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Stock Market Serial Killers

06/04/12 09:04:32 AM
by Billy Williams

Stocks, like serial killers, can be charming and disarming, but the moment you turn your back and your money over to them, you are in big danger.

Security:   FB, CLB
Position:   Hold

Every share traded on the stock market is a potential killer that has a global reach, plus the ability to put you and everyone else connected to you at risk. Every dollar in your trading account that gets "murdered" by one of these psychopathic stocks makes you less wealthy and less able to take care of your family and your future. Worse, it makes you less able to make effective changes in the course of your life that would lead to the betterment and enrichment of the lives that count on you the most -- your kids, your spouse, and your aging parents.

Every stock is a potential serial killer that draws you in by the false appearance of steady, though paper-thin, profits, being a "good" investment, and the most deceptive trait, being a "good value."

Look no further than Facebook (FB) and its initial public offering (IPO) and note the disaster that followed. Facebook has an enormous following and was written up in every financial periodical in the world as the anticipation grew to a fever pitch as it made its shares available to the public. See Figure 1.

All the bright possibilities of a shiny future glittered of its offering price of $38 a share of a company that many felt was destined to join other pioneering and iconic companies like Microsoft and Apple as a trailblazing company that promised potential stratospheric growth and profits.

FIGURE 1: FACEBOOK. Facebook's IPO launched with a lot of fanfare, but the disaster that followed will be talked about and studied for decades. The hype that surrounded this IPO was designed to draw in investors and make the sellers rich, not the investors themselves.
Graphic provided by:
Meanwhile, on Planet Reality, the investors who bought shares and grew drunk on the intoxicating possibilities woke up with a hangover as the fiasco that followed the IPO. There were false reports, Morgan Stanley scurrying for cover as claims of misrepresentation mounted every day, and talk of a "relaunch" that would be the first of its kind ever mentioned in recent memory.

There were billions at stake, and amateur investors left holding lifeless trading accounts sucked dry of their capital. Just another day on Wall Street, folks. Move along, nothing to see here.

Wall Street is not your friend, remember that.

Next, remember that each stock is just like a serial killer.

They can smile at you, charm you, and sweet-talk you out of your money while hinting at all the promise of fame and fortune, but the moment you hand over your money, you are in serious danger. Stocks don't care if that money was your retirement, your kid's college fund, your spouse's inheritance, or the down payment for a bigger home so that you could move your elderly father in with you and take care of him. They. Just. Don't. Care.

Don't forget it.

So, how do you protect yourself from these predator stocks? Answer: Rules.

FIGURE 2: CORE LABORATORIES. Core Labs is the complete deal in that it embodies most, if not all, of the seven vital characteristics of a winning stock. It offered a buy point of $76.85 on June 8, 2010, and later went on to register an almost 100% return to date with more upside potential available.
Graphic provided by:
There are seven traits that have been reliable for selecting profitable stock investments for centuries. They are:

1) Current earnings growth of 25% or more
2) Annual growth of 25% or more
3) New products/services, management, price highs
4) Supply & demand
5) Leadership - leading stocks in leading groups
6) Institutional support
7) Market direction

See Figure 2 for an example.

Stocks that exhibit these traits are the good guys and will make you wealthy if you invest appropriately while controlling your risk against the unforeseen.

Strong fundamentals are indicative of a growing company that has a competitive advantage in its marketplace. In addition, new products/services or the addition of effective managers that can steer a company through a period of growth expansion can put a spark under a company's afterburners, launching it higher. This can also cause spikes in a stock's price highs before or during such a transition, which signals that it's a good stock candidate to invest in.

Strength begets greater strength, and so does stock leadership in the stock market. The strongest stocks tend to lead the stock market to new highs and lead the way while other stocks just follow along or get dragged along. Stock leaders blaze the trail higher, always.

When these traits are in full effect, they attract the big players in the investment world, the institutional traders. These traders have massive buying power behind them and can offer a stock significant price support and, as a result, help it launch a new rally to even higher price levels.

Finally, if you confine your trades to nothing more than buying on the long side of the market, you will have gained a strong edge against unnecessary losses. In order to maintain this edge, you want the larger market to be in a confirmed uptrend so that you can ride that wave of momentum higher rather than invest in a stock that is going to be dragged down under the weight of a bear market.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

E-mail address:

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Date: 06/06/12Rank: 1Comment: 

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