Stocks & Commodities V. 27:8 (98): At The Close by Thomas Bulkowski

At The Close by Thomas Bulkowski

Here’s a handy set of tips on what to look for in a stock to add to your portfolio.

Traders and investors are always shopping for bargain stocks. When you log onto your favorite website and see that the price of a stock has dropped 50%, does the half-off sale mean you should buy? Perhaps. This article reviews shopping tips to help improve your chance of picking a winning stock.

TIP #1: BUY IN A BEAR MARKET AND HOLD IN A BULL MARKET

I computed the year-to-year price change of 565 stocks from 2000 to 2009. The table in Figure 1 shows the results. For example, the change in price from January 3, 2000, to January 2, 2001, was a drop of 1%. The bear market began in March 2000 and ended in October 2002. Look at the recovery in 2004, a year after the bear market ended. Prices climbed by 23%.

I know from research into dead-cat bounces (a chart pattern) that the larger the drop, the greater the bounce. Since the average price of the stocks I follow dropped 62% from 2008 to 2009, I expect a large bounce after the bear market ends. The table suggests that holding a stock at least a year into a bull market following a bear market will lead to tasty gains.