How to Pick the Right Stock for Trading.
With the uncertain times of 2020, what strategy can you trust when it comes trading the stock market?
Note: This article was put together before the #EndSars protest.
The stock market goes up and down on any little news and things are more uncertain than ever. This is why you need to learn my tactics of picking the right stocks going forward.
On Sept 15th, 2020, I shared 2 unstoppable cheap penny stocks to buy which were FCMB and UCAP at the recommended market price of N2.03 and N3.01 respectively. It’s now 32 days and both stocks have appreciated by 15% and 20% to N2.35 and N3.63.
These are growth figures that beat our current inflation numbers of 13.22% and have outperformed Treasury Bill rates of 0.16% (pro rated on an annualized rate of 2%).
On the 26th, September 2020, I also shared banking stock that was on a clear path to appreciating to a multi-month of N30, a lot of people actually shared their objections and why the stock may fall as they thought the sentiments on NSE index was largely bearish. Well! the stock which is GTB did test the N30 and is trading above that psychological level.
The most recent stocks to buy are Zenith Bank and Dangote Cement. Both stocks exhibited a bullish potential that is not far from institutional activities; the banking stock is already up by more 19.3% from the market price of N18.05 while Dangote Cement currently selling for N150, up by 4.1%
If you missed these opportunities before the market rally, don’t worry! I am about to share my practical steps to spot stocks like this before they appreciate more.
Know the current state of the market.
A lot of investors that want to profit from capital appreciation are yet to understand the importance of NSE market sentiments.
Market sentiment lets you read the emotions of thousands of investors in the stock market. I use the NSE all-share index to track investors’emotion so I can gain an insight into investors perception – when sentiments are positive, the market index goes up and if it’s negative, the index closes lower.
The reason you have to study the NSE all-share index is that you can easily spot the beginning of a bullish or bearish market so you can quickly reschuffle your portfolio to buy early or exit the market before others.
Here are some of the early calls on the NSE all-share index:
The last screenshot reflects the current bull run on the NSE market. The initial trend on NSE all-share index showed that institutional buyers were gradually returning to the market but at that time, to mop-up stocks with high-dividend yield because of the falling rates in the fixed income market.
One thing you must know is that stocks tend to perform better in a bull market and you will definitely enjoy additional gains from capital appreciation if you can get in early before others. In the same way, they go up when the general market sentiment is positive, that’s how they go south in a bearish market.
Follow the stocks that are attracting attention.
This is where the big fishes are – you don’t have to go against the market or do you own analysis by deploying the complex financial market model, leave that for the big money managers and scan for the stocks they will mostly buy using relative strength, fundamentals and dividend yield.
Relative strength helps you find stocks institutional investors are buying more – they are fundamentally sound stocks that have outperformed the market index with more room to go up. This is the strategy behind UCAP and FCMB stock recommendation on the 15th, October 2020.
What I do is to look at the performance of the NSE all-share index and screen for stocks that are going up faster than others with prices above their key averages.
Know the Dominant Trend of the Stock
Even when you know the general market sentiment is positive, not all stocks will align with the general market trend.
Look at Union Bank, the stock has lost 10.28%, 11.11% and a whopping 20% in the last 30-days, 3-months and on a year-to-date basis. This is far from the capital appreciation witnessed on some of its peers in the banking sector. The question is, why are investors dumping Union Bank’s stock amidst the market bull? Well! I haven’t read any breaking news but I’d surely not be in this type of stock when other stocks are shooting up.
If you are still holding Union Bank stock for capital appreciation, you haven’t done to your homework as a growth investor except you believe in its long term outlook as a value investor.
Every growth investor must ascertain the dominant trend of stocks before they buy. The dominant trend of a stock is where it is going to irrespective of the share price gyration- Your stock is up today! tomorrow, it’s down! You are not only confused but thinking of whether to sell and take profit immediately or buy more.
The simple truth is, you are yet to master technical analysis of stock and you know what? you can’t find the most dominant trend of a stock if you pay more attention to the price-performance on a daily basis.
I use the weekly and monthly chart and if you follow my stock recommendations on this blog, you will notice that 80-90% of the stocks I pick always hit the target prices in weeks or months, irrespective of the zig-zag moves.
Buy on Pull Back
Once you have identified a stock that passes the above checklist, put it on your watchlist and plan your entry after a brief pulls back.
I love to buy a stock that pulls back after a brief rally but still trading above its key moving average prices.
Announcements: Once the dust is settled in Nigeria, we’d announce a webinar on how to manage and grow a portfolio of N1m and above in Nigeria and US market. Kindly subscribe to the blog for updates.