How to Choose Only the Best Stocks (And Why It’s EXTREMELY Important to Do So in this Market)

by Darrin Donnelly on January 12, 2011

Click on chart to enlarge.

Click on chart to enlarge.

The stock market is in the midst of a strong uptrend and we’re seeing LOTS of stocks break out of good-looking bases and surge to new heights.  Every day, new growth stocks are breaking out and rising 3%, 5%, 10%, or more. 

Hey, this Darvas trading stuff is easy, right?  All you have to do is look for a stock with strong earnings, look for a Darvas Box or some other proven chart pattern, and then buy when the stock breaks into new highs on good volume. 

That’s all there is to it, right?

Well, not exactly.

In fact, at times like these, you need to be EXTREMELY selective about the stocks you buy into. 

When it seems like just about every other stock is racing to profits, the average trader can start to think this is all too easy.  They become less disciplined in what they buy. 

Everywhere they turn, they see another stock breaking out and they start to focus on all the stock moves they’re “missing.”  This focus leads to excessive portfolio turnover as the trader becomes so interested in catching TODAY’S big winner that they get rid of last week’s big mover, which may now be taking a well-deserved rest.

The problem with this type of behavior is that it leads to a portfolio loaded with sub-par holdings.  These stocks are often a little “late to the party” and they lack the elite technical and fundamental criteria to be classified as true market leaders. 

These types of stocks usually experience the harshest drop when the market takes its first corrective dip (which it always does) and they’re also the most likely to underperform over the life of the market’s uptrend.

That’s why it’s so important to focus your trades on only the best of the best fundamental leaders and only those stocks showing the best of the best technical action. 

As the saying goes, “a rising tide lifts all boats” and you don’t want to be caught riding in those boats that are the first to sink when the tide subsides. 

How do you find the best of the best?  How do you separate the true market leaders from the “hot stock of the day” that will have fallen off a cliff a month from now?

One key is to put more emphasis on FUTURE growth expectations. 

Coming out of a recession, it’s not hard to find plenty of stocks with high earnings figures.  Earnings increases of 30% or more is fairly common as companies recover from periods of slow or even negative growth.

But what will next quarter and next year bring to these companies?  Is their recent growth simply “rebound” growth or is it expected to continue at this pace for several quarters and years to come?

Those companies with high growth rates that are expected to increase even more in the near future are the companies that will outperform the market during the lifespan of the uptrend.

Another key is to focus on only the best technical action. 

Again, lots of stocks are breaking out of good-looking bases right now.  Therefore, it’s imperative to focus more on stocks that are breaking out of GREAT-looking bases.

Which stocks are breaking out fastest?  Which stocks are coming out of longer-lasting, more constructive bases?  Which stocks are seeing their Relative Strength lines turn up and are therefore outperforming the majority of other stocks?  Which stocks are seeing the best price-volume action prior to and during their breakouts?

These are the types of questions you need to be answering right now.

It’s easy to get excited about whichever growth stock is breaking out today when we’re seeing so many of them, but the great traders will focus their portfolios down to a concentrated handful of only the absolute best leading stocks.

* Want to see the current list of those stocks that are truly the best of the best leaders on the market?  You can access them all, complete with exact buy points and stops, in Darvas Trader PRO, the premium newsletter for Darvas trend traders.

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