VectorVest Views 4/29/05.
A person asked me why we had suggested in last Friday's Views that "Prudent Investors get their shopping lists ready." My answer was simply to say, "You want to buy low, don't you?"
Prior to making the suggestion cited above, I had noted that the Buy/Sell Ratio, BSR, was at its lowest level since October 2002, and I said "the market always goes up after the BSR reaches such an extremely oversold level." Take a look at the Market Timing Graph. Set it up so that it shows only the BSR in the "All Weekly" mode. Note that the market has always rallied shortly after the BSR fell below 0.20. A couple of these rallies were short, trading rallies, but most of them were long, powerful, explosive rallies. They provided wonderful opportunities to buy stocks at low prices and that's what bottom fishing is all about.
There are many ways to play this game. Prudent Investors, for example, would look for beaten down stocks with good fundamentals. Aggressive Investors would look for stocks with explosive upside potential. A good search for Prudent Investors to use was suggested in Chapter 15 of my book, Stocks, Strategies & Common Sense. It involves finding high VST-Vector stocks that have hit 26-week price lows, putting them into a WatchList and buying the top stocks ranked by VST-Vector descending when the market begins to rise. I prefer working with stocks hitting 26-week lows as compared to 52-week lows because the latter often seem to have fundamental problems that may require years to resolve. Another bottom fishing technique for Prudent Investors is to sort stocks by RS descending when the BSR goes below 0.20, putting the highest RS stocks with "S" ratings into a WatchList; then buying the top stocks ranked by VST-Vector when the market begins to rise. Prudent Investors should also consider using "Biggest Bargains" and "Turnaround Candidates" found in the Prudent Group in the UniSearch tool.
Jubilee is the classic bottom fishing search for Aggressive Investors and Traders. This search finds beaten down, low-priced stocks having good fundamentals. It was created by one of our subscribers, Mr. David Smith, and it has produced sensational results on many occasions. The key to using this search is to use it at the completion of a deep, debilitating downturn as reflected by a very low BSR. VST Mighty Mites is another good bottom fishing search.
Getting back to the basic premise of this essay, one should remember that bottom fishing is a contrarian strategy. Bottom fishers savor falling stock prices during a downturn and think about buying when everyone else is selling. So if you're thinking about buying stocks at bargain prices, you may get your shopping list ready now, but wait until the Color Guard says it OK to go Bottom Fishing.