Are you researching the wrong stocks?

  • Create a system, or be enslaved by another man’s
  • Your edge in the market
  • Future household names

I must create a system or be enslaved by another man’s.

So said William Blake, the 18th-century English poet and painter.

Blake wasn’t an investor, or a trader. I think he was referring to doing his own thing and not being subjected to others’ opinions, rules, or systems of living. Fair enough.

Still, it works pretty well if you relate it to the market and investing/trading.

I was reminded of this quote (which, by the way, appears at the start of Jack Schwager’s classic book, The New Market Wizards) when looking at the performance of Aussie gold stocks today.

The sector has been hammered.

At the time of writing, Newcrest Mining [ASX:NCM] is down 2.5%.

Northern Star Resources [ASX:NST] is off 5.3%, while Regis Resources [ASX:RRL] is 4.1% lower.

There are some even larger falls at the smaller end of the market.

What’s going on?

It’s not as if the gold price has collapsed. Gold priced in Aussie dollars has barely moved lately. Sure, it’s down from the all-time high of around AU$1,820 an ounce reached in early July. But, with a current price around AU$1,740 an ounce, that’s a correction of less than 5% in nearly two months.

As far as I can tell, gold investors — clearly a flighty bunch — are getting out, ahead of Janet Yellen’s much anticipated speech at the Jackson Hole Symposium on Friday.

Yellen is expected to strike a ‘hawkish’ tone in her speech, which means she might make the case for another rate rise in the US. I don’t know whether this view is accurate, or whether it’s just a rumour that has developed and taken on a life of its own.

But it makes sense in terms of the game that’s going on between central banks and markets. Over the past few months, markets have somewhat embarrassed the Fed by dismissing talk of a possible US rate rise this year.

This has coincided with increasing talk about central banks losing control, and the ineffectiveness of monetary policy. We here at Port Phillip Publishing have been saying as much for years. But now even respectable and educated voices are coming around to this view. (Which, to be honest, makes us kind of uncomfortable.)

Given this development, it makes sense that Yellen will want to talk tough and let the market know who is boss. Even though a rate hike is extremely unlikely anytime soon (US interest rate markets are pricing in only a 20% chance of a September rate hike), Yellen will want to reiterate that the Fed is prepared to move and blah, blah, blah…

That’s why gold investors are getting nervous. They don’t want to be holding stocks if Yellen’s words fire up the dollar and knock gold down on Friday (or late Friday night, early Saturday morning in Australia).

But what if they’re wrong? What if Yellen comes out with a run-of-the-mill speech telling us pretty much everything we already know? Gold stocks will likely bounce strongly.

Which brings me back to William Blake. You need a system to deal with highly uncertain situations like these. Otherwise, you’re just guessing.

Before I get to that, let’s have a look at today’s market action…

Markets

Overnight, the Dow Jones Industrial Average closed down 0.35%.

The S&P 500 index fell 11.46 points, or 0.52%.

In Europe, the Euro Stoxx 50 index gained 14.86 points, or 0.50%. The FTSE 100 fell 0.48%, and Germany’s DAX index closed up by 0.28%.

In afternoon trade in Asia today, Japan’s Nikkei 225 index is down 20 points, or 0.12%. China’s CSI 300 index has slumped 1.16%.

In Australia, the S&P/ASX 200 index is down 25 points, or 0.45%.

Gold is trading at US$1,326.55 (AU$1,737.99) per troy ounce. Silver is US$18.60 (AU$24.38) per troy ounce.

The Aussie dollar is worth 76.28 US cents.

Create a system, or be enslaved by another man’s?

What do you do when you buy a stock? You hope it goes up, right?

But what if it doesn’t? What is your exit strategy?

Most people don’t really have one. And they panic when their shares start to fall.

We talked about this the other night in the Quant Trader live webinar. As Jason McIntosh pointed out, people always want to know what to buy, but they never ask when they should sell.

Jason reckons getting the selling right is more important than the buying. Yet most people do not have a strategy for selling.

And, on days like this (if you own gold stocks), when you don’t have a system, you tend to panic.

Jason reckons a trailing stop-loss is the best ‘selling’ strategy you can have. It gives a stock plenty of room to move, but when the trend looks like it is turning down, it gets you out. There is no room for an emotional decision, or for hoping and holding.

That’s exactly what Quant Trader does. It constantly calculates a ‘dynamic’ stop-loss level that gets you out of a trade before things turn really ugly. It’s not foolproof, of course. Nothing is in the markets. But it’s a system that takes away the stress and indecision that occurs when you don’t have a system.

Put simply, a stop-loss level represents the point where you say: ‘I’m wrong here. I need to get out and reassess.’ It helps you to lock in a gain and protect your capital, or stop a run-of-the-mill loss turning into a disaster.

If you don’t have a system and want to learn more, I urge you to check out Quant Trader. It’s a total trade management system. Try it out for 30 days (with a money-back guarantee) and you’ll be converted.

Below, Jason reveals another important edge that Quant Trader provides. That is, it has a knack of finding future stock market winners well before they become household names.

Cheers,
Greg

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Are You Researching the Wrong Stocks?
By Jason McIntosh, Editor, Quant Trader

David versus Goliath — it’s a classic script you know well.

A smaller player rises up against the odds to beat a larger rival.

We often link David versus Goliath encounters to the sporting field. At other times the battle may pit an individual against a big corporation.

