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There are always opportunities in the stock market for catching a major move and trend trading that market for years.

Just as there is always a raging bull or bear market somewhere, there is also always a wildly hot stock that dramatically outperforms the market indexes for years and years.

Although I’m primarily a technical analyst, I do use some fundamental data from time to time as well.

One of my favorite ways of finding the next “hot stock” is to look for a company that is becoming part of the culture, similar to an approach used by Peter Lynch.

What I mean by that is a company that provides a product or service that is not only popular and liked and sells well, but it actually becomes ingrained into our culture itself.

Examples:

• Remember when fast food first began to surface? Soon we had a McDonald’s in every city … and then we started seeing McDonald’s every mile in the city!
• The same thing happened with Starbucks, except to an even greater extent in some areas where you would have more than one Starbucks coffee houses within a block or two!
• Of course we all know about the ever-present i-pod from Apple.
• And hardly anyone today logs onto the Internet without using Google in one way or another.
• Oh, and remember when eBay swept the nation … and world?

Of course hindsight is 20/20 and everyone can look back at those companies and wish they were on board with them early.

But here’s the great thing about looking for these types of companies that become part of our culture: You don’t have to buy them early before anyone else does. When a company becomes part of our culture, it often has long-term staying power for years and years.

Of course all investing and trading is risky. There are no guarantees. Some companies may release a product that the culture clings to, but then fall out of favor due to negative news, faulty manufacturing, law suites, etc.

Also along the way, even those that enjoy long term success have their ups and downs like any other.

Of course all good things must come to an end. Competition enters, technology and tastes change, and what was so central to the culture in the past can seem old fashioned in the not so distant future.

Therefore even with this approach, it’s critical to learn how to read charts so you can understand what is going on in any stock and how the market participants are treating it.

Below are some examples of stocks with products that became part of our culture. These charts are percentage change charts over the last 5 years. I’ve also plotted the S&P 500 on the chart (the black line) so you can see if the stock outperformed the index.

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McDonalds (MCD) has been a major part of the American culture for a long time, and they have spread internationally as well. Here is a stock that continues to out perform the S&P even after all these years. It has shown a lot of staying power!

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Google (GOOG) is one of the most influential and powerful companies in the world. As the Internet has emerged to dominate our lives, Google has emerged to dominate the Internet.

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Apple (AAPL) has shown amazing staying power and creativity. While they did not fair well in the battle of the operating systems against Microsoft, they came back aggressively with the i-Pod and i-Phone that have taken the US by storm … and it’s stock has taken the market by storm.

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Starbucks (SBUX) is everywhere! This omnipresence of Starbucks is so well-known that it is often the brunt of jokes on TV and in movies that show 2 Starbucks on the same block or directly across the street from each other. While this is definitely a company that has become part of our culture, its 5-year track record has not been as impressive as the 3 previous companies.

E-Bay (EBAY) was a cultural phenomena that changed the way people operated online, bought products, and made money for themselves. It was a Wall Street darling for a long time. I still remember the day that turned (yes, it was one day) and it never fully regained it’s luster with investors. This is a reminder that even stocks that become part of our very culture, can still take big hits (trading and investing is very risky) and that we need to always use protective strategies in our investing.

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(these relative strength charts measure percent move
in the last 5 years – the relative strength of these
stocks to the S&P looks dramatically different
when measured over different times)

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So here’s the big question:

“How do we find the next “hot stock” that will become part of our culture?

There is no sure-fire way to do that, but here are some things to consider:

• Look around the environment. Is there a company that is buying up real estate and establishing a dominant physical presence that is just starting to become obvious, like McDonalds and Starbucks did?
• Read magazines and newspapers that publish cultural trends.
• Ask your teenager! He or she will probably know what is hot before you do!

Remember, you don’t need to catch these companies before they are successful and visible. The trends of these companies can last a long, long time. On the other hand, I still like to use hedging strategies to protect myself.

The way I use the relative strength charts above and also the techniques I use to hedge my positions are detailed in my Swing Trading Course.

