In the recent market sell off, traders were reminded of a trading strategy that worked for many years. In the long bull market that began in 1982 and ran almost continuously until 2000, buying the dips became a popular strategy.
The strategy involves buying stocks after prices dip. In other words, investors are looking at entering stocks that are in long term up trends when they are in short term down trends.
Buying dips is a time tested strategy that excels in a bull market. The key is ensuring that the stock is in an up trend. There are a number of ways to define up trends including popular moving averages.
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One problem with long term moving averages, including the popular 200 day moving average, is that prices can fall significantly before breaking below the moving average. This means buying dips using the 200 day moving average risks buying the beginning of a down trend.
Instead of moving averages, trends can also be defined using the current price. With this technique, new 52 week highs are up trends and new 52 week lows represent down trends. Buying near the 52 week high is a proven way to beat the market in the long run.
For this screen, we searched for stocks that are within 10% of a 52-week high. This would be defined as an up trend since the price is close to new highs. To define the pull back, we used the 20 day moving average. This is a short term approach to finding trends.
Finally, we focused on stocks priced at less than $5 per share. The reason we like cheap stocks is because these are the ones that have been proven to be most likely to deliver large gains.
One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.
One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.
Four Stocks Meet Our Strict Requirements
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.
Intelligent Systems Corporation (NYSE: INS) through its subsidiary, CoreCard Software, Inc., provides technology solutions and processing services to the financial technology and services market in the United States and European Union.
The company designs, develops, and markets a suite of software solutions to accounts receivable businesses, financial institutions, retailers, and processors.
Its software solutions allow companies to offer various types of debit and credit cards, as well as revolving loans; to set up and maintain account data; to record advances and payments; to assess fees, interests, and other charges; to resolve disputes and chargebacks; to manage collections of accounts receivable; to generate reports; and to settle transactions with financial institutions and network associations.
The stock appears to be breaking out of a consolidation pattern that has been formed over the past year.
Breakouts from consolidations can deliver quick gains to traders.
Mizuho Financial Group, Inc. (NYSE: MFG) offers banking, trust banking, securities, and other financial services in Japan, the Americas, Europe, and Asia/Oceania. It also offers consulting services, including asset management and asset succession; payroll services; and sells lottery tickets issued by prefectures and ordinance-designated cities.
The chart below uses monthly data to show how the stock has performed since the financial crisis.
MFG appears to be trending higher and the recent pullback could prevent an ideal entry level for traders with a long term focus.
Safe Bulkers, Inc. (NYSE: SB) provides marine drybulk transportation services worldwide.
It is involved in the acquisition, ownership, and operation of drybulk vessels for transporting bulk cargoes primarily coal, grain, and iron ore.
The company recently reported that it had a fleet of 39 drybulk vessels with an aggregate carrying capacity of 3,513,800 deadweight tons.
Its fleet consisted of 14 Panamax class vessels, 9 Kamsarmax class vessels, 13 Post-Panamax class vessels, and 3 Capesize class vessels.
The monthly chart again shows how far the stock has fallen as the global financial crisis and the crash in oil prices affected the shipping industry.
This up trend seems to be well underway and the break out to new multi year highs confirms a bullish outlook in SB.
SMTC Corporation (Nasdaq: SMTX) provides electronics manufacturing services worldwide.
The company offers end-to-end electronics manufacturing services, including product design, and engineering; printed circuit board assembly; production, enclosure, cable assembly, and precision metal fabrication; systems integration and testing; configuration to order; build to order; and direct order fulfillment services.
It provides integrated contract manufacturing services to original equipment manufacturers and technology companies primarily in the industrial, networking and communications, power and energy, and medical market sectors.
The weekly chart of SMTX shows the strength of the recent price move.
The gains could continue as the semiconductor industry continues to show signs of growth.
Any of these stocks could be a potential winner and all worth further research. If you are uncomfortable doing your own research, there is a TradingTips.com trading service, Triple-Digit Returns, which uses a very specific system for choosing the right stocks to trade.
Triple-Digit Returns looks for companies that are misunderstood and potentially undervalued, lost darlings, mergers or spinoffs that could benefit share holders, or companies that show signs of strong interest by insiders who know the company best and see value.
This service provides a recommendation once a week. It could be used for trading or learning how to analyze stocks since each recommendation includes a detailed explanation of the company. To learn more, you can click here.