Power Factors are easy to understand but strangely hard to follow…
When you buy a stock, what do you hope will happen?
The answer seems obvious. You want it to go up. Every rational investor begins a relationship with a stock this way.
But something funny happens here – both before, in the selection process… and after, once the stock shows its stuff.
Beforehand, investors cringe at the idea of buying stocks that have already gone up a lot. This is a mistake, but I get why people make it.
As consumers, we’re trained not to buy that widget we want when we know it was cheaper a few weeks or months ago. We seek deals in nearly all the spending we do.
Then, when we start investing, we keep this same frame of mind. We hear phrases like “be greedy when others are fearful” and think buying stocks in downtrends is a good idea.
Truth is, you don’t want stocks that are falling in price. They may seem “cheaper.” But they’re going down because collectively, investors would rather sell it than buy it.
On the contrary, you should buy stocks that are going up. We’ve made the case before that you should “be greedy when others are greedy,” and that holds up here.
But then, what do we do when the stock we buy falls? We buy even more! We convince ourselves we’re getting a better deal by buying more of a losing position when really we should just cut our losses.
Meanwhile, if a stock goes up, we take profits much quicker… failing to see the long-term potential of our good decision.
That tendency is so common, behavioral finance researchers gave it a name: “the disposition effect.”
One of Jason Bodner’s key Power Factors – positive price action – saves you from the damage this can do…
For a stock to be a great buy, Jason understands that it should have strong upward momentum. Continuation of that momentum is only a better sign.
And the presence of this factor tends to beget the other two factors – business growth and institutional support.
Smart investors only want to buy companies with strong fundamental growth rates. The smartest investors are the ones at the multibillion-dollar institutions, with deep pockets and analytical firepower to find the fastest-growing businesses.
When they find great businesses, their buying pushes the stock higher and higher.
So those are the Power Factors:
- Positive price action
- Strong fundamental growth rates
- nusually high buying volumes suggesting big money at the wheel
Every Monday here in TradeSmith Daily, I show off the top- and bottom-ranked stocks in Jason’s Quantum Edge system, which is built with precise measures of these three Power Factors. You can find those below.
But I also want to show you the price action of each of these stocks compared to the broad market.
Here, for example, are all the top-ranked stocks this week charted against the S&P 500 from the start of the year:
What you’ll immediately notice is that every single one of these stocks is beating the market in 2024. Some stocks, like ANET, WHD, and APO, have been part of this list for weeks and months.
Now, let’s look at the five bottom-ranked stocks:
(Glatfelter [GLT] appears to have recently been delisted, so it doesn’t appear in the chart above.)
I shouldn’t have to point out the gravity of the difference. The bottom-ranked stocks are all volatile and headed in the wrong direction.
Understand, every Quantum Edge-ranked stock uses the three Power Factors in concert. They have positive price action, business growth, and institutional support.
What this tells us is you simply cannot have these three important factors along with a stock that’s in a downtrend. It doesn’t compute.
So stop buying stocks in downtrends… and start buying Power Factors stocks like those at the top of the list above.
Another buy signal to watch is breakouts…
We’ve been loving trading breakouts here at TradeSmith.
That’s when a stock charts new highs after a period of making slow but steady progress from a smackdown low.
When stocks make breakouts, especially breakouts to new highs, it’s a signal that investors are in “price discovery” mode. They don’t know where the price will wind up, other than the fact that it’s higher than where it was before.
That’s exciting. It represents pure wealth creation. Everyone who’s ever owned that asset is in profit. That’s a beautiful thing.
We’ve talked plenty about the breakouts in bitcoin lately, so I won’t tire you with more.
Instead, I’m going to show you a breakout I found in an unlikely place – the boring old fossil fuel company Exxon Mobil (XOM). (Disclosure, I own shares of XOM.)
Especially over the past year, XOM has trended higher, charting a series of higher lows. And admittedly, it’s been facing stiff resistance at around the level it’s trading today, $122 per share:
Call it excitement for the new Trump admin’s pro-fossil fuel stance if you want. But if we zoom out on the chart of XOM, we can see that this breakout has been building from all the way back in 2021, when oil stocks were dead money. And the resistance line traces all the way back to the start of 2023.
I expect XOM to break to the upside here. And one good reason why is its Power Factor rating.
XOM rates a 67.2 total on the Quantum Score, right in the “sweet spot” zone where stocks are considered a buy:
This is from our TradeSmith Finance dashboard tool. With it, any subscriber of Jason’s work can look up any Quantum Score they want.
And that’s a great score – unusual for a cheap, yielding fossil fuel stock. Take, for example, Warren Buffett’s favorite oil stock, Occidental Petroleum (OXY). That rates a middling 43.1:
BP is even worse:
Though another bright spot is in Chevron (CVX) shares (although this stock isn’t anywhere as close to a breakout):
— Michael Salvatore
Marc Chaikin warned people about NVDA before its 2023 bull run - now he's naming his next pick or the AI tidal wave. Learn more here.
Source: TradeSmith