Native Americans, Cycles, and the Stock Market: 3 Stocks Ready for Gains
Having recently returned from my circumnavigation exploration of the continental United States, I have been contemplating the beliefs of the original Native Americans and how they can be applied to the stock market.
I was fortunate enough to drive through several Reservations to observe the indigenous people’s work, ideas, and lifestyles. The most critical and applicable aspect of the Native American philosophy is their belief in the cyclical nature of time. In other words, things simply repeat; day/night, winter/summer, rainy season/dry season, moon phases and on and on. Â This is radically different than the Judeo Christian Western Man’s view of a linear time line consisting of a beginning and end instead of repetitive cycles.
While both these philosophies make sense depending on your world view, the cyclical idea is more applicable to trading the stock market. It’s amazing that a culture that never had an organized financial exchange subscribes to a philosophy that is so relevant for financial trading. Buying and selling appears to take place in cycles. Some market practitioners claim these cycles are ever changing but the fact remains that there are repeatable patterns that happen time and time again in both individual stocks and the broad market as a whole.
The easiest to understand and most exploitable cycle for the trader is the fact that oversold markets tend to get bought and overbought markets tend to get sold. In other words, stocks that have sold off but are still in a long-term uptrend attract the interest of buyers sending shares higher from the lower levels. Our extensive studies and hands on experience since 1995 have proven this to be the case time and time again. We have further quantified this cyclical behavior into an easy to follow, 3 step process to choose companies most likely to repeat the cycle of short-term gains after a sell off. The remainder of this article will lay out the 3 steps and provide 3 company names that fit each and every one of the criteria listed.
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 companies that take advantage of this quantified cyclical pattern for your consideration.
Cadence Design Systems
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The Knot Inc
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Monster Worldwide
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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.