Newsletter
June 9, 2007
Background Stress: Don't Let It Impact Trading
Market & Sector Review
O'Shaughnessy's Tiny Titans
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Background Stress: Don't Let It Impact Trading
Have you ever suddenly made a move in the markets for apparently no good reason? You didn't give it a lot of thought you just moved on impulse. Maybe your stock wasn't moving fast enough or you feared missing that big move, perhaps you were worried your stock would fall hard; you just didn't want to see what would happen next. As much as we would like to monitor and trade in a cold and calm manner, and with a rational mindset, sometimes our emotions seem to get the best of us.
Why? Explanations for such emotional behavior may not be apparent at first glance, however in retrospect, there may be a host of factors that come together in a split second that makes us act on impulse. When it comes to trading we must know what we are doing and why; one of the reasons that impulsive decisions happen is that background stress has been left unchecked.
Trading is stressful enough with your money on the line. We all know a single loss doesn't matter much, but when those losses begin to mount it becomes even more stressful. It lurks in the back of your mind while other issues may gnaw at you. Other stressors that occur in everyday life when added in can make you, when you least expect it, lose your cool, make a move you shouldn't have.
It's virtually impossible to eliminate all background stress but you can reduce it. Try talking to friends and family more often. If you have friends that trade talk with them about what's good and what's bad with your trading and other stressors in your life. Don't have a trader friend? Send me an email, maybe I can be of assistance. Whatever you do try and admit to someone, almost anyone, that you're experiencing a little trouble. Realize that it actually takes more energy to pretend you don't have a problem than to merely admit that you may be stuck. Once you admit to yourself, you can devise a game plan to move on.
Stress can get the better of you if you let it. It builds up if it isn't released. Many traders find it useful to let it out physically. By going for a run or working out at the gym, you will let off steam. It may seem like a little thing, but it really helps. You will feel a little less stressed out and be able to cultivate a more detached, rational mindset.
You can measure a man's character by the choices he makes under pressure.
- Winston Churchill -
Market & Sector Review
O'Shaughnessy's Tiny Titans
In his newest book, "Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years," James O'Shaughnessy argues that investors can predict where the markets are going by simply looking at historical long-term trends.
Through an examination of stock market history, O'Shaughnessy developed four stock selection approaches for individual investors that attempt to take maximum advantage of market trends. He focuses on finding stocks among the various market capitalizations that are most likely to do well based on his research. This newsletter deals with the micro-cap strategy.
O'Shaughnessy studied data dating back to the late 1790s and found that equity markets tend to move in trends of about 20 years. According to this pattern, a 20-year trend began in early 2000 during which greater returns will be earned by small- and mid-cap stocks and large-cap value stocks. The previous 20-year cycle favored large-cap growth stocks, while small- and mid-cap stocks and large-cap value stocks were, on average, under-performing the market.
In the January 27 Newsletter I discussed some of O'Shaughnessy's work from his book "What Works on Wall Street", available in the Newsletter archives of this site. This week we will look at his approach for the micro-cap sector (Tiny Titans), which are included in our on-site watch lists.
The Tiny Titans screen is intended only for the more aggressive investor. The Tiny Titans screen searches for cheap micro-cap stocks with upward price momentum. O'Shaughnessy believes there are many advantages to investing in micro-cap stocks. Few analysts cover these small stocks and this lack of coverage leaves much room for upside potential when good stocks are largely unnoticed. Additionally, micro-cap stocks have a low correlation with other market capitalization strategies, including the S&P 500, which is comprised mainly of mid- and large-cap stocks. This means that the performance of the S&P 500 has a smaller impact on the performance of micro-cap stocks. For example, when the overall market (as measured by the S&P 500) is in a slump, a portfolio of micro-cap stocks is more likely to perform better. These tiny stocks, however, are highly volatile and best suited for investors who can handle the dramatic swings that a portfolio of these stocks will produce.
Market Capitalization
The Tiny Titans screen looks for stocks with a market capitalization between $25 and $250 million.
Price-to-Sales Ratio
The stocks must also have a price-to-sales ratio that is less than one.
Relative Strength
Finally, the 25 stocks with the greatest 12 month relative strength are picked for the portfolio.
Again our on-site watch lists contain stocks that fit this criteria (in the growth stock section) along with daily updates of technical data and fundamental data in a conveniently downloadable spreadsheet.
Largest Changes In Raw Numbers (21 Days)
[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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