How to find the best stocks
Last Friday we said that energy stocks still look great. And we showed you why this is true on multiple fronts: the charts, the recent headlines driving investor psychology, and positive developments in the energy sector.
But there is another reason we are bullish on energy stocks right now. It is perhaps the most powerful reason of all – and it’s based on one of our proprietary strategies. It’s a strategy that can help you find profits in any market environment.
Is the market going up? Great. Is the market going sideways? No problem. This strategy still works.
Is the market in a downtrend with fear and worries rising? Still not a problem. This strategy can deliver results in any market environment.
And the strategy isn’t geared to any specific sector or industry. It is pointing toward energy stocks right now because that is where opportunity exists in the moment.
But if things shift next month and there is more opportunity in, say, utilities or home builders or semiconductors, then no problem. The strategy will shift and point us in that direction.
Basically, this strategy is like a bloodhound sniffing out concentrated profit opportunities in the market. But instead of tracking a literal scent (like a bloodhound’s nose), it tracks down constructive changes in volatility.
Here is how the strategy works in a nutshell:
- Look for stocks that have a higher current VQ than their long-term Average VQ; and
- The stock is in the SSI Green Zone.
Why does this strategy work?
You’ve probably heard the saying that “bull markets climb a wall of worry.” Well, the same thing is true of individual stocks.
When a stock has a higher current VQ than its historical average VQ, it’s an indication that there is extra “worry” built up in the stock.
When that same stock starts a new uptrend, that extra worry will act like rocket fuel for the ensuing uptrend.
It’s really as simple as that.
Again though, it’s not just the increased volatility by itself that is the positive sign. It’s the increased volatility AND the existence of a solid uptrend.
In physics there’s a concept of kinetic energy. Kinetic energy is the force required to accelerate an object from a state of rest up to a given velocity.
If you think of a professional baseball pitcher that throws 95 mph fastballs, for example, the kinetic energy is the amount of energy that the pitcher needs to generate with his body in order to get that baseball up to 95 mph.
I think about this high VQ strategy in a similar way. The higher than average VQ, or the “extra worry”, is like kinetic energy that can accelerate prices higher.
That’s why I’ve started to refer to this strategy as the “Kinetic VQ” strategy.
We recently ran a screen for this “KineticVQ” strategy, and the results came back with a focus on… you guessed it… energy stocks.
Our first example of this is Energen (symbol EGN), an oil and gas exploration company. This name was selected by our “KineticVQ” strategy.
As you can see from the chart below, EGN is rising rapidly and showing signs that it may have bottomed, while flashing a green zone SSI signal. The recent surge into the $61 area represents a significant breakout from multi-month congestion.
The bottom section of the chart shows that the current VQ of EGN is about 35% while the historical average VQ is closer to 24%.
Another example of our “KineticVQ” strategy in action is Oneok (OKE), a company that processes, stores and transports natural gas in the United States.
As the chart shows below, OKE has recently broken out to multi-year highs. New multi-year highs can be an uncomfortable buy point for many investors… but new multi-year highs can also be one of the very best times to buy, if a major new uptrend is getting underway.
What gives me even more confidence that OKE could continue higher from here is the fact that the current VQ is close to 30% while the longer-term average VQ is more like 22%.
There’s still plenty of “worry” left in this stock to fuel even higher prices.
As I mentioned, this new strategy does not favor any particular area of the market. It just goes to where the potential profits are.
Our “KineticVQ” strategy is designed to help you find exactly those stocks… and thus find the most attractive areas of the market… regardless of what the overall market is doing.
We’ve recently added Average VQ as a field in TradeStops. You can read more about it here.
We’re digging into new strategies like this more and more these days. Expect to hear more from us soon about how you can take more advantage of such strategies yourself.
Richard Smith, PhD
CEO & Founder, TradeSmith