Powerful Day-Trading Strategies Combining Fundamentals and Market Direction
By David Ristau, The Oxen Group
Knowing when to buy and when to sell is the key to every investor’s success and failure. Knowing when to buy and when to sell, however, changes for different investment styles. For long term investors, buying on bad news and selling on good news is a crucial part of investing. For day-trading strategies, including the Oxen Group’s strategies, ignore long term analyses. We are interested in what the stock is doing for the day. We use specific buying and selling patterns based on the fundamentals of the stock and a knowledge of market direction.
If you are looking to find that perfect stock that will move 3-4% each and every day, it is all based on fundamentals. News, earnings, upgrades, downgrades, mergers, etc. move stock on each day along with the market direction. Knowing how to play this information along with the market is crucial.
Today, I want to lay out for you four different types of trades The Oxen Group looks at to make our successful plays: a) good fundamentals, good market, b) good fundamentals, bad market, c) bad fundamentals, good market, and d) bad fundamentals, bad markets. You might think that the best place to make money is in a strong fundamental, good market situation, but that is not always true.
Here’s a review of the different types of trades:
Good Fundamentals, Good Market
One of the most significant market moving pieces of information is the earnings report. When we see a significant earnings beat on EPS and revenue or a strong outlook announcement along with earnings, we can expect that will help move that stock. It will not only move the stock, but it has the capability to move similar companies.
For example, let’s take O’Reilly Automotive Inc., which reported its earnings Wednesday night, July 29. The company reported outstanding earnings, beating revenue expectations, beating profit expectations, and increasing their yearly outlook. This was great news for the auto part retailer industry, and it affected a similar company AutoZone Inc. which has a similar business model.
The Oxen Pick, for Thursday, July 30, was AutoZone Inc., however, the way we wanted to buy and sell it was dependent on market movement. Coming out the same morning was the job reports and a number of crucial earnings reports that would shape the way the market would moved. The market would either move lower, move sideways, or move much higher. What happened? We had a good market from early on.
But no one could have known that was going to happen. The way we recommended the stock takes this uncertainty into account. If the market is strong, we would want to get right into the stock because as the market moves up, the stock will have basically two major reasons to bolt – its own fundamentals and the overall strength in the market. Therefore, we know this stock will gap up, probably have a slight movement backwards or sideways 10-20 minutes into the day, and likely keep churning from there.
It’s not a science, but what I hate to see is that people get into a stock right as the market opens or in pre-market because they are so excited about the stock. Sometimes, that will be the top. Often the stock will pull back due to profit taking, and that is when to buy in.
When do you sell?
I think 2-3% per day is the perfect amount. If you made that everyday, you could turn $5,000 into millions very, very quickly. That is why I never want to be greedy. Set a limit of 2-3% and wait it out. If it moves up 5%, you missed some, but at least you didn’t wait for 4% when it was more likely to hit 2-3% and end up losing money. The tricky thing about a good market is that it can turn at any moment, it can get toppy, and intraday there are so many aspects that are uncontrollable. That is why with 2-3% we have control. We can estimate what the market will do based on morning news, data, earnings, futures, etc. From that, we can make an educated guess this stock will rise or fall in the first hour to two. After that, intraday news and intangibles really take over.
So, get that 2-3% limit.
And then celebrate!
Good Fundamentals, Bad Market
The same situation could have been vastly different for AutoZone Inc. if the market had been weak. If job reports had been weak and earnings had been nothing special, it is likely the market would have continued a downward trend. What would that have meant for AutoZone?
A perfect short sell. The stock would likely still gap up, but with the market being weak, more sellers and profit-takers would enter the market. After a gap up and maybe slight increase, the upward movement would no longer be available. So, instead of continuing to increase, the stock would lose its momentum. This is a trend I have seen time and time again on stocks I think are buys which end up losing momentum. It is not that the fundamentals aren’t there, it is that the market has such strong effects on a stock’s ability to maintain increases.
So, in this situation, we would want to short sell the stock closer to a top, which tends to come in around 45 minutes to 1.5 hours after the market opens. The stock may even finish in the green, but if it gaps up 3-4%, and slides down 2-3% back off those morning highs, you can make another chunk of change.
On these shorts, though, it is important to not get greedy. Take the 2-3% and get out. With those strong fundamentals, the stock could rebound back, but even if it does not, it is not likely to continue to see a huge amount of downward movement.
A real example of this was on Wednesday’s trading day with Massey Energy Inc. The company had reported terrific earnings that moved the stock up 5% in afterhours on Tuesday. On Wednesday, the stock gapped up over 6%, but with the market being so bearish, after moving up through the first hour, lost momentum and moved down over 2%.
Bad Fundamentals, Good Market
This is my personal favorite day trade. When we have a stock that is really weak on fundamentals in after hours, for example, a downgrade or miss of earnings expectations, one expects it to go down, and it will. The best part of this trade, is that it can be an absolutely excellent buying opportunity. What often happens is that the stock will gap down and race down early in the trading day. However, as the market continues to be bullish, the stock starts to move back up.
For example, on Thursday, July 30, the market had an extremely bullish day and the market bolted up. Exxon Mobil, however, had extremely poor earnings before the market opened, with a 66% decline in profits and an over 45% miss on revenue. These were bad earnings.
What happened? The first 40 minutes the market sold it off, but later, with the market relentlessly increasing, XOM turned into one of the best buys of the day. After 40 minutes, the stock started to turn around. It moved up over 2% off those lows. The sellers ran out and people bought into it even with the bad fundamentals because the market was behaving so bullishly.
This is definitely a great type of trade to try. We need a market that is at least 1% to 1.5% up to make this move. A small gain in the markets won’t yield the same results. Like the good fundamentals, bad market trade, take your profits and get out quickly. The poor fundamentals are likely, in the longer term, to play out.
Bad Fundamentals, Bad Market
This trade is probably the easiest to execute and needs the least amount of fine tuning. If the market is looking bad and is moving down, and you have a stock that has really displaying weak fundamentals, get in as soon as possible – short the stock. I have seen some of these stocks get some slight support 10-30 minutes in, but it is so minor.
The greatest worry with these weak stocks in a bad market is that the market will bounce off a bottom. In a bear market trend, it is less likely to happen. But as we have seen this past week, in a bull market, liquidity moving back into the market can take the market back up off the bottoms, along with the stock we’ve shorted. So keep an eye on this position and cover if you see the market and the stock firming up.
Again here, set your limits and be careful.
Keep on investing,
David Ristau