Now let’s have some fun …

What do you think of this as one possible approach to investing? Post your comment and let us know!

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An important part of stock market research, whether you’re day trading Dow futures or you’re buying stocks, is to have at least a rudimentary understanding of how transactions are done at the stock market exchanges.

In the first 3 parts of this series of articles on floor traders we looked at the futures and commodities markets. In today’s video you get a tour of the New York Stock Exchange.

Enjoy and please post your comments below.

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I still remember the first time I heard about short selling stocks. I knew all about buying stocks. And I knew that after you bought them you could sell them. But it never occurred to me that you could sell them BEFORE you bought them!

The concept took a little while to get my head around.

As I discussed this new (to me) concept with other investors and traders, I soon discovered that many people feared short selling stocks and the idea made some people mad as they accused anyone who would short a stock as “un-American” because they are “betting against American business.”

For some reason, shorting never bothered me. It didn’t feel scarey and it didn’t strike me as unpatriot. On the contrary it made perfect sense that people should be able to participate in the market whether it is going up or down. To only be able to invest to the upside seemed rather limiting and naive … but I was certainly in the minority in that opinion.

First let’s address the issue of what short selling stock actually is. It can be very confusing to someone new to the markets who have been taught to buy low and sell high.

Actually, shorting the market is still buying low and selling high. It’s just doing it in the reverse order: First sell high, then buy back low!

But the mystifying aspect to most is: How can you sell before you buy?

Actually what you would normally be doing is borrowing the stock (since you didn’t buy it first), then selling it so you you can buy it back later at a lower price (and then return the shares to the lender).  There is also a fee for this “borrowing.”

While that may sound complicated, it’s a fairly simple process with many brokers and can be executed with the simple press of a button (assuming you have meet all the requirements of your broker and the stock is available for shorting).

You can also short Futures which have been historically more friendly to short sellers than the stock market.

One objection is that shorting is more risky than buying because if you buy a stock your risk is limited to the stock going down to zero. But if you short, there is no limit how high the stock can go against your position.

So, is short selling stock really evil?

Does it hurt the stock market?

Does it do damage to American business and our economy?

This is a perennial topic that seems to pop its head up most commonly during bear markets (for obvious reasons). And so as Washington is attempting to “clean up Wall Street,” the topic is back on the table in D.C. again.

One topic on the table: Restore the “uptick rule.” This rule was introduced during the Great Depression and required that a person could only short a stock if it moved up a tick before you shorted it. The intent was to curtail “bear raids” which could send the market crashing down. However at the time, the stock market moved in fractions. Now it moves in pennies and so the uptick rule has less effect as a move up or down by a penny is inconsequential.

It was only last September when the SEC attempted to curtail the bear market by such a policy. But they didn’t simply re institute the uptick rule, they actually implemented a temporary ban on the shorting of hundreds of financial stocks.

Did it work?

Look at where the market was in September 2008 and you’ll see that it wasn’t too successful at holding the market from going down further. Whether it saved some of those financial institutions from going out of business may be another question.

Sometimes investors get overly excited and pump up markets beyond their true value. We’ve seen this with real estate, financial institutions, technology and even tulips!

While it is good to maintain some balance, and it is certainly possible for the market to go to extremes up or down, short sellers provide a valid role in the markets by helping to apply pressure against the infamous “irrational enthusiasm” we’ve experienced in various markets over the years. And if they don’t prevent it, at least they play a role in bringing markets back to their fair value eventually.

That’s my opinion.

What’s yours?

Leave your comments below.

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I don’t want to make too much about this because I’m not fully educated on it myself.

However if this is a real possibility, traders need to be made aware of it.

To read about the proposed H.R. 1068 to amend the Internal Revenue Code and impose a tax on certain security transactions, go here:
http://www.govtrack.us/congress/billtext.xpd?bill=h111-1068

I’d love to hear comments from you about this one. Is this legit? Do you know anything about this? How do you feel about it? Enter your comments below.

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