Monday, October 02, 2006

Why stock selection *is* important

Trader Mike had linked to an interesting post by Taz Trader as to why he/she lists no stock picks. But, I have to disagree (as a stock picker) with Taz Trader's lead point; if one is to apply the lessons of Technical analysis, one needs to offer the best opportunities at the lowest risk - this can't be done using hindsight, it has to be done in the here and now with real examples. By suggesting stocks one is offering a marker from which one can be measured by.

At its simplest; one can't trade words.
1. Designed To Dazzle!
Stock picks are designed to impress people with there "ability to predict what a stock is going to do". Sorry, but I can't predict what stocks will do - so I wouldn't impress you.

When you visit these "stock picking" sites, they always tell you which ones have made enormous gains. They don't tell you about the losses.

Sorry folks, but that is disingenuous at best. Just ONE TIME I would love to go on one of these sites and see all their most recent losses in a big flashing neon red box right on the homepage!

Now that is a stock picking service that I would recommend.

Well Taz, my average gains are losses, per trade, for each month, for all of my 2,900 stock picks (and counting) are available on the index page of my homepage and have been since June 2004.

Now - I don't expect anyone to trade all 2,900 stocks, that is why I have my Collective2 portfolio which is a sample portfolio based on stocks drawn from my blog and website:

But, I doubt I will be getting Taz Trader's recommendation any time soon...

Which brings me to my second point:

In May of this year I mailed out this to my Newsletter Subscribers. My bullish thesis at the time was based on (three) occassions when my Breakout scan (momentum stock picks, listed here for free) failed to generate any stock picks for a period of a few days and tech market internals were oversold. Subsequent Breakout picks from this time, for a period of 2-3 months after this 'low', performed very strongly.

I have highlighted the periods on the newsletter returns when I have been bullish the market (green highlight, based on the aforementioned factors), bearish the market (red highlight, when market internals were overbought), or neutral (cash favored, falling from overbought conditions, but not qualifying as oversold).

I was confident this summer would have followed the same pattern, but those strong momentum plays never appeared as the old rally stalwarts like stocks in the energy sector continued to dominate. The failure of new leadership to emerge during this period is a concern for the health of the rally and may signal a much greater malaise which could express itself on the next leg down. With Small caps and Techs struggling to challenge summer highs, and market internals overbought, it could be an ugly few months ahead. Better periods to buy will emerge, but I am opting for the bearish side of the fence. This is no time to be brave.

I got it wrong in May, will it be second time (un)lucky?