Warren Buffett’s favourite valuation tool – Total Market Capitalization of Public Stocks vs GNP – says the U.S. stock market is getting expensive. Well, if you believe in the same valuation metric ratio as the measurement in stocks investment, you may want to take note and start selling or to at least take some profits. The valuation is at above 100% now although it has not reach the historical value of above 160%. But at 160% you’re actually playing with fire.
Stocks are trading at or near their 52-week high and hence there’re many breakout stocks. Of course many players were shorting the stocks during the Egypt crisis hoping to earn fast bucks. They got burnt badly and played significant role in helping the bull when they covered their short positions. If you do not believe in Warren Buffett’s valuation tool and think trading breakout stocks is cool, the same way legendary traders such as Nicolas Darvas and William O’Neal made their fortune, you may be grinning from ear to ear.
Nicolas Darvas turned $25,000 into $2 million within 18 months by merely scanning the newspapers in just five minutes – during 1957-1958 Bull Run. Since his secret was revealed, many followers have been using the same method – hope and pray for upside breakout and riding on the stocks thereafter. Remember 3 days ago I mentioned about a stock that saw heavy volume and breakout accordingly? Yes, Research In Motion Limited’s (Nasdaq: RIMM, stock) was one of the breakout stock candidates.
RIMM’s breakout started last Thursday with heavy upside volume and value above $66.00 a share. About 23.5 million shares were traded when the stock skyrocket from $63.00 to $66.88 – a volume above 3-month average. Since then the stock has been holding quite steady and never retreat, a good sign that the breakout was not caused by some fat-fingers that accidentally bought into the stock.
Sure, one of the contributors could be the company’s new gadget scheduled to release this quarter – tablet Playbook. But that’s old news and everybody knew about the Playbook. What could be the reasons for the heavy buying last Thursday? Well, the fun about trading stocks or options is the fact that rumour mills create excitements better than orgasm. If the rumour about Playbook may be able to run on Android OS could spark such interest, don’t get surprise if the rumour about RIMM being a potential buyout runs again.
And if you do not like RIMM because it’s inferior to Apple Inc.’s (Nasdaq: AAPL, stock) iPad and Google Inc.’s (Nasdaq: GOOG, stock) Android, maybe you need to be reminded that RIMM has zero debt. I don’t think RIMM story is going to end soon. Heck, maybe the RIMM brand still stands after Nokia is long dead. Hence, while you should get yourself busy targeting breakout stocks, get yourself prepared for any eventuality of major pullback due to consolidation.
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