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The 5 Keys to Identifying a Fundamental Day Trade

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David, at The Oxen Group, has been kindly providing us with day-trading picks before the market opens. He has an excellent track record, which is posted in Oxen Group section and updated every few days. Below is an outline of the factors he considers when identifying high-probability trading opportunities. For more, visit The Oxen Group website and sign up for a free newsletter. - Ilene

The 5 Keys to Identifying a Fundamental Day Trade

day trading, quotesOne of the main sections of our site is our Oxen Picks. These are day trades that The Oxen Group makes everyday that are ideas for stocks we believe will move up for a single day that investors can make 3-5% on each day. The Oxen Picks have had some significant growth since we started them, making nearly 40% on a $3,000 portfolio. The portfolio has no long-term stocks. Every stock we buy, we sell the same day. And, we only buy one stock every day. The method behind it, however, is sound and continues to foster growth. That method begins with fundamentals and the 5 Keys to Identifying a Fundamental Day Trade.

Today, I am going to lay out for you the five keys to executing the fundamental day trade that will help you become a better day trading investor by identifying 5 signals that can help you select a trade. These signals are easy to understand and they will help transform your trading style into a much more astute investment strategy.

Identifying the Fundamentals

To begin to look for that perfect stock or ETF that will move up 4-5% in a single day, we first need to look for something that can propel the stock. Even the best technicals seldom can give you 5% upward movement intraday alone. This 4-5% movement we are talking about, additionally, is not from yesterday’s close, but it is movement within the day. That means we want to identify a stock that can be bought sometime in the morning and sold later in the day that will give us significant upward movement from our entry.

Stocks do not move on their own, though, therefore there are a number of fundamentally bullish categories that we can use to identify stocks:

1. Earnings

There are multiple ways to play a company’s earnings. One of the most effective ways to invest based on earnings is after a company has already announced their earnings. We are looking for positive earnings that were surprising, especially ones that say something about a sector. If one company announces earnings, and they report positive earnings because they had a large profit off of a lawsuit versus another company that has positive earnings from an increase in sales or saw higher demand, the latter is more telling of a sector, as a whole. That news can move a sector and all the stocks in that sector.

We like the sector-telling earnings because it means that something about the sector is most likely bullish that is either being reiterated from a thought already provoked about a sector or a new idea about a sector, as a whole. For example, if Burger King Holdings Inc. (BKC) reported earnings that noted that they were seeing increased demand for fast food as buyers cut back on more expensive restaurants, and they were transferring that money to fast food. This information would propel not only BKC, but it would propel McDonald’s (MCD) and Wendys/Arbys Group (WEN).  The positive earnings affect the companies that are closely related to the company reporting earnings. Typically, we do not want to invest for a single day trade in the specific company that reported the earnings because these companies will typically jump up extremely high the next morning and have less room for upward movement because of the gap from the closing price.

Therefore, we look for competitors that will profit from the good news. Take for example, J. Crew Group Inc. (JCG) and Gap Inc. (GPS). On May 28, 2009, J. Crew, in after hours, announced earnings that exceeded estimates quite significantly when they reported an earnings per share at 0.34 EPS, while the street was estimating 0.11 EPS. This was seriously bullish news for JCG. The next day the stock jumped 26.4%. The only issue was that the stock gapped up so heavily that investors missed a lot of that movement. So, The Oxen Group, on that day, instead, recommended Gap Inc. The company a close competitor, especially with their Banana Republic line. On the same day, GPS moved up almost 5%, and intraday, The Oxen Group was able to invest at the beginning of the day on a low and ride the stock up for a 4% gain. We got in at the beginning of the day while the stock was still at a low price, and then rode the movement upwards.

The suggestion, therefore, is that earnings can be utilized to make gains on companies that do well by using competitors that have similar product lines. The same can be said in the reverse direction. If a company bombs estimates, a lot of similar companies in the sector will be pulled down with it, meaning a good short sell play is in store.

Additionally, with extremely good earnings, it may be time to examine a day trade on an ETF that models a sector. For JCG, retail ETFs are sparse and have low volume, but if it were an energy or financial company, with ETFs that are heavily traded and have significant beta, playing an ETF in the same way we played Gap is perfect.

Earnings can be a very solid fundamental bull or bear call for a single day trade. However, earnings do not come out everyday. So, where else can one look when trying to identify a bullish fundamental trade for the next day?

2. Upgrades/Downgrades

Upgrades and downgrades are extremely powerful mechanisms that can propel a stock up or down significantly. Ratings can move a stock up or down 1-2% to 9-10% depending on the ratings company’s significance, the ratings movement, and the company being rated. Companies like Moody’s, S&P, Credit Suisse, Goldman Sachs, Morgan Stanley, and Fitch are ratings companies that are particularly significant. Smaller equity firms tend to have less of an impact on a coming day’s stock movement. Further, another issue with upgrades/downgrades is that they typically come intraday or in the morning. However, when they do come in the evening, they work in the same way as earnings.

An upgrade or downgrade will have a strong effect on an entire sector if it has something to do with a broader picture of a sector’s bullishness or bearishness. If the company gets downgraded because of risky investments taken or bad credit, this will not have as strong of an effect versus a company that gets upgraded because the demand for oil appears to be increasing significantly.

For example, on Saturday, June 6, 2009, Torchmark Corp. (TMK), an insurance company, was downgraded by Fitch Ratings for bad investments the company made, as well as, a sector wide decline in the ability for insurance companies to be profitable in this market. The downgrade most likely had a stronger effect on all the companies, as all insurers ended in the red, than if it had been a more personal downgrade. Obviously, a multitude of factors go into companies within a sector, but upgrades and downgrades can be very significant in predicting the movement of single stocks and sectors.

