Buy Cheap, Sell Dear
Yesterday I briefly discussed the performance of the Russell 2000. Today, I want to give you greater detail on what this index is showing us. So I've asked SmallCapInvestor PRO lead research analyst Jason Cimpl to put together a video on the Russell. His video can be found by clicking HERE.
A basic understanding of technical analysis can help investors decide when to enter and exit a stock. I've reiterated this point a number of times in the past few weeks. In Monday's edition of SmallCapInvestor Daily I wrote:
"When the U.S. stock market is flashing mixed messages, like it has been lately, I return my attention to looking for good entry prices. Unless something has changed my fundamental view of the market, these dips are the time to buy more of the companies I like, for less. Remember, buy cheap, sell dear."
Why was I looking to buy a dip then, and what signals might have showed us that Wednesday's action was a perfect time to be buying?
I'm looking to buy a dip because I think good stocks are ultimately going higher. And I'm looking at 50-day and 200-day moving averages as indicators. More on this later.
A good down day like this, when almost everything is being sold, is when you pull out your wallet. (Of course, we want to be selective and not buy just anything.) Prudent investors do their research on the stocks they're interested in, and then they snatch them up when the window of opportunity is open. I do this research for my subscribers, so they can focus on when to buy.
On Tuesday, I recommended a water treatment stock to subscribers of my SmallCapInvestor PRO advisory service. Along with the rest of the market, that stock dropped considerably Wednesday. I hope subscribers have been watching this stock's price action to pick an attractive entry price. You can sign up for a trial subscription to SmallCapInvestor PRO, and get the write up on this company by clicking the link at the bottom of this article.
So let's return to a sector I'm bullish on -- energy. Readers know I believe small oil and gas exploration companies are the best place to be as energy prices go higher in the long-term. The fundamentals of scarce commodities like oil (and water) make this group compelling. So I've been looking for better entry prices on oil and gas stocks.
Last Thursday I mentioned a group of oil and gas companies that we've been following in SmallCapInvestor Daily. The stocks stalled out around October 15th, and last Thursday, they broke to the downside. Pretty much the entire sector was trading lower. The companies mentioned were: American Oil and Gas (AMEX:AEZ), Pioneer Drilling (AMEX:PDC), Abraxas Petroleum Corp (Nasdaq:AXAS), RAM Energy (Nasdaq:RAME), Rex Energy (Nasdaq:REXX) and Tri-Valley (AMEX:TIV).
So I did a little comparative analysis to see what has happened with this group of six stocks since I recommended watching the sector last Thursday.
Between last Thursday's close and this Wednesday's low, the group was down an average of 28.66%. Yikes, that's a pretty good dip. Steep declines like that suggest investors are stampeding toward the exits. I'm looking for the stocks to find support.
The first support line is the 50-day moving average. Almost this entire group of stocks bounced at or near this support line. The chart below shows this for Tri-Valley, which performed perfectly. It is not always this precise, but if you look at charts for the others you'll see similarities. If this group can hold their 50-day moving average lines, that support level is a good entry point. If they break lower, look down to the 200-day moving average. That's quite a drop.
Yesterday, around their 50-day moving averages, the entire group bounced like crazy, rising almost 8%. Had you bought the basket at the Wednesday lows, then you would be up an average of 9.06% as of yesterday's close.
Today, the market is looking for direction as it digests the latest economic news. Many stocks are giving back some of yesterday's gain and providing yet another opportunity for investors who have been looking to start a position. Or add to an existing one.
Buying when everybody is selling is the best time to get more of what you want, for less.
Now don't get me wrong. I'm not saying go out there and try to time the market perfectly so that you buy at the bottom of a dip, and sell at the top of the range. That's tough to do, and you'll miss breakout moves higher.
I'm saying be aware of what is going on, both in the stocks you like, and in the broader market. Then use this awareness, and confidence I might add, to buy at your price.
Think about it, we all love to buy things we want when they're on sale. Be it a car, sporting equipment, cloths for the kids, whatever. And we hate that feeling of buyer's remorse, the emotional drain when you think you've made a mistake. Buying on sale decreases the likelihood of that feeling.
And with small-cap stocks, buying on sale can lead to tremendous profits.
Again from Monday's letter:
"In small-caps, the drop is typically greater than in large-caps, and the recent market action has born this out once again. But the reverse is also true, and history has shown that small-caps consistently outperform large caps on the upside. Investors who purchased the Russell 2000 small-cap index ten years ago would have enjoyed returns around 40%, versus a 20% loss for investors in the S+P 500."
Hopefully you use this primer on technical and market analysis to find attractive entry prices on the stocks you want when they're on sale. I'm constantly using this technique in all of my portfolios, and particularly in SmallCapInvestor PRO. It has helped to grab quick gains in my favorite stocks.
