Deron Wagner has some good advice on picking stocks this morning – even though his column concentrates on trading ETFs. When looking for stocks to buy within your sector of choice, he says you should:
Buy the leaders, not the laggards! When I was a novice sector trader years ago, I often made the expensive mistake of buying the stocks that were lagging behind others in the sector. My thought process was that the leaders had already gained too much, so the laggards were bound to “catch up” to the leaders. While this is a logical theory, I learned the hard way that it rarely works that way. Time and time again, I watched my laggard stocks go nowhere, while the stocks that were “already up too much” continued to surge higher. Simply put, stocks or ETFs showing relative weakness within a sector do so for a good reason — traders and investors are not buying them. The reason they are weak does not matter! All that matters is the price action (and volume). Stocks and ETFs with relative strength are not only the first ones to shoot to new highs when the corresponding sector index bounces just a little, but they are also the last ones to fall if the broad market suddenly reverses to the downside.
Recent Comments