 2/3 of the predicted peak you should sell the stock.
- Peak and Plateau Curve. Some stock prices rise to a peak and plateau over time. Crude Oil commodity stocks in 2008 resemble a peak and plateau curve. Examples include BP Petroleum (BP) and Suncor Energy (SU). When the stock price reaches the plateau and it holds the price value for a period of time, you should sell the stock if the commodity price does not rise further.
- Undervalued Stocks. Buy stocks with a P/E (price to earnings ratio) of <12, an EPS (earnings per share) >5% and an annual dividend yield >2%. Typical stocks include Husky Energy [TSE: HSE], Wells Fargo (WFC) and Chevron (CVX).
- Quarterly Earnings Reports. Look for stocks in which the corresponding commodity price has been rising significantly during the quarter. For example, with high crude oil, gasoline and diesel prices there will be a significant impact on 2008 Q2 earnings of companies such as ExxonMobile (XOM) and ConocoPhilips (COP).
Buy these stocks a few months before the company reports its quarterly earning results and sell them shortly after the earnings announcement, when the stock price has peaked.
- Commodity Contracts. Look for a stock in which the commodity contract between supplier and buyer is going to significantly increase the commodity price. In 2008, high contract prices have resulted in a significant stock price rise for companies such as Potash (POT), Consol Energy (CNX), Arch Coal (ACI), Fording Coal (FDG), Companhia Vale (RIO) and United States Steel (X).
Buy these stocks 3-4 months in advance of the contract renewal date and sell them after the earnings announcement, when the stock price has peaked.
- Good News. Good breaking news will result in a price rise of the affected company stock. For example, recent news of discoveries of large deposits of shale oil, coal and crude oil made by Arc Energy (AET), Enerplus (ERF), Continental (CLR), Range (RRC), Talisman (TLM), Duverney [TSE: DDV], (Goldsource [CVE: GXS] and Petroleo Brasileiro (PBR) resulted in significant increases in stock price. Buy stock immediately upon the news announcement and sell them after the price peaks.
- Bad News. Bad breaking news such as an extended power shortage, mine flood and bad asset backed securities recently resulted in the value of company stocks of Anglogold Ashanti (AU), Cameco (CCO) and CIBC (CM) to drop significantly. If you owned these stocks at the time you should have sold them immediately. If you did not own them, you never buy on weakness. They will seldom fully recover from their lows regardless of the commodity.
- Acquisitions. Acquisition announcements immediately result in a rise in the stock price of the acquired company. Recent acquisitions and attempted acquisitions of companies such as Bell Canada (BCE), Yahoo (YHOO) and Cordero (COR) have resulted in a significant increase in share price. Buy stock immediately upon the acquisition announcement and sell them after the price peaks.
- Trends. New trends created by fashion and business companies such as Crocs (CROX), Lululemon (LULU) and Research in Motion (RIMM) created hype that resulted in share prices soaring beyond their intrinsic value. Buy trend stocks immediately upon the news announcement and sell them after the share price peaks.
- Technological Breakthroughs. Companies involved in technological breakthroughs usually see a significant rise in the stock price. Companies such as Petrobank (PBG), Ivanhoe Energy [IE.TO], Quantum Fuels (QTWW), Timminco [WAR: TIM], Synthesis Energy (SYMX), Shlumberger (SLB), Rentech (RTK), Global Resources (OTC:GBRC) and Dupont (DD) have seen increases in stock prices due to these types of recent announcements. Buy the stock when the technological breakthrough announcement is made and sell it after the price peaks.
- Value of the Dollar. Sometimes it is profitable to buy stocks in a foreign market knowing that the value of the domestic currency is going to drop. For example, it has been forecasted that as the US economy comes out of the recession in Q3 2008, the value of the US dollar will rise about 15% above the value of the CND dollar. Early in Q3 2008 Canadians should consider selling Canadian stock and buying US stock. When the value of the US dollar has stabilized, you should then sell your US stock.
- Stock Promotion. IPOs (Initial public offerings) are initially offered at a set asking price, then discounted over time to attract more buyers and finaly offered again at the higher price until the IPO is sold. Recent examples of companies issuing IPOs include VISA (V) and Sprott (SII). Buy these stocks when they have bottomed and sell them when they have peaked.
- Subsequent Stock Issues. Known as a BBP (Brokered Private Placement), companies often issue stocks to be used for additional exploration expenditures, working capital or general corporate expenses. A recent example of a company that issued a BPP for additional exploration expenditures was Goldsource (GSX). Generating additional cash in this manner is a positive indication of a highly potential asset and normally results in a stock price increase. You should buy these types of stocks immediately. If you own a stock in which the BPP is to be used to pay off debt, you should sell it immediately. Keeping it will result in diluting your stock value.
- Inside Trading. Certain company officials known as Inside Traders are required to disclose the purchase and sale of their company stock. When an insider buys stock you should consider buying it and when an insider sells stock you should consider selling it too.
- Stock Buy Backs. Occasionally companies feel the selling price of their stock is too low and buy back large quantities. A recent example was PetroCanada (PCA) buying back 5% of their outstanding shares. Known as an NCIB (Normal Course Issuer Bid), the announcement often leads to a stock price rise. Consider buying the stock following the NCIB announcement and selling the stock after it peaks.
- Stock Splits and Consolidations. Occasionally companies feel the selling price of their stock is too high or too low. If the stock is too high they tend to split the stock shares, for example 1:2. If the stock is too low they tend to consolidate the stock shares, for example 6:1. Companies involved in recent stock splits and consolidations include Suncor Energy (SU) and Pacific Rubialis (PEG). Buy stock well in advance of the company announced stock split or consolidation date and sell the stock immediately after it peaks.
- Seasonal Sector Cycles. Certain company stocks are priced higher during certain parts of the year when demand for the corresponding commodity is stronger. Agricultural and amusement stocks are at their lowest in the winter. Typical examples include Viterra (VT) and Cineplex (CGX). Buy stocks well in advance of the seasonal cycle beginning and sell off well in advance of the end.
- Non Compliant Resource Report. Occasionally there is a news flash about a huge resource discovery affecting one or more companies. These discoveries lack a compliant resource report, such as 43-101 or 51-101, to validate the resource size. Recently a Utica Shale natural gas discovery resulted stocks in area companies such as Gastem (GMR), Petrolia [CVE: PEA], Questerre [TSE: QEC], Junex [CVE: JNX], Petrolympic [CVE: PQC] and Epsilon (EPS) to skyrocket. Only buy into these types of stocks if there is a compliant resource report and the resource value is well in excess of the company market cap. In these situations, buy into the stock upswing and sell off immediately when the stock peaks. Do not buy back into the stock after a pull back unless there are further positive news announcements.
- Foreign Government Laws. New foreign government laws can have a major impact in the value of company stocks. For example, Canadian legislation requires that Income Trust companies become incorporated before 2011. Examples of Income Trust companies include Canadian Oil Sands [COS.UN], Superior Plus (SPF), True Trust [TUI.UN], ARC Energy (AET) and Enerplus (ERF). These companies hold valuable oil and natural gas resources. Their stock prices rise with commodity prices and the companies pay high dividend yields to shareholders. Normally new government laws negatively impact stock value and the stock should be sold immediately. In the examples above, the stocks should be purchased in anticipation of being acquired by incorporated companies between now and 2011.
- Cash. Always have on hand about 20% of your holdings in cash to buy stocks when positive news announcements are made.
Disclosure: I have stocks in COS, SPF, TUI, AET, ERF, TIM, PEG/, PQC, PBR, GMR, PEA, QEC, CCO, CLR, DDV