Stock Selection Strategies:
Generally anyone who invests in value stocks and holds it for long term is bound to make profits provided the company keeps on growing at a consistent pace. Past performance is never a guarantee for future performance, so we have to be watchful in stock market. Different types of investor’s invest in stock market with different goals and different time horizons. One goal is universal in stock market that is to make profit. But some want to make it fast and some are comfortable with slow but long term growth. One can employ these strategies in different term or long term goals.
Pre-Bull Market Phase: Bottom Fishing in Bear Market:
This strategy enables to pick stocks near bottom. Generally advice to buy stocks when trends are already established, rather than trying to pick a stock near bottom, as one can’t say for sure that the last bottom would be the final bottom of the existing bearish trend. Traders have to understand are that its not the decline of prices that is killing for most investors, but it is the waiting period that flushes out most of the short to medium horizon investors from even good stocks. So in case of stock bought with a consideration of bottom fishing in bear market may not decline further, but may remain in that range for a long time. So when bottom fishing, trader must be prepared for 2 things.
- If the bottom is broken, the stop loss must be done.
- If bottom is held, but stock consolidates for long time. Trader must have the holding capacity for it.
When bottoms are not broken, and sharp V shaped recoveries are registered, this strategy can help picking stocks near rock bottom prices of that respective bear cycle. Two possibilities are there. Either the stock may consolidate below its major averages from many months to come, to waiting period can extend. Or it can start rising after formations like positive divergences. The first target is always the next big moving average resistance, which could be its 200 day moving average. If it manages to break above this average, it is then the real bull phase rise starts.
Bottoms can take a long time to form. Short –lived bottom with V shaped recovery. So before initiating bottom fishing at any level, one must check whether the stock is correlating with index. If that in this case, one can go forward with accumulation near that respective bottom price at which the stock tends to consolidate. If stock is not correlating with index then go by individual cases and decide accordingly. In bear market when markets seem like near bottom always look for historic lows where patters like double bottom are forming. One can also focus on index stocks. It is obvious that when the market index is going to rise, it is because of the stocks included in the index. So such stocks are bound to rise. Technically strong stocks from the list of index constituents, and focus on such stocks for accumulation. Quality Stocks in bear markets, and accumulate then by bottom fishing, or on resumption of up trends and trader will never go wrong in stock market.