As the stock market gets pounded by a weak economic reports and statistics it is clear to me that one way to stay out of trouble in the market is to develop a list of 'Must-have' characteristics that help determine whether a stock is buyable or not.
These characteristics will be things that a stock has to have, otherwise there is no point in buying as you will then have a lower than expected probability of success. The whole point of developing a system is to find stocks with high-probabilities for making money and not the other way around.
Far too many stocks do not have the vital elements that big winners always have. These elements include big percentage increases in earnings and sales, a compelling story and product, and shares that trade in a winning manner by going up on big volume. So many people buy substandard stocks (and during terrible markets) that it is amazing that anyone has any money left at all.
When I make mistakes it is usually because I either get the story behind a stock wrong in that it is not as big as I thought, or I screwed up the timing of my trades in it. Both fall on me to get better at this and that is why my 'must-haves' list is such a valuable tool.
I have faith that my screening tool will always give me lists of high-quality stocks to start with, and it is then for me to use other tools like this to find the winners buried among them. Thus, if a stock does not have the 'must-haves' then I will not buy them period, and this policy helps keep me out of trouble.
My 'Must-haves' list for buying a stock are:
1. The stock must be listed in my screening results for the most current week. Because my screen requires stocks to have high growth rates, high ROE, etc., this ensures that any stock I see shown on it has the growth parameters that I require. If a stock is not on the screener list then it doesn't exist to me
2. The stock must be above it's 50-Day Moving Average.
3. The stock must also have a big up-volume spike or multiple spikes as these confirm that big institutional investors are interested and want to own the stock.
If I'm going to lose money I'd rather have it be from stocks that meet my criteria than from crazy long-shots. In a bad market it is very easy to lose money but if you have valid selling-rules to go along with your 'must-haves' list then you have a chance to really minimize any damage that may occur from a bad market.
It is definitely a bad market right now and I think that most traders who have good systems are probably out of the market now and waiting for he next good situation to appear. Long-term holders that need to stay invested don't necessarily need to exit the market, but what they should have is some sort of system that keeps an eye on their portfolio. For example, my grandmother needs to own health-care stocks with good dividends, so what I'll do is try and find the best one in the sector and maybe switch some of her money into that, such as going from a weak Pfizer (NYSE: PFE) to a stronger Johnson & Johnson (NYSE: JNJ).
There are a million ways to do this but the key is simply having a system that agrees with you. Yes, even burying your head in the sand and ignoring everything is also a system, the problem is that is it simply has low probabilities of success. A market downturn is actually an opportunity to make your system better so I suggest you spend your time doing exactly that in preparation for the the next bull market. Until then, be careful. As Mark Twain once said:
"JUNE: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, October, December, August, and February."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.