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22 swinging stocks for quick-hit profits
Swing traders are the markets' tigers, devouring short-term gains and moving on before the stock goes cold. Here are some rules for the short-term game and some possible prey to get you started.
By Jon D. Markman
In early 2003, shares of Denver-based Titanium Metals (TIE, news, msgs) sold for the equivalent of $1.55 a share. Today, the stock fetches $77. During those three years, the stock has been terrific for buy-and-hold investors. But even if you didn't buy the stock early in Titanium's run, there were plenty of opportunities to make big profits with low-risk trades.
Normally in this space I write about the multiyear investment opportunities that arise from corporate, political and economic events, such as the race by Boeing (BA, news, msgs) and Airbus to build lighter, stronger, faster planes that has led to accelerating titanium demand.
Today, though, Id like to get down and dirty in the world of people whose investment horizons extend no more than a month or two. Not red-eyed day-traders, but so-called position or swing traders who look for chances to buy stocks like Titanium Metals for 20% to 40% gains, and then move on and find another. If buy-and-hold investors are anacondas, eating one big meal every few months, swing traders are tigers, hunting and killing once a week.
How can you become a short-term tiger, while not abandoning your inner anaconda?
Its really not that hard. Youll need five things: A willingness to narrow your investing universe to companies undergoing fundamental change that have stocks that trend well; a subscription to a decent online stock-charting service; a little courage; and an unswerving ability to face up to occasional failure quickly without remorse.
Demand performance
To get started, let me make one thing clear. A lot of what you think you know about why stocks go up and down is right in the long term but wrong in the short term. - Over long periods of time, companies that are undervalued in relation to their future growth prospects, and which grow earnings at a pace greater than the markets expectations, make great investments.
- Over short periods of time, what makes stocks go up is a group of passionate buyers that are more aggressive than sellers. End of story. Think of it this way: If there is a finite number of shares available, and current holders are reluctant to part with them, then buyers must offer increasingly greater amounts of money to encourage holders to change their minds. Stocks rise when they are most profoundly wanted.
To swing trade successfully, your mission is to find stocks that are in demand. But not just any rising stocks. The ones with the best chance of actually being successful over the next two to six weeks are ones that are rising on progressively higher volume.
Makes sense, right? The more buying transactions that are taking place, the more the story behind the demand is appreciated -- and the more likely it is that you will find willing sellers when you are ready to offload your purchase at higher prices.
A piece of the action
Who are these buyers? Most often, they are large financial institutions. Mutual funds. Hedge funds. Pension funds. People with a lot of money. Duh, right? But theres more to it.
Virtually all of these institutions specialize. For instance, they tend to concentrate on growth stocks, or value stocks, or small stocks, or foreign stocks. The greatest number focus on some shade of growth, but as a glib rule of thumb, the bravest and smartest of the most successful fund managers in the world focus on value. These guys can do open-heart surgery on a balance sheet and find life where others see death. These are the guys who bought Apple Computer (AAPL, news, msgs) at $10 three years ago, or Titanium Metals at $5. Its hard work, and you dont hear about all the times it doesnt work out.
As a swing trader, you are not looking for value. You are looking for volatility, for action, for a trend. So much of the time, you will be looking for stocks that are sort of crossover hits: Shares are being handed off from the value guys to the early-bird growth fund managers, and then to plain-vanilla growth fund managers, and finally to momentum traders. These changes of constituency provide some of the best opportunities for traders, as the number of managers who consider the stock applicable to their investment style widens.
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