I get asked all the time, “What are the best stocks to trade right now?”
The truth is that there are always hot and cold stocks AND what’s hot today can be cold tomorrow. Timing is the key.
Although there are many ways to find the best stocks, one of the best ways is to simply check to see which stocks are moving up or down the most. Yes, you guessed it. I have scanners that do just that.
This week, the markets have seen quite a bit of mixed movement.
In light of this, Chris Johnson and I are back in today’s Profit Strategy Podcast, covering our thoughts on how infrastructure package uncertainty and the new stimulus checks are impacting the market. We’ll also cover a few COVID-19 updates before talking about today’s focus, moving averages.
As always, it is important to identify key indicators that explain the trading potential of any position.
The sad truth is that most traders are going to get spanked this earnings season. If you want to join them, that’s your business.
If you’d rather make money instead, read on.
Trading is all about finding reliable, repeatable historical patterns and counting on them repeating into the future. I’ve made a great living on this fact. Everything I do is based on rules-based systems that historically produce consistent profits.
The most reliable pattern by far is produced by earnings announcements. On many stocks, earnings creates gaps on specific, pre-announced dates. We have a precise triggering event on a pre-defined date. It gets no better than this.
And yet, most people play it completely wrong.
Check out the chart below on Zoom Video Communications (NASD: ZM):
The green “E” triangles are pre-announced earnings dates. Notice that over the past 3 earnings, Zoom gapped up, then down and then dropped big AFTER the announcement.
See, most people are trading earnings the wrong way. They essentially “bet on the black” by trading directionally over the earnings. They buy stock, short stock or buy calls or puts and hold over the announcement hoping that the stock moves their way.
This is a sure-fire way to get spanked.
A smarter way is to trade both directions by buying calls AND puts, creating a straddle. This is a safer way, but not the best way.
Demand for stocks and options is at record highs. It’s a veritable “Traders Gone Wild” environment as retail traders (that’s you and me) gobble up stocks and options. The party started in 2020 and traders are pumping up the volume with even more exuberance.
Indeed, CNBC reports that average daily volume in stocks is skyrocketing:
14.7 billion (so far)
*Source: Piper Sandler
And it isn’t just stocks that are getting extra attention.
Check out how options volume has exploded over the past 2+ years:
0.9 billion (so far)
Interactive Brokers’ Steve Sosnick indicates that there has been a phenomenal rise in short-term call option trades.
So, where’s all of this extra volume coming from?
With the advent of retail brokers like Robinhood offering $0 commissions, millennials are flooding the markets. This is evidenced by the 6-million strong Reddit community that created a massive short-squeeze, sticking it to Wall Street hedge funds.
This demand creates movement. Stocks move farther and faster than ever before. The same is true for options.