Today’s Trading Lesson From TradingMarkets

In the short time I have
been at Tradingmarkets.com, I have received e-mails concerning
“Glamour Stocks.” There are many ways to interpret what these are, but let’s
keep it simple. The Glamours are the function of a bull market and are,
specifically, the leading stocks that produce the extraordinary returns every
investor is after. Past winners such as Yahoo! (YHOO),
America Online (AOL)
and Cisco (CSCO)
fall under this category. The trick is being able to find these stocks before
they make a huge move.

To find these stocks takes nothing more than
research in what traits all of them shared before they made their move. Once all
of these qualities have been found, simply look for them in companies trading in
today’s market and buy them.

First and foremost, the overall market must be in
an uptrend, or about to begin one. Three out of four stocks will follow the flow
of the market, and if you jump into a winner, it will be that much bigger if the
market is helping push it higher. The best way to back this one up is to recall
one of the biggest winners — if not the biggest — of the past decade: Cisco
Systems. It began its run of over 80,000% in the latter part of 1990, just as
the bull market was beginning.

Once a positive trend has been established, the
first thing to look for in a stock is earnings.
The bigger the better, and naturally, the greatest stocks have all had huge
earnings growth. The greatest stocks will show quarterly earnings growth of at
least 50% from the same quarter a year ago. Well-known winners such as Yahoo!,
Peoplesoft (PSFT)
and Nike (NKE)
all displayed earnings growth of this caliber.

Before Yahoo! launched a
450% increase in seven months, the four
prior quarters showed earnings growth of 200%, 400%, 500% and 800%!

Next, the stock should be part of a
top-performing industry group, or at least keep company with a few other
innovative and emerging market-leading companies. It is important that the group
displays characteristics that are on the cutting edge and are needed in the
marketplace. This “edge” will fuel future earnings, and in return, the stock’s
continual advance. When Costco Wholesale (COST)
went on a 108% run over seven months in 1991, five other stocks in its peer
group were performing in the top 10% of all stocks in the market.

Lastly, the stock chart needs to be analyzed.
There should be evidence that institutions are moving into the stock. Average
daily volume should accommodate large pools of money. Despite common misbeliefs,
funds can move into stocks showing only tens of thousands of shares in daily
volume. It will just take them longer to accumulate a position. Although one
thing to remember is that these stocks tend to be more volatile when the
institutional buying dries up or takes a break. The chart should also show that
the stock has been consolidating for an extended period. Usually, this is a
differentiating feature of a “Glamour” vs. a typical breakout. The huge moves
will usually put in the perfect base and last for many months. Weekly charts
come in handy when analyzing these bases since they focus on a longer time
frame.

There are definitely many ways to
make money trading growth stocks. But when you are looking through charts and
analyzing companies, it may pay off much larger to find the glamour stocks. When
it comes to allocating money to buy stocks, companies showing these traits are
the ones that belong in your portfolio and will make you the big returns.