The Anatomy of a Bullish Stock Idea

You log in to the Wall Street Journal and there is a bullish story about AAPL’s (Apple Inc.) stock and you think about adding it to your portfolio. CNBC has an analyst on the air who is bullish on VMW (VMware Inc.) and you immediately want to buy it. One of the traders that you follow on Twitter just announced that he/she is buying TSLA (Tesla Inc.) and you start to think about if you should do the same.

As investors, we are bombarded by this type of “information” all the time. While this might be a good starting point, it is not enough information on which to base a trading or investment decision. It is just that, a starting point. Does AAPL meet your criteria for a name that should be in your portfolio? Is now the best time to buy VMW or is it likely due for a pullback that provides a better entry point? How do you begin to answer these questions?

We believe in using a proven process to find bullish stocks that are likely to outperform the market and then identifying the right time to enter the trade.

On February 27th, 2019 in my Morning Insights note, I highlighted Yandex Nv – A (YNDX) as a bullish stock for Chaikin Analytics clients to consider. I wanted to walk through the thought process for coming up with this idea.

At a high level, finding this idea can be boiled down to three steps:

  1. Identify the market’s trend
  2. Identify leading parts of the market
  3. Identify Very Bullish and Bullish stocks within the leading parts of the market, based on their Chaikin Power Gauge stock rating.

Our process starts from the top down by identifying the current trend in of “the market.” To do this we look at the SPDR S&P 500 ETF and can see that the fund has been rising since making a low in December. SPY is above the rising long-term trend line and Chaikin Money Flow is bullish, providing confirmation to the price trend. Notice that in September when the fund was making a new high, Chaikin Money Flow was bearish (red) signaling that the new highs were not confirmed.

SPY-chart

Next, we look for areas of the market which are showing signs of relative strength. We do this by checking different ETFs to see how they are performing relative to the SPY. In this case, we are looking for industries which are not only going up but are rising faster than the broader market. This increases our chances of success because we are essentially swimming with the prevailing tide.

Here, we are using the SPDR Factset Innovative Technology ETF (XITK) to represent the Technology sector in order to begin to find bullish stocks which are likely to outperform the market. We can see that XITK is outperforming the SPY by checking Relative Strength vs SPY. This heat map allows us to quickly see if an ETF is outperforming (green) or underperforming the market (orange). It’s clear that XITK is outperforming but we can also see that the fund is in an uptrend confirmed by bullish Chaikin Money Flow. This gives us confidence that the uptrend and the trend of outperformance are likely to continue. Finally, XITK has a Bullish Chaikin Power Gauge ETF rating.

XITK-chart

Next, we look at the stocks which are holdings within the fund with a focus on the Very Bullish and Bullish names based on their Chaikin Power Gauge stock rating. I have highlighted YNDX which was my bullish stock of the day in my Morning Insights note to Chaikin Analytics on February 27th, 2019.

Starting at the top of the chart, we can see that YNDX had a Very Bullish Chaikin Power Gauge stock rating, its trend was strong and it was part of a strong industry group. Next, we look at the Relative Strength vs. SPY and can see that the heatmap was green, indicating outperformance. This is the “strategic” set up: Very Bullish and Bullish stocks in strong trends and industry groups which are leading the market, are the types of stocks investors should consider for bullish trade ideas.

From there we move to the “tactical” set up. Once we have identified the types of stocks to consider for bullish trades, we want to know if the timing is right. To do this we look at our Overbought / Oversold Indicator because our odds of success increase if the stock is oversold. Next, we look at Chaikin Money Flow to check if investors are accumulating shares. The green reading tells us that they are. Finally, we look to see if the stock is above the long-term trend line. In this case, it was and the trend line was rising, increasing our conviction level.

YNDX-Chart in Chaikin Analytics

This is the process that I use every day to identify bullish stock ides for Chaikin Analytics clients to consider. In the event that conditions call for a bearish idea, we look for Very Bearish and Bearish stocks which are lagging the market. Ideally, these stocks are in weak sectors / industry groups and have become overbought with bearish Chaikin Money Flow.

Using a proven, repeatable process, can increase your odds of finding winning trades. Is this process going to work 100% of the time? No. That’s why we strongly advocate for managing risk in a disciplined and systematic way. More on that in a later post.

Let us know what you think. What’s your process for finding a potential winner in the market?

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