How do you generate profits by actively trading stocks with the markets at or near all-time highs? Watch your watch list! Every online brokerage has a function in which you can add stocks to follow, and financial media sites and apps allow you to populate a watch list as well.
What to watch for on your watch list? Sharp moves that provide buying opportunities. Capitalizing on those opportunities is one of the few -- if not the only -- ways to generate alpha in these times of inflated equity valuations.
Ideally, your watch list is combined with a set of limit orders that you have placed with your brokerage. I realize that you probably don't follow the markets as closely as we professionals do, but that's the point. Limit orders obviate the need to follow tick-by-tick trades from 9:30 a.m. to 4 p.m. ET each weekday.
Also, limit orders remove the need to attempt game theory strategies against the faceless algorithmic trader that could quite likely be stalking the other side of your trade. You cannot beat the machines. Ever. You may think you can, but please do not delude yourself; you cannot.
This process is even more necessary when dealing with smaller stocks. I write a newsletter called MicroCap Guru, and believe me, I know of what I speak. Smaller-capitalization stocks move with a rapidity and volatility that can be mind-numbing. More often than not, those share price moves are unaccompanied by any news events or broader market trends that might make them predictable or even understandable. They just happen.
Relying on a watch list will keep you from overreacting to intraday moves, especially if you have specific levels at which you would buy and sell. If you deal in companies in cyclical industries, the watch list is crucial to generating investing profits.
For instance, this week crude oil prices are in the midst of a pullback, as the front-month West Texas Intermediate futures contract has lost 7% of its value. Yes, commodity prices are volatile, and yes, U.S. oil inventories are too high and have been for the past three years. That said, a 7% decline in a week is remarkable, and this week's commodity pullback has hit smaller E&P stocks hard. So, my watch list alerts for those sector stocks have been flashing incessantly over the past three trading days.
I'm more bullish on natural gas than oil here, but I'm seeing opportunities across the sector. Gastar Exploration (GST) , Sanchez Energy (SN) , Southwestern Energy (SWN) and Chesapeake (CHK) have all popped up on my alert list this week. Of course, one can never buy every name that looks attractive on a given day, but what I am trying to do is shave down my positions in energy bonds and preferreds -- which have performed very well but are vulnerable to rising long-term interest rates -- to free up room to buy common shares of these companies.
Also, if you read my column regularly, you'll know that I believe dry-bulk shipping to be the most mispriced sector in the markets. The benchmark Baltic Dry Index has come roaring back from its usual Chinese New Year low, posting a 50% gain in the past three weeks. Also, more importantly, the number of charter fixings has risen dramatically and that volume has led to much better pricing for charters of 12-18 months in duration, which is the truest indicator of the health of the shipping market.
Against that backdrop, shares of my firm's largest holding, Navios Maritime (NM) , fell from $1.90 to $1.64 the past two weeks. Navios' management expressed their continued bullishness on dry bulk on their Feb. 22 earnings call, and for the life of me, I couldn't figure out why the shares were dropping. So I bought more this week and will continue to do so below $1.70. That's my limit price. I have had to shave some holdings of my Real Money Best Idea -- Navios Maritime's Preferred Series G (NM-G) -- to raise money to buy the common, but that is a merely a tactical move to try to capture upside.
Other dry bulk names also look attractive as the BDI rises, and Scorpio Bulkers (SALT) , Star Bulk (SBLK) , Eagle Bulk (EGLE) , Diana Shipping (DSX) and Globus Maritime (GLBS) all are represented in my watch list.
So I believe timing is key in these markets. Watching your watch list in conjunction with actively curating your list of limit orders will allow you to produce above-market returns.