There is an infinite number of stocks that you may want to buy. So, how do you decide which is the best stock to buy?
Warren Buffett recommends three general investment rules. (1) The company in question must generate superior returns to the shareholders. (2) The management running the company must be reputable, honest, and capable of running the company. (3) The stock must be reasonably priced.
On paper, Buffett's recommendations seem to be a sound and viable investment strategy. However, in the real world of investing, it may not be easy to implement. For one, unlike Warren Buffett, most of us do not have unlimited funds to invest in all the stocks we like. Second, most investors do not have the discipline or the capability to maintain positions for an indefinite period.
Investing is equal parts art and science. It is partly an art form since individual investors have different risk tolerance levels, time horizons, financial goals, needs, and wants. Art requires more than investment discipline. It also requires perseverance, solitude, tremendous emotional discipline, and self-awareness. It is also a science because it takes exhaustive research and a rigorous investment process to find the right and best stocks to buy. You cannot randomly pick any stock and expect it will perform well.
Technical analysis is one of three popular investment disciplines. The other two are Fundamental Analysis and Quantitative Analysis. Fundamental analysts study the fundamental aspects of the company such as its financials, revenues, expenses, profitability, etc. The quantitative analyst uses mathematical formulas, algorithms, and statistics to predict relationships, correlations, and price moves based on a set of conditions. Technical analysts study stock prices based on price and volume trends, patterns, and technical indicators.
Each investment discipline has its pros and cons. Also, each method has different factors affecting it. Different tools that work and different applications that are more effective depending on market conditions. Successful investors or traders need to understand the nuances of each form of analysis. There is no one size fits all solution when investing.
Regardless of which investment disciplines you favor, the KISS principle, an acronym for keeping it simple, stupid applies to all. Most systems work best if they are kept simple rather than complicated. Simplicity should be a primary goal of any investor, whether experienced or novice. Unnecessary complexity will only confuse and should be avoided at all costs.
How do you select the right stock, the right entry point, and the right exit point? From a technical perspective, how do you choose the right technical indicators, the most effective oscillators, and the appropriate technical process to help you navigate the stock selection process?
As it pertains to technical investing, there are three major factors to focus on: relative strength, price momentum, and the primary or dominant trend. Almost all technical leadership names will have common technical characteristics. The technical leaders will display relative strength against their peers in their respective markets, sectors, and industries. They will have strong price momentum, and most importantly, are in intermediate-to-longer-term uptrends.
SCTR is a relative ranking system that incorporates six (6) popular technical indicators against three different time frames (long-term, medium, and short-term). The technical indicators are the 200-day ma, 125-day rate of change, 50-day ma, 20-day rate of change, 14-day RSI, and the Percentage Price Oscillator. This technical ranking system uses a numerical score from 0.0 to 99.9 to rank every security against peers across similar markets, sectors, and industries. A stock with an SCTR over 90 tends to be the strongest in the group. On the other hand, a stock with an SCTR below 10 is often the weakest. In general, an SCTR score between 40 and 60 is considered average. Signs of technical weakness occurs when the SCTR declines below 40. Signs of emerging technical strength occurs when the SCTR begins to rise above 60.
The SCTR score considers multiple timeframes and puts more weight on the long-term technical indicators over the short-term indicators. The overall SCTR score consists of 60% weighting on the two long-term indicators (200-day ma and 125-day rate of change). The two medium-term indicators (50-day ma and a 20-day rate of change) account for 30% of the overall SCTR score, and the two short-term indicators (14-day RSI and 3-day slope of PPO) comprise the remaining 10% of the overall SCTR score.
The keyword is relative. SCTR score is a relative measure that compares one stock to other stocks within a specified sector, group, or market. Since this is a relative measure, it does not convey how the group or sector is performing. If the group has performed poorly, and one stock stayed at the same level of performance, then the stock's SCTR rank may rise relative to the other stocks within the specified group. Just because a stock's SCTR rank rises do not imply that it is performing well. It suggests the stock is not performing as poorly as the other names within its universe.
When accompanied by other technical methods, it can be a way for an investor or trader to identify technical leadership names. It can also be a useful tool to avoid underperforming securities within a sector, group, or market.
Leadership stocks will have common technical characteristics. They typically have high SCTR scores relative to their peers and, most importantly, are in rising or sustainable intermediate-to-long term uptrends. By screening for stocks with relatively high SCTR scores (greater than 60), trading above the two key moving averages (50-day and the 200-day), and setting new 52-week highs may help narrowed the stock selection process down to potential technical leadership names. You do not need to have the unlimited resources of Warren Buffett and a decade-plus time horizon to implement this simple and discipline investment screening process. As with any successful investment screening process, it will need to be updated and tweaked to remain effective. As market conditions change, the screening process will also change.
Enclosed we have applied the technical screening process against three US market capitalizations (Large-cap, Mid-cap, and Small-cap stocks).
In the large-cap arena (S&P 500 Index), there are 18 large-cap S&P 500 stocks. In the mid-cap arena, there are 49 names, and in the small-cap arena, there are 75 securities that satisfy the technical scans.
A summary of the technical leadership names are as follows:
S&P 500 stocks ranked by SCTR scores are: TPR (SCTR score = 99.1), ALGN (97.8), RF (91.4), DE (94.5), NWL (93.8), DRI (91.9), PYPL (88.9), TWTR (88.5), NWSA (88.3), RJF (87.7), AVY (86.6), NOW (81.9), IPG (81.1), MET (80.9), HCA (80.3%), CDW (77.9), EBAY (65), and FTNT (63.9).
In the mid-cap arena, the top 20 ranked names by SCTR scores are: PENN (99.0), WMS (96.6), SBNY (95.8), SNV (95.5), ACIA (95.4), ALLY (95.1), WK (95.0), TPL (94.2), EWBC (93.8), CNHI (93.4), AGCO (92.3), ACHC (91.9), DKS (91.4), OVV (91.1), VIPS (90.6), ZEN (90.6), DDAIF (89.4), DNZOY (89.3), LAD (88.7), and PLAN (88.6).
In the small-cap arena, the top 20 stocks by SCTR scores are: ZOM (99.8), MGNI (99.4), MSTR (99.4), GRWG (99.3), KOPN (99.2), VERU (99.1), AVXL (99.0), EXPI (98.8), CRMD (98.5), DMTK (98.5), PLSE (98.3), APPS (98.0), SM (97.8), RICK (97.5), SIG (97.4), ORGO (97.2), UPWK (97.0), LE (96.9), ASPN (96.6), and OPRX (96.5).