This guest post has been written by Mike from The Dividend Guy Blog. His blog is well known for high quality dividend investing article and his most recent book: Dividend Growth: Freedom through Passive Income.
By giving us the opinions of the uneducated, journalism keeps us in touch with the ignorance of the community.
Now that you have the liquidity ready to buy any stocks you want, that doesn’t mean you should be in a hurry to do anything. I know people that are sitting on the sidelines for quarters and more. Let’s be honest, that’s not my style. I’m way too impatient for that ;-). But there are moments when it’s easier to be impatient. The good news is that most opportunities on the stock markets are as visible as Black Friday Sales!
Trust the Media
The funny thing is that while the announcements are usually read, the wording doesn’t match with the action you should take. My best source to know if I should be looking at which stocks to buy is definitely the media. When you read word like “crisis”, “recession”, “high level of debts”, “unemployment rates”, “Governments problem”, etc. You should read only one word “buy, buy, BUY! I’ll take what recently happened in 2011 as an example. While the companies are making higher profits than they were back in 2008 (before the crisis), their stocks are well undervalued compared to the same period in time.
After 2008, most companies cut down their costs, improved their productivity and restructured their debt correctly. This is why they are highly profitable and have tons of cash sitting in their bank account. However, this fact doesn’t reflect the stock value. Why? Because there remains a lot of uncertainty around the Euro zone and the U.S. Government debts. While everybody is scared and worried, nobody figures that most companies don’t have problems similar to Governments, and this is why they can go through a potential recession without much harm. These are the moments where you have to remember that you are not buying emotions when you are purchasing a stock. You are buying a company making money. So your only concern should be “will this company continue to make money in the upcoming years?”. I guess you won’t stop gassing your car, drop your cell phone or cease going to the grocery store in the upcoming years. So I also guess that well managed companies in those fields are pretty safe regardless if the Canadian Government budget shows a deficit, right?
Bad news and stock market panic are usually my favorite triggers to start looking actively for stocks to buy. I do that because I don’t have much time to invest in managing my portfolio and the media are fairly reliable to emphasize any panic movement on the market. However, if you are more meticulous and have more time, you can also use the moving average to detect entry point.
Let’s take a step back and look at what the moving average represents. The moving average is a statistical concept used to measure major trends in data. The moving average is usually used by technical traders. It helps trigger a buy or a sell action. You can use a moving average with any number of data points you want (10, 20, 30, 50, 100, 200, etc).
Moving Average Technical Analysis Example
Let’s say that you have 50 data points and you want to calculate the 20 days moving average. You will take the data from 1 to 20 and make an average. This will be your first point. Then, you will take the data 2 from 21 and make another average. This will be your second point on the graph. You now take data 3 from 22 and so on. Along with your graph from 50 data points, you will also have a smoother line showing the current trend of your data; this is the moving average.
What is the point of using the moving average while trading?
The moving average will replicate the trend of the stock you are following (INTC in this example); therefore, it shows when the stock is on an uptrend or a downtrend. As you may know already, there is a huge psychological factor in any stock market.; consequently, if you can predict the trend of a stock or an ETF, you will know when it is the best moment to buy or sell. While this sounds pretty magical, it is far more complex than this wishful thinking. When the moving average added on the stock chart helps you determine what the major trend is.
How to apply the moving average to my stocks on the radar list?
Since the moving average will give you the general trend of a market or a specific stock, the key is to identify the moment where the stock price goes under the value of the moving average and goes back up to cross it upward. If you look at back at the INTC graph, you will see that I have circled in red the middle of the graph. This is because the stock price crossed the 200 days moving average and then crossed the 50 days moving average right after. I personally bought INTC in August, 2011 when there was a momentary drop under the 50 days, but not the 200 days. The moving average will tell you that the stocks should not decrease to a lower level (unless there is other very bad news on the market ).
This technique is not perfect as it can’t predict the unpredictable (Black Swan Law). If you have selected solid stocks (thanks to your investment criteria!), you will at least buy the stocks at a lower price than if you simply bought the stock the same morning you found it.
Once You Bought Your Stock, When is the Right Moment To Sell?
The second great question that comes after buying a stock is definitely: when you I sell it? I cover this aspect in my book; Dividend Growth: Freedom through Passive Income. Make sure to take a look at it!