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Wednesday, February 23, 2005
Market Recap
A very tame CPI number out this morning showed there is little inflation in the economy. This sparked a small rally in the equity markets. The Dow gained 63 points, the S&P gained 6 points and the NASDAQ was positive by only a fraction by the end of the day. Tech stocks just cannot gain any traction right now. With good earnings news and some decent economic news out this morning, you would think the NASDAQ would get in gear and make a run to catch up to the other indices, that is not happening and it is a concern.
The Leading Sectors
The leading sectors of the market continue to move higher while tech stocks struggle. These sectors are ones we have mentioned here many times before and they may seem boring but they have been slow and steady for over a year now. I am talking about energy, the home builders, and steel stocks. We were pounding the table on these sectors a year ago. They are very good places to be for long term investors but the trader in me, cannot trade these stocks daily or even for swing trades because there is not enough volatility, although the home builders have been volatile lately. Congratulations to those members who had the patience to buy and hold. In this case, buying and holding was the correct call. In last night's commentary, we talked about this very topic, buying and holding. There seems to be some confusion on my stance about buying and holding. The point I made last night was that, I would not buy and hold past market leaders that have fallen out of favor. Contrast to buying and holding the market leaders, this is always a good investment plan until those leaders start to move over and make room for new leaders. Below, I have a plan for the buy and hold investor that I believe can be very profitable if you are in the next market leaders. Members who trade less frequently would be wise to settle in on some of the leading sectors when we occasionally mention them in the commentary. Those members who took our advice and got into these sectors last year have done very well. I still receive emails from some who have made 50, 75, and 100% on some of these issues.
The Next Market Leaders
In last night's commentary, we talked a little about former market leaders NT, LU, and SUNW. CSCO and MSFT were also market leaders when they were relatively new and had revolutionary products. These products took the world by storm and the stocks soared by thousands of percentage points. These products are old news now, so the growth is over. These companies are still awesome companies. MSFT is a cash cow but the stock is dead in the water and we will never see gains like it once had. Like teenage fashion, for every fad that comes and goes, there is always a new fad that will take its place. These former market leaders have stepped aside; they have made room for new leaders to move in a take their place. After the bear market, there was a massive sector rotation from these tech leaders. As we came out of the bear market, smart money knew that these leaders would not lead again. New leaders began to emerge. Some of those leaders were mentioned above and others were stocks that nobody ever heard of like TZOO, TASR and USNA, Even PETM was a quiet leader rising 1500% from its low. These stocks are no longer the leaders, they have stepped aside. Now it is time to find those leaders that are going to take their places.
The Visionary
I am in constant search mode for companies with new products that will revolutionize the world. These are the stocks that can make you very wealthy over time. These are aggressive growth small cap stocks with products that have great potential but have not caught on yet. MSFT started out as a small cap company with a product (windows) that nobody ever heard of. The companies I am talking about are companies that we may have not even heard of yet but they are there for us to invest in right now. Finding these companies are like trying to find a tooth pick in a hay stack. For every MSFT, there are 1000 companies that will fail. This is where you either have to be extremely lucky or you have to have vision.
The stock market has been around for over 100 years and there were always visionary investors that recognized the importance of being in companies with revolutionary products or services. They knew that they had to look to the future and not in the past. The past market leaders were no longer the front runners. New emerging companies became the leaders because they had products that were going to be needed by the masses in the future. It is all part of the cycle. A good example of this was the rail road stocks. Back in the covered wagon days the smart investor realized that trains were going to be the faster more efficient way of travel and ship goods. All the rail road stocks began a massive move upward and made many investors very wealthy. Like all cycles in the stock market, this new revolution got old and the next generation of shrewd investors saw the automobile as the next revolutionary product. They realized that cars were going to be the more efficient mode of travel and the rail road stocks began to decline while the major car manufactures started to soar. People who invested (bought and held) these stocks through their expansion got very wealthy. All these stocks are now well established companies with limited growth and the stocks are now dead money. They are okay if you want a dividend but I'm looking for much more than just a dividend.
The “Stock” Car Race
I am a trader but I will admit that under certain circumstances, the buy and hold mentality can be a brilliant strategy if you are in the right stocks such as the market leaders we spoke of above or you are lucky enough to find the next MSFT and just put it away and through away the key. First of all, it is hard to find such a company with that type of revolutionary product. If you are lucky enough to find one, how can we be sure this is our home run stock? Of course, we will not know this until after the fact. How do you know, you will not sell the stock when it doubles for your first 100% gainer. The temptation to sell is overwhelming when you have made 100% on a stock purchase. I can almost guarantee that 99% of the investors who bought MSFT in 1991 were out of the stock long before it could have made them millionaires.
I do not know what the next MSFT will be but I know they are out there waiting for us to find. Some of the revolutionary technologies are in the Nanotechnology sector. We know this sector is going to be big but the wait for the stocks to materialize could still be years away. Fuel cells are another emerging technology with a lot of potential but will they ever catch on? RFID is another technology just waiting to happen but when? I will continue to look for some of these emerging technologies and try to find the leading stocks in each of these sectors. I will place these stocks in my long term portfolio and throw away the key. When I wake up in 5 or 10 years, I may just have the next MSFT on my hands but if I am wrong? I may just wake up broke. Trying to find the next MSFT is a gamble. Even investing in the current leaders is a gamble if you happen to be the last one to sell after the inevitable cycle rotation. They do not lead forever. Long term investing is like a 500 mile NASCAR race. Over the course of your lifetime, there will be many lead changes; you have to be flexible enough to rotate into the leaders. If you just buy and hold forever, your “Stock” Car leader that sat on the pole position could end up in the pits by the end of the race (retirement age).
-- Due to technical problems with the annotative portion of stock charts, there are no charts tonight.--
Reminder:
There will be no bulletin tomorrow, Thursday February 24th due to the fact that I will be out of town for one day. I will not be available for trading tomorrow either so there will be no alerts. Business as usual on Friday the 25th. The next Bulletin will be Sunday evening. See you then.
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