But is this sort of match-up relevant to stocks?

Well, I think it is.

History shows that smaller stocks often outgun their bigger cousins. And this has important implications for you. It could change the way you structure your portfolio.

Let me tell you what I mean…

Most of my trading is algorithmic these days. But I still follow a handful of analysts. This helps me develop a broad market perspective. It’s also the source of some unique research.

One of my favourites is Rod Smith — the chief strategist at RiverFront Investment Group. He publishes a commentary called The Weekly View. It’s free, and well worth a look.

Last week’s edition had some fascinating research. The focus was on the performance of small-cap stocks versus large ones. And sure enough, it’s the small-cap stocks that came out on top.

Have a look at this chart…



chart image

Source: RiverFront Investment Group
Click to enlarge


The graph shows the performance of US small-caps after inflation. It goes back to 1926 and includes thousands of stocks. RiverFront estimates the trend averages 8.2% per annum.

So how about the Goliaths?

Well, their average return is around 6.4% — nearly 2% lower. This performance margin makes a huge difference over time. Small-caps are currently ahead by a staggering 400%.

No one can say if these trends will persist. The future could bring different rates of return. But I have no reason to believe that small-caps will lose their dominance.

Your edge in the market

Many retail traders see themselves at a disadvantage. They believe the big investment firms have more resources and better information. The little guy — they think — is always a step behind.

But this is wrong.

You actually have an important edge over the big firms. This is because you have less capital to invest. In turn, this makes it easier to take advantage of small-cap opportunities.

You see, a big fund can have difficulty trading smaller stocks. There simply isn’t always enough liquidity. This often results in a reliance on larger companies in the ASX 200.

There are over 2,000 listing on the local market. Of these, you’ll only find a small portion in the big indices. This opens a lot of possibility for the retail trader who knows where to look.

Quant Trader doesn’t signal the biggest ASX stocks (typically those in the top 40). This makes more room in the portfolio for small to mid-cap companies.

Now, don’t get me wrong. There’s nothing wrong with a blue-chip portfolio. But, like you saw earlier, you can make more money outside the majors.

And this makes sense.

Emerging companies naturally have strong growth potential. That’s what often drives the share price. It can also lead to takeover activity, which produces further share price gains.

Ask yourself this: Which stock is more likely to double in the next two years — a company in the ASX 50 or a rapidly growing small-to-medium size business?

The answer is obvious. You can see why smaller stocks have historically done well.

Future household names

A member made a suggestion a while back. His view was that Quant Trader should just track the ASX 200. He didn’t think it was worth bothering with stocks that no one knows about.

Well, Quant Trader does bother. It looks beyond the top 200. The system scans hundreds of essentially anonymous businesses. This is where you’ll find many of the best opportunities.

I had a look at Quant Trader’s open trades during the week. The aim was to see if live signals were uncovering smaller companies that are getting bigger. The findings were interesting.

At the top of the list is mobile phone business Vita Group [ASX:VTG]. It demonstrates the growth potential of smaller stocks perfectly. It began with one store in 1995, and now operates over 100.

Quant Trader’s first signal was in December 2014. The shares were up over 270% at yesterday’s close. The second and third signals are also showing triple-figure gains.

So how big is VTG?

Quant Trader uses a custom algorithm to rank stocks. It gives a similar result to ranking by market capitalisation. This allows the system to order stocks from largest to smallest.

VTG’s rank was 455 at the time of the buy signal. The company wasn’t big enough to make the ASX 300. But don’t think this is a micro stock. VTG has a market cap of over $700 million.

The second best performing stock is Smartgroup [ASX:SIQ] — a salary packing business. The shares were up by 180% at close of business yesterday.

SIQ is a little larger than Vita Group. Its ranking at the time of the first buy signal was 283. The big funds that focus on the ASX 200 will NOT have this stock in their portfolios.

In third position is a larger company — Aristocrat Leisure [ASX:ALL]. This stock’s ranking was 71 when Quant Trader gave its first buy signal. ALL is one of the largest stocks in the portfolio.

Here’s a table showing Quant Trader’s top 10 open trades…

Company Code Rank Gain
Vita Group VTG 455 278%
Smartgroup SIQ 283 183.50%
Aristocrat Leisure ALL 71 126.10%
SG Fleet Group SGF 309 115.20%
Fisher & Paykel FPH 277 96.70%
APN Outdoor APO 178 87.80%
Dacian Gold DCN 320 82.70%
Auckland Airport AIA 302 82.00%
Sealink Travel SLK 518 80.80%
Catapult Group CAT 431 79.10%

Have a look at each stock’s rank. The average at the time of the first signal was 314. Many of them were not in the ASX 300. In fact, Catapult Group was (and still is) outside the All Ordinaries.I wouldn’t call any of these stocks household names. A couple of them may have a familiar ring. But none make it into the ASX 50. Aristocrat is the only company to come close.

Now, let me stress this next point. None of these stocks are micro businesses. They all have market caps in the hundreds of millions of dollars. But they are small in comparison to the leaders.

Smaller stocks won’t always do well. That’s why I always tell people to spread their risk. It’s also important to have an exit point. This gets you out when a situation changes.

But I think it’s interesting. You can do very well in stocks without buying a single Goliath.

To learn how you can take advantage of Quant Trader’s algorithmic system for finding the next ‘David’ on the ASX, click here.

Regards,

Jason McIntosh
Editor, Quant Trader