How do you know if your portfolio contains the right shares?

TransStock > Analysis > How do you know if your portfolio contains the right shares?

Exactly one month ago, I wrote ‘Are the celebrations on the American market ending?’
Since that article, the stock exchange index for S&P 500 quotes sidelong. This results in debates between believers and non-believers. That phenomenon can take some time before it is resolved. 

Sooner or later, the support or resistance will collapse, and a new movement arises as a result.

During this phase, it is imperative to check which shares peak. Those are the shares that ensure that the stock market index increases further. if you have such shares in your portfolio, an upward breakthrough will result in excellent business.

Does your portfolio contain risers?

When regarding a portfolio, there are risers and fallers. The shares described above are part of those risers. Yet, investors are tempted to safeguard their profits. Some employ a profit target of 20 percent or lower. This might appear interesting on the short term, but on the long term your portfolio will always contain too few risers compared to the fallers. 

If you work with a strong stoploss at the same time, you will end up with a bundle of small losses to go with your small profits. 
For that reason, it is important to monitor your strong shares. A share within the portfolio with an increase of 50% or more should not be rare, but should rather be normal.

Logically, these are the shares that profit the most from a new market breakthrough. And these are the shares that neutralise all of your small losses. 

Relative Strength Index

I am returning to the relative strength index that we used in the previous contribution to select the correct stock market. this approach is very easy and can be employed by everyone, because in this phase, you are not looking for indicators or averages. 

You compare your favourite share with an important index, such as the EuroStoxx 600 or the American S&P 500 index. 

Relative strength of GBL (Euronext Brussels)

In the graph above you can see two curves: the share GBL (orange line) and the EuroStoxx 600 (black line). 

Both curves are virtually parallel to each other and start at a 100 percent. Over a period of two years, the EuroStoxx 600 rose with 2 percent. GBL increased by 14 percent.

Comparing tops and bottoms

The top in November is important. You will see that the top of the index is at a similar level than the top in May. For the share GBL, the November top is much higher than the one in May. This illustrates the strength of the share GBL.

Such a share definitely has to be retained, because this type of share pulls the index upward. When the market sentiment turns, naturally you have to keep an eye on the GBL. If the share drops below an important support, you should sell. 

Relative strength of NVIDIA (American Nasdaq 100)

On 7 October 2015, my program showed a purchase advice for the share NVIDIA at 26.02 dollars. At the end of December 2016, the NVIDIA quotes at 100 dollars. The share moved sideways for afew months, and subsequently regained its boom.

How did the NVIDIA perform compared to the Nasdaq 100 at the end of May 2016?

I am zooming in on the consolidation period from November 2016 until May 2017.

With the exception of 1 rise of the Nasdaq – indicated in red – the NVIDIA does exactly what is expected of the share. If the Nasdaq rises, the share rises; if the Nasdaq drops, so does the NVIDIA. 

On May 10th, the share breaks through its decreasing peg formation and flies up even further together with the Nasdaq. In my program, the share still is set to ‘keep’ and quotes at 215 dollars.

 

From this article, we will take away four elements from technical analysis that can help us to successfully invest in shares:
  • Promising shares are shares that outperform the index;
  • ideally, they are parallel to the index, albeit with a different percentage;
  • keep promising shares and sell weakly performing ones;
  • a stoploss that is too small is a missed opportunity!

 

Paul Gins
About the author

The trend is your friend

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