Why It’s Important to Have Near-Term Catalysts for Your Stock

There’s a big difference between trading and investing.

When you invest in a stock, you should be going in with a long-term view. You can certainly change your opinion as time goes on and events warrant it.

But you shouldn’t plan to hold a stock for years and then get spooked by one bad earnings report (unless something extraordinary happens, like fraud).

Trading is different. A trader is often looking for a specific catalyst.

A technical trader (one that uses stock charts) might see a breakout to a new high as a reason to expect the stock to go even higher.

Additionally, many traders view earnings reports as important catalysts. It’s not uncommon to see a stock surge or plummet after reporting quarterly results.

Axon Enterprise (Nasdaq: AAXN) recently surged 22% in one day after reporting much-stronger-than-expected results…

Petrobras (NYSE: PBR) popped 9% in one day when oil prices jumped more than 3%…

And Nevsun Resources (NYSE: NSU) spiked 16% in one day after it received an offer to be acquired…

It’s important to have near-term catalysts for your stock. Otherwise you have no reason to believe the price will quickly move higher – other than “it’s a good stock,” which isn’t a valid rationale at all.

Without a reason to expect a stock to jump in the near term, your investment could be dead money. It could just sit there, doing nothing. If you’re putting your money to work in the market in the short term, you want the trade to be completed fairly and quickly.

Make your money, get out and move on to the next one.

Below are a few potential catalysts that you can look for to get your stock moving quickly.

  1. Earnings: Most companies announce earnings dates in a press release a few weeks before the report comes out. If the company you’re interested in has not yet announced its earnings report date, simply add three months to the last quarter’s report date and you’ll likely be pretty close.
  2. Analyst Upgrades: When a new “Buy” or “Sell” recommendation is issued, stocks can move significantly. So I want to give my trades the best opportunity to be upgraded. To do that, I find stocks that analysts hate.If most analysts already have “Buy” ratings on a stock, the chances of an upgrade are slim. The bandwagon is full. But if most analysts rate the stock a “Hold” or “Sell,” you can sometimes get a nice move higher when they upgrade it.Look for stocks that don’t have many existing “Buy” recommendations.
  3. Short Squeeze: If a stock is heavily shorted (traders bet the stock will fall so they sell it first and buy back later), every tick higher in the price of the shares is causing pain for the shorts. Eventually, when the losses get to be too much, the shorts exit their position by purchasing the stock. That creates more demand and pushes the price even higher. As the price climbs, more shorts buy the stock and you can get a powerful move from all the extra demand for the shares. Look for stocks with more than 10% of the float (the numbers of shares available for trading) sold short.

Stocks typically don’t make big moves for no reason. You need a catalyst that will push your stock higher in the near term.

If you can’t find one, you may want to find a different stock.

Good investing,

Marc

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Source: Wealthy Retirement