Inertia has a place in investing. Things that go up tend to continue to go up. Don’t believe me? It’s called trend investing, and a lot of successful investors invest this way. Some investors are smart enough to find companies as they start their upward trend. Others look for an established trend and then hop on board for the ride.
Most people want to be the first type of investor. They want to find the trend as it begins. But that’s hard, and I’m just not that smart. Others, like myself, use momentum indicators to find trends as they’re getting established and simply join in on the fun. But even those that are less knowledgeable of the markets, charts and indicators, can easily screen for companies hitting New Highs.
Obviously the later an investor joins in on a trend, the more dangerous it is simply because the trend is probably in the later stages of development. But that doesn’t mean it’s over. It just means that there may not be a lot of time left before it reverses. That’s where close monitoring becomes critical.
I screen for New Highs because they make for short term swing trades. If I’m nimble enough I can make a nice chunk of change in a very short time. If anyone attempts to use this strategy, one of the keys to keep in mind is volume. Volume always confirms trend so stocks that enter New High territory should also be accompanied by increasing volume. If that’s not happening, the trend is probably coming to an end. Reversal may be coming soon.
Here’s some nice advice from Investopedia:
Consider these reasons for buying relatively expensive stocks:
• You are buying a stock that is trending upward, not downward. You are not hoping or waiting on a turnaround story or a buyout. Chances are, your stock has proved its value before you buy it.
• A stock at or near its high is working with Wall Street money instead of fighting it. And, institutional money moves stocks. Unfortunately, retail buying and selling are not significant market events. Aligning your investments with money managers who manage billions of dollars may reduce the risk that you'll lose a lot of your own money.
• Cheap stocks tend to trade less frequently. If you own a stock that trades lightly, chances are you may have difficulty finding a lot of buyers at your desired price(s). Stocks that lack volume also lack institutional support. And, as stated above, it's the institutional money that determines stock prices on Wall Street.
• Making any investment decision solely based on one indicator is not a good strategy. As you find these uptrending stocks in leading industries, one strategy may be to wait for a minor correction of 8-12% before pulling the trigger. This will mitigate the risk of "buying at the top" and therefore provide some cushion for any potential losses that you may incur.
If you're interested in looking for New Highs to consider, there's plenty of places to view New High lists. Most newspapers carry them and there's numerous websites that list stocks hitting new highs. I keep my own list and include them in weekly articles I publish on this sight under the drop down "New Highs". You can also link to it here. I don't include all companies that hitting new highs, only the ones that meet the following criteria I'm interested in.
The list includes those companies hitting new highs, have more than 25% estimated earnings growth over the next year and the next 5 years, have a positive forward P/E ratio, and a current ratio greater than one. I've found that companies that fit this description are very appealing to investors looking to increase the value of their portfolios.
While high earnings estimates can go undetected for extended periods of time, once they're recognized by investors it's generally the reason traders continue to push these shares into even higher territory. This often occurs for an extended period creating opportunities for swing traders.
If you'd like to see this list on a more frequent basis, you can view the list by clicking on this link. It's the source of my information. (Source)