4 Stocks to Beat the Market
What does it take to beat the market in the short term? How can traders buy stocks that are likely to outperform the average stock over the next five to eight days?
These were the questions we wanted to answer as we developed our Short Term PowerRatings. Was there a way to develop a system, a rating system that would allow traders in the short-term timeframe to know at a glance whether or not a stock deserved consideration as a trade?
By looking at various factors including volume, trend, volatility and momentum–and through an analysis of millions of short-term stock trades from 1995 to 2007–we were able to answer this question with a resounding “yes!” We were able to quantify which stocks were likely to outperform the average stock over a five-day period, which stocks were likely to underperform the average stock over a five-day period, and which stocks were likely to perform about as well as the average stock over a five-day period.
The stocks in the first category were stocks that, under the right conditions, short-term traders should focus their buying on. The stocks in the second category, stocks we called the low, Short Term PowerRatings stocks, were stocks that investors should avoid at all times or bet against, if a trader’s system or method included selling stocks short.
The stocks in the last category are stocks with average Short Term PowerRatings of more than 3, but less than 8. These are stocks that short-term traders should more often watch than trade. The ranks of the average stock today, it should be remembered, are where tomorrow’s high and low Short Term PowerRatings stocks will come from.
How significant is the edge provided by Short Term PowerRatings? Consider this: stocks with our lowest Short Term PowerRating of 1 have not only failed to keep up with the average stock after five days, but also have actually underperformed the average stock by nearly 5 to 1 after five days. While we do not recommend that traders short every low Short Term PowerRating stock, the ranks of the 1-rated stocks are among the first places that traders looking to sell stocks short should look.
On the other hand, stocks with the highest Short Term PowerRatings, the stocks with Short Term PowerRatings of 10, have been among the best stocks for short-term traders to buy. Our research revealed that 10-rated stocks actually outperformed the average stock from 1995 to 2007 by a margin of nearly 17 to 1 after five days.
If that’s not a powerful short-term edge, then I don’t know what is.
The stocks in today’s report do not have quite the highest Short Term PowerRatings. But with their Short Term PowerRatings of 8, all four belong category of stocks that has outperformed the average stock by more than 8 to 1 over the next five days, according to our research. This makes these excellent potential trading candidates when bought on pullback–as all four stocks are currently doing.
Note also the 2-period Relative Strength Index values next to each stock to give traders a gauge of how oversold the stocks are as of Thursday’s close. We consider a stock to be oversold when its 2-period RSI falls below 10. We consider a stock to be severely oversold when its 2-period RSI falls below 2.
First Charter
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FCTR |
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PowerRating). RSI(2): 11.61
FTI Consulting
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FCN |
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PowerRating). RSI(2): 6.60
Dime Community Bancshares
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DCOM |
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PowerRating). RSI(2): 17.16
Buckle
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BKE |
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PowerRating). RSI(2): 12.47
For more simple and straightforward tips on short-term stock trading, consider getting a copy of our free report, written especially for those who trade stocks in the short-term “sweet spot” of five to eight days. Click here to get your copy of “5 Secrets to Short Term Stock Trading Success”–or call us at 888-484-8220–and see what the TradingMarkets approach to trading can do to make you a better trader.
David Penn is Senior Editor at TradingMarkets.com.