Madoff Madness, Irrational Exuberance and 3 PowerRatings Stocks

Over the weekend I attended the U.S. Marshals’ federal auction of notorious financial swindler, Bernie Madoff’s assets. Other than a decent watch collection, there wasn’t much there that you couldn’t find at any random Hampton’s garage sale. What I found most interesting was the lesson taught in irrational exuberance by observing the auction.

Items that were estimated to sell for several hundred sold for literally 1000’s of dollars. Most notably, the con man’s satin Mets baseball team jacket was projected to sell for $500 but sold at a whopping $14,500! The bidding erupted into a frenzy for some items with people literally jumping out of their chairs to cast their bids. It was a crazy, intense scene to say the least!

It was a great analogy to the stock market which in its rawest form is nothing more than an auction with buyers and seller bidding up prices. Often prices move to irrationally high levels as greed takes over the bidder’s mental state, just like at the Madoff auction. Underlying fundamentals, economic conditions and reality simply do not matter once greed moves into the marketplace in a big way.

Short-term stock traders don’t care about the why’s of stock moves. They are interested in anticipating and catching the moves before they happen regardless of if they are irrational or not. The raging bull market in stocks being experienced right now is being called irrational by many analysts and economists. However, traders are trying to ride the wave regardless of the underlying factors. During these times of extreme bullish sentiment, catching stocks before they make their move becomes even more difficult without a proven method. We have developed a tested and proven system to locate stocks ready to make a short-term move regardless of the underlying situation. This article will provide you the easy to use and understand system, as well as 3 companies fitting the criteria right now.

Although no stock picking system is fool proof, our extensive testing since 1995 across all market conditions has proven the effectiveness of the 3 step process. This article will lay out the 3 step stock picking system and provide 3 names fitting the criteria.

The first and most critical step is to only look at stocks trading above their 200-day Simple Moving Average. This assures that a strong, long-term up trend is in place, increasing the odds that you are not buying into a falling knife or catching a stock in a death spiral.

The second step is to drill deeper into the list locating stocks that have fallen 5 or more days in a row or experienced 5 plus consecutive lower lows. Yes, you heard me right, fallen 5 or more days in a row. I know this fly in the face of conventional wisdom of buying stocks as they climb higher. However, our studies have clearly proven that stocks are more likely to increase in value after a period of down days than after a period of up days.

The third and final step is a combination of whittling the list down even further by looking for names whose 2-period RSI (RSI(2)) is less than 2 (for additional information on this proven indicator click here) and the Stock PowerRating is 8 or higher.

The Stock PowerRatings are a statistically based tool that is built upon 14 years of studies into the inner nature of stock prices. It ranks stocks on a scale of 1 to 10 with one being the most volatile and least likely for short term gains and 10 proven to be the most probable for gains over the next 5 days. In fact, 10 rated stocks have shown to have a 14.7 to 1 margin of outperforming the average stock in the short-term.

The stocks that fulfill each of the above steps have proven in extensive, statistically valid studies to possess solid odds of increasing in value over the 1 day, 2 day and 1 week time frame.

Here are 3 stocks for your consideration fitting the above 3 steps:

Endologix
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Freddie Mac
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Alpha Pro Tech
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Learn more strategies for trading stocks in the short term with a free trial to our PowerRatings! The highest rated stocks have outperformed the average stock by a margin of more than 14.7 to 1 after five days! Click here to launch your free PowerRatings trial today!

David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.