Thomas Jefferson
How do we manage the odd paths stocks can travel? We do our best to achieve a delicate balance between giving them space and choking them through micromanagement. We filter through a few measures of price action to rank our universe by performance. Since human biases can cause us to see things that aren't true, we use the raw price data to compare each stock against the following:
Stock vs. Itself
A stock that stops moving at the same rate of change as previously, or begins trading with less volume and/or price range is a sign of a stock trying to rest.
Stock vs. Index
A stock that fails to keep up with its corresponding benchmark is potentially a stock that can no longer power ahead without the help of the market.
Stock vs. Universe
A stock that fails to keep up with other trending stocks could be the first stock to reverse if and when the rest of the universe stops trending.
Stock vs. Zero
A stock that goes down less than others might be a good sign, but in the end we want to own stocks that go UP in price. Less bad is not a reason to own, so a long flat period must be examined further.
We put all 1000+ stocks on our watchlist up against these markers each week, and examine more closely if any of the above patterns emerge. We then decide whether the stock still qualifies as part of our portfolios, and sell or cover those that don't make the grade.
