Being Picky Can Make You A Superstar
Investor
The Dynamic Wealth Report
August 18, 2010
by Justin Bennett, Editor
There are quite a few things to be picky about in life. It could be
something as simple as finding a good apple at the supermarket.
Or maybe you like to be picky about the bigger things in life as well…
Picking the right person to marry for example. You certainly wouldn’t
want to marry a Washington Redskins fan if you’re a diehard Dallas
Cowboys fanatic. Doing so may make for an icy relationship during
football season!
What else should you be choosy with?
Well, being picky with your investments makes all the difference in the
world…
You have to be finicky when putting your hard earned money to work.
After all, if you’re not selective, you could simply buy stocks by
alphabetical order. But buying Alcoa (AA) all the way through
Sealy (ZZ)
may not work so well.
Obviously, there are lots of better ways to pick stocks for your
portfolio.
One way you can do it is by looking at relative strength…
Relative strength is how well a stock trades versus another “measure”.
Finding stocks with good relative strength can lead to outsized gains
for your portfolio.
For example, you can pick a stock in the coal industry by seeing how
well it trades versus other stocks in the industry. Stocks showing the
best strength relative to others in the group should be the first ones
you look at.
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There’s a reason one stock is performing better than others in the
industry.
But what you should really take a look at is this…
Start looking for stocks showing relative strength versus the
broad market.
This works especially well when the broad markets take a turn for the
worst. During these rough periods, major averages fall and so do most
stocks. But not all stocks fall the same amount when the broad markets
pull back.
Look for stocks holding a strong uptrend while the broad markets fall. This is a good way you can find stocks with relative strength.
Let me show you what I mean…
The top chart is
MercadoLibre (MELI). They’re an online commerce
provider in Latin America. The bottom chart is the Nasdaq, a broad
market index. The time frame of the two charts is identical.
Notice how well MELI held up while the Nasdaq was plunging in April and
May. MELI was showing relative strength. Sure it came down, but MELI
didn’t get the same technical “damage” the Nasdaq did.
If you bought shares of MELI at point 1, you’d be sitting pretty…
As the Nasdaq went on a brief upswing in early June, MELI went
ballistic. Shares shot up nearly 30% in a matter of weeks.
You can see it again just before point 2 on the charts…
The Nasdaq took a nasty dive to new yearly lows. But at the same time,
MELI simply pulled back to its up-trending support line (the green
line).
Once the Nasdaq started
showing signs of strength at the lows (point 2),
shares of MELI started rocketing higher again.
If you bought shares at point 2, you could have tacked on
another 30%
winner.
The bottom line is this…
You should look for stocks showing relative strength during a broad
market downturn. Once you find them, you’ve increased your odds of
having an
explosive winner when the broad markets start trading higher
again.
You have to be a little picky if you want to pull in fantastic gains in
the markets.
Finding stocks with relative strength versus the broad market is one way
to do it!
• Oil (Below $75 a barrel)
The most recent EIA report shows oil inventories falling slightly last
week. However, oil supplies in the U.S. are higher than average for this
time of year. And as the summer driving season comes to a close, oil
inventories may rise further due to falling consumer demand.
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