Emails from readers often provide ideas for topics I should cover in the next newsletter. A rather impassioned email arrived in response to my Friday morning’s comments about CAT (Caterpillar). The writer took umbrage with what he viewed as the pumping up of a dog stock.
There are some important points that were missed in his missive.
Seasonal Forecaster is a service for short to medium term traders. How do traders make money trading stocks? Not by buying great earnings reports and selling bad earnings reports. If that worked, every trader and investor on Earth would be incredibly rich and successful.
Traders make money only if the stock moves (if employing a direction-dependent strategy). And a stock’s price changes only if current demand is greater or less than current supply. Otherwise, there would be no reason for the price to change. If all buyers looking for XYZ stock are willing to pay the asking price for the available quantity, and they will be happy and not want more, the price will not change. It’s that simple.
If a stock’s price is changing, and moving upwards, especially on a major stock on our large market, it is because there is wide, strong interest in the stock overwhelming the available supply. The many participants may have countless reasons for wanting the stock. I don’t need to understand their exact reasons. But arguing with the market is not a path to success.
If I identify a pattern that experience has shown to be a very reliable indicator of buying support that has already driven up the stock, and is likely to keep propelling the stock, I’m not that concerned about the recent earnings. CAT for instance, had to deal with fraud in a China subsidiary, something that isn’t that surprising to me. They need to cut back on inventory as some markets are slowing. But is Caterpillar a dog company? By no means.
It is not uncommon for companies to ‘adjust’ their earnings by shifting funds around, booking sales early, and so forth. A company may intentionally dump all problems into one quarter just ahead of union negotiations. Who knows. Earnings can be manipulated and there are times it makes sense to make earnings look worse.
What I do know about CAT is that it is one the biggest and best manufacturers of serious construction equipment. If you have a serious project to do, you go with those big yellow machines. CAT is not headed into obscurity. When they have problems, they make adjustments and get back on track.
In Friday’s newsletter I showed where CAT recently broke above highs set last fall. The earnings announcement barely slowed the stock’s advance.
Seasoned traders know that stocks that regularly show strong, above-average volume on days when the price breaks recent resistance levels is a sign of strong, most likely institutional, buying. They also know that when a stock shrugs off bad news, it is another sign of strength. And trading strength is what makes traders very successful.
The final thing I look for is a strong seasonal pattern. Do the institutions have a track record of returning to this stock year after year? CAT’s strongest quarter is not always Q4. Their revenue may very well be tied to the seasons, and smart institutional traders will figure out the cycles and come back to the profit feeding trough at the same time each year. By identifying the patterns of the institutions, we can ride their coattails.
CAT is no exception. CAT has risen an average 10% over the next 17 weeks (4 months), with gains in a strong 86% of the years. This is a 29 year track record. If you are looking for minimum net movements for option trades, you’ll see that 19 of the past 29 years produced moves greater than 5%. A variety of option strategies will work well with a stock like this.
Closed Seasonal Forecaster picks from the last two months are 19 for 19, and it’s been exactly the above type of picks that have done it. I am happy to have a house full of CATs.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, click here: www.markettamer.com/seasonal-forecaster
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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