3. Foreign Markets

Another way to gage how well a stock may do is to see what is going on in foreign markets. Typically, this will have the most impact on commodities, such as oil, and products that are sold overseas or overseas companies that have a PLC or ADR in the American stock exchange system. For example, oil, oil and gas stocks, oil and gas ETFs, and anything that has to do with oil is affected strongly by the price of oil and its changes. So, if one can know what the oil market is doing overseas, it can be a great fundamental indicator of a predictor of whether oil may be bullish or bearish.

For example, if the oil inventories are skyrocketing in Asia, demand is down, and the price of oil plummets in the Hang Seng and Nikkei, this will have an effect on the NYMEX. In the globalized world we live in, what happens in one-country affects us all. If oil demand is dropping in China, any company connected to selling gas or pumping oil out of China will be severely impacted by the demand drop. The price of oil will be affected negatively, which will in turn negatively affect other oil companies, oil producers, and ETFs.

The same is true, in reverse. On June 1, 2009, The Oxen Group recommended Toyota Motors Corp. ADR (TM). The company, in Asia, had skyrocketed due to booming Prius sales in Japan that were significant in Japan’s extremely weak consumer economy. Therefore, if Japan was able to do well with the Prius, one might conclude that while the car may not have done as well in America, it was bullish news that would positively affect the ADR. It was not so directly bullish, however, that it would send the stock up 5-6% out of the gates, and we would never have a chance to buy in. The stock did gap up, moved back, we were able to get in and make 2% off the ADR for the day.

4. Financial News

News can come in many ways and can be fundamentally bullish or bearish, but the amount of news that can come out in a day is so heavy that it actually is not one of the most significant factors. Then, when it is a big story, it will typically come intraday, and you will miss the opportunity because the movement on the story will occur so fast. Therefore, investors should be looking for news that comes in after hours and that is significant enough that it can help a stock out or a sector, as a whole.

For example, one of my favorite pieces of news to use to invest is box office weekends. The company that owns the movie that wins the box office tends to have a very good day on the Monday after that weekend, especially if the winning was extremely bullish, like they surprisingly beat the favorite or recorded some type of record profits. For example, on May 29-31, "Up" won the box office and it was the third largest revenue for a Disney-Pixar animated flick, coming in way above estimates. It sent the stock up a solid 4% on that Monday simply based on that fundamentally bullish news. On June 5-7, though, "Up," while retaining the top spot did not do as well, and the news was less significant. Disney ended June 8, 2009 without the 4% gain and finished sideways.

When using news, it has to be something fairly significant that can truly propel a stock. On the same front, if it is too large of a story, the stock may jump too much that it cannot have enough movement back intraday to buy into the stock.

One of the interesting ways to use news is towards a sector ETF. If on a given day, in after hours, three or four major financial companies have some rather bearish news that could affect the financials, it may be a nice time to buy into an inverse ETF that can help defray that bearish news.

Be careful with general news, though, because it does not always have the effect you want.  Sometimes news is taken a different way than you would expect.

5. Futures

The final key telling-signal of fundamental bullishness or bearishness is the futures market for the Dow, S&P, and Nasdaq. These markets open at 12 AM on the trading day, and trade up until the start of the session. The futures markets can give an investor a general sense on the direction of the market in the given day that can help support or shy away a given stock.

For example, suppose you are excited about Dryships Inc. (DRYS) for tomorrow because the shipping indexes are jumping up significantly in Asia. At the same time, though, the futures are significantly in the red for the coming trading day, due to a multitude of bearish news and earnings that were reported the afternoon and night before for the American market. This could really hinder the movement DRYS could have that day simply because the market is in the red.

In the reverse, futures can help you feel more confident that a stock with some fundamentally bullish indicators really could continue upwards if the market is looking healthy.  Futures are a helpful indicator to determine if a stock will be a good or bad day trade; definitely worth considering.

So, there you have it. The five fundamental indicators to help you identify the perfect day trade. There are a number of other indicators that go into any trade. Technicals are very relevant, the entry and exit of the stocks are important.  The thing to keep in mind, though, is that fundamentals are the start of the ability for a stock to move up.The patterns that were identified in the piece should help anyone to find and search out stocks that would be bullish. Everyday, the Oxen Group chooses our Oxen Picks starting with the ideas above, and we have seen nearly 40% in two months.

The final piece of advice to keep in your tool belt is to stay confident in your picks. If you have done the research and the evidence is there for the stock to move up, then you should feel confident that your ideas will work. If it does not work to perfection, it is okay because if you keep identifying fundamentals, it will work.

Sincerely,

David Ristau, President, Founder of The Oxen Group

 


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  1. houteeman

    I feel there is a big disadvantage in the great unwashed getting in on a stock or ETF before the futures set the price.  Because the Market "closes" each day and the futures establish the opening price – of course also considering other factors as you noted.  Despite the other factors an issue Opens generally consistent with the futures price.  We are already at a disadvantage due to that baked in scenario.  Admittedly I am a baby at this but would argue that the Market should never close.  The opening and closing are tantamount to a control that is unfortunate for us.
    However, I am coachable and would value and appreciate any help as I have been dropped in the grease a bunch.
     

    Thanks.

  2. qcmike

    Dave
    Where is this information available ?

    "The final key telling-signal of fundamental bullishness or bearishness is the futures market for the Dow, S&P, and Nasdaq. These markets open at 12 AM on the trading day "

    Thanks
    Mike

  3. newparadigmz

     futures…
     
    http://www.cnbc.com/id/17689937
     
    http://www.bloomberg.com/markets/stocks/futures.html
     
    cnbc is updated more frequently
     
    i’d love to hear if there are any other free ones that update frequently

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