Speculating On Stocks

We all hear of those stocks where folks invested a small amount and came away with massive gains. You always hope to be that person, but you never seem to get lucky. Well chances are, most people never do. Those opportunities are few and far between. Just have to be in the right place at the right time.

Nothing wrong with a little speculation every now and again. If you’re going to do so with highly volatile stocks, you shouldn’t do so with much of your portfolio. I’d say no more than 5%-10% of the portfolio should ever go into something like that. Plus you need to do a good bit of research as well.

A lot of speculation these days tends to be in the biotech market. Lots of companies trying to get a drug on the market in various stages of drug trials, hoping to get the FDA to approve it. If the company is lucky enough to get approval, you could be in for a big payday.

Another method to gains is a small company that has a drug that makes it attractive to a bigger pharmaceutical company. Their drug pipeline is lacking, so they buy up a smaller company to gain access to the particular drug. Sometimes, just on rumors of big suitors, these companies stock can soar.

Take for example, Ariad Pharmaceuticals ($ARIA). Last year they had a drug on the market and they were up to $23. Then the FDA makes them pull it after some adverse reactions till they make some changes. The stock drops all the way down to $6. Then it goes even lower. They eventually make some changes and they are able to market again but to a smaller set of patients to prevent adverse side effects. The stock starts to go up again.

All of a sudden, there are rumors of several pharma companies interested in them for the leukemia drug, including GlaxoSmithKline($GSK) and Eli Lilly($LLY). They went from $6.75 a couple of days ago and are now up to close to $9 as of this morning. Some of the rumors suggest a price offering of $20 may be possible. Needless to say, anyone that bought into it are already happy and could have the potential to be even happier if the rumors turn out to be true. But this is usually the exception to the rule. There are plenty of others that have a quick rise and then a hard fall as their drug fails to get approval, or a buyer never comes.

So you have to be diligent and be prepared to get out quickly. Speculation isn’t for the faint of heart.

#1 – Always do your research on the company and see what they say as well as financial publications thoughts on the company.

#2 – Identify a catalyst for the stock to go up and how likely you think that is.

#3 – Set an entry and exit point for yourself once you find one that looks promising and stick to it.

#4 – If the stock rises, look to skim some of the profits off as these can tend to rise and fall quickly. You can keep your base amount invested, but pocket gains as they come.

#5 – If you hit your target, sell out of your position unless you find another catalyst likely to keep it going. You really need to justify staying in though.

Good hunting and good luck!

Stock to watch – TSLA (Tesla Motors)

A stock that I’ve found to be very intriguing is the electric car company Tesla Motors ($TSLA). They have had quite the price run-up in the last couple of months. On April 1st, they were sitting at 43.93 at the close. On May 28th, they closed at their highest closing price of 110.33. That’s a whopping 151% gain! Quite the impressive ride!

The company was founded by Elon Musk, the co-founder of PayPal and founder of SpaceX. Needless to say, here’s someone that has been very successful in previous ventures and not someone you typically want to bet against. His previous success certainly draws you to look much more closely at Tesla.

As a recent article in Forbes suggests in its title, “Tesla Stock Today Looking A Lot Like General Motors In 1915“. In reading what they had to say, I’d have to say I’d agree that there are certainly a lot of similarities to what GM tried and was able to do. Such as being innovative and bringing the V-8 engine to market. How they grew the business and took the auto industry with them. Or how similar the price of the stock has moved in the same sort of time frame for both companies at the start.

Tesla is doing things in total contrast to what the rest of the auto industry is doing when it comes to electric cars. They have found a way to make a flashy sports car with power, but uses no gasoline. They have a network of charging stations going across the country so folks will have a place to plug up and within 20 minutes they can be on their way with a full charge. They are willing to sell a car directly to you without the need of a dealer. They make something that looks sharp and performs at a high level. I’d say that makes it worth a look.

Certainly the auto industry is being a bit taken aback by Tesla and have to go back to the drawing board to try and keep up. Auto dealers don’t like the fact that Tesla is willing to work with you directly instead of having to go to them first. So in some states they are either suing or trying to get legislation in place so that Tesla can’t sell directly to the consumer. I personally think going after them on that is just ridiculous. Why do we need to go through a dealer?

In any event, there are parallels between Tesla and how GM started off and grew by being on the cutting edge and innovative. The guiding hand from Elon Musk is one I think you have to bet on as he has a great track record.

They showed their first profit at their last report and I think it will only grow as time goes on. Especially as they work on bringing a car to production that is meant for the mass consumer at a much lower price point.

So, I suggest that you look for a spot to pick up some shares when it takes a bit of a dip so that you have a good entry point. This is a stock I would suggest holding onto for the long haul. I see this as a stock that has the potential of great long term growth like Google and Apple has showed us. I would say in the next five to ten years, you’ll wish you had bought more shares of this stock when you had the opportunity.

 

Technical Trading of Stocks

These days, a lot of folks turn toward technical indicators and oscillators to trade stocks instead of looking solely at the fundamentals of a company and its stock. With this type of trading, you are looking for trends on charts and graphs that signal a buy or sell of a particular stock.

There are general groups of technical indicators that can assist in helping you form an opinion on buying and selling stock, options or forex. They are as follows:

  • Trend Analysis – Looking at short and long-term trends to find points where it crosses over the long-term averages.
  • Pattern Analysis – Looking for such things on the charts such as a head and shoulders pattern, triangle patterns, pennants, etc.
  • Trading Ranges – Looking at support and resistance lines and seeking a breakout from the pattern.
  • Relative Strength Index (RSI) – Looking at a stock’s performance recently compared to its historical strength. With this you are looking for overbought or oversold conditions which might suggest a reversal of the trend.

A good place to start reading an introduction on technical indicators and oscillators would be at StockCharts.com with the article: Introduction to Technical Indicators and Oscillators.

For a list of some of the more popular overlays and indicators in use and links to more in-depth information in each, you can look at StockCharts.com at the page: Technical Indicators and Overlays.

Then there is a good article that’s should be a guide for people new to technical trading. This comes from John Murphy, currently with StockCharts.com. He was the technical analyst for CNBC show called Tech Talk. He’s also authored several books on the subject such as “Technical Analysis of the Financial Markets“. You can read up on his laws for technical trading at: John Murphy’s Ten Laws of Technical Trading.

I hope reading through these resources will help give you a better sense of technical trading and help you decide if it’s something for you. At the very least, it’s something you can study and chart on paper for a while and see what works best for you.

If you have a favorite indicator or oscillator that you use and think others would find it very useful, please share more info with us in the comments section.

Trading Tip #1

As today’s action on yesterdays VMware pick shows us, always do a check for upcoming earnings dates for stocks you trade. I failed to check for that myself yesterday before recommending from how the charts were looking. Trading can be very volatile before and after the earnings date, as it was this morning with an over 19% drop as I am writing this.

If you are going to buy something going into earnings, you may want to look at purchasing a put option to go with it for downside protection. Having that piece of mind can be helpful and keep you from losing much. If the stock price goes up very much, you’ve only lost the put premium. If the price goes down a great deal, that put can help offset the loss you had in the shares.

Keeping a close eye on details like upcoming earnings can save you a lot of heartache later.