Stock traders make money when stocks are volatile. The most stable stocks are usually in the Consumer goods sector. But that is not always the case. U.S. News writes that consumer companies fall as U.S. hit the skids. If you are going to be trading them the question is how to value consumer stocks. This applies to medium term for swing traders and short term for day traders.
U.S. stocks are skidding Tuesday and are on track for their biggest drop in more than a month. Consumer companies are taking big losses as investors worry about the health of the U.S economy. Machinery companies are also down, while concerns about Europe’s banks are hurting financial stocks. The price of oil continues to fall.
Investors flee to consumer stocks when the market is ready to fall. The idea is that these stocks are safe havens. The problem is that investors have been pouring money into blue chip safe haven stocks and P/E ratios have been climbing beyond what the market will bear. Thus these stocks are correcting. How to value consumer stocks is traditionally with fundamentals. What dividends do they pay? How much money do they have in the bank? Do they have any debt? And how strong are their brand names in the niches they sell to? But a problem arises when these stocks become safe havens.
Overbought and Over Priced
Investopedia tells what overbought means.
Overbought refers to a situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals.
In technical analysis, this term describes a situation in which the price of a security has risen to such a degree – usually on high volume – that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback.
In general a stock that has risen rapidly on high volume in a very short time tends to become overbought. From the viewpoint of technical analysis the relative strength index, stochastic oscillator and money flow index are helpful ways to value consumer stocks that have become too pricey.
It Is All in the Timing
Stocks go up and stocks go down. Buying and the bottom and selling at the top are everyone’s goals. But sometimes the market seems to be chasing its tail and fundamentals make little sense. On such occasions it is best to hold cash and only day trade in the market. There are numerous profitable day trading strategies. Trend following and taking small profits is one approach. Another is to follow the news of the day and trade when the market becomes volatile. Traders who want more reliable returns and less risk often do rebate trading as many ECNs pay market makers who place limit orders. Trade only stocks at high volume and set your limits to small increments. Get in when conditions are optimal and get out when the market is not making sense.
