Make sure your trades are fundamentally sound
By Doug Sutton
Over the last 14 months we have seen the stock market fall back in historic proportions.
During that pullback there have been literally hundreds of great companies who have seen the
price of their stock reduced by 50-90 percent and the loss had nothing to do with the quality
or viability of the company. They just fell along with the companies that truly deserved to fall.
Over the last two months we have seen the market settle and even make a slight rebound. It
is now time for us to take a really close look at those stocks that have great fundamentals,
which are economically viable and then buy them.
An understanding of fundamental analysis is critical to your success in the stock market.
Fundamental analysis is the means by which an investor can research the financial information
that determines the strength or weakness of a company. This is especially important if you plan
to own the stock or buy an option with more than three months to expiration.
When it comes to fundamental analysis, you don’t need to be a CPA. You don’t need
to have an MBA. You don’t need to be a math whiz. There are three basic skills you need
to possess in order to become skilled at fundamental analysis: the ability to tell big from small;
the ability to read numbers up to 10 million; the ability to recognize a numerical sequence,
such as 3 is bigger than 2, and 2 is bigger than 1.
The most important fundamental criteria to examine is the average daily volume. That’s the
No. 1 criteria. Period. A stock must meet my volume criteria or I’m done with it. It’s
the only excluding criteria I have, because if a stock isn’t trading enough volume,
I won’t touch it.
Here my personal volume requirements for buying stocks and options:
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For stocks priced less than $5, I want a minimum of 100,000 shares traded daily.
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For stocks priced between $5 and $30, I want a minimum of 300,000 shares traded daily.
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For stocks priced more than $30, I want a minimum of 500,000 shares traded daily.
Next I take a look at what I call “Three in a Row.” This is the 52-week high,
the 52-week low, and the closing price. It’s critical to know all three prices while
going through the analysis process because you want to be aware of the area in which the
stock is trading.
If I have a stock trading near its 52-week high, I want to know whether it will continue to make
higher highs. Or does this stock keep hitting its head and pulling back, over and over. If it
does, it could fall down on me.
The same thing is true with stocks at their 52-week low. Is this thing going to rebound or will
it continue to trickle down? And if the stock is somewhere in the middle of the range, I now
have some price targets. It gives me parameters, a best-case and worst-case scenario.
Fundamental analysis is a skill you need to acquire. It’s really critical to your success.
Right now, you can buy stock for prices less than you are paying for options on CME, GOOG or ISRG,
and the stock does not expire on the third Friday of the month!
Attend my two-hour online class, “Fundamentals for Our Times,” on Monday, Feb. 23, at
9 p.m. You will learn how to give your trading candidates a thorough fundamental checkup. You will
learn a simple, straightforward way to look at a company’s fundamentals and pick winners.
In today’s market this is more important than ever before.
Classroom space is limited. You can register online at BetterTrades or by calling
1-800-676-4410. Become fundamentally strong. Register now.
