My Stock Picking Toolkit for the Common Investor

Talking Equities is a weekly newsletter that provides information regarding equity analysis, investor spotlights, market conditions, and investing strategies. All information provided in Talking Equities should be considered an opinion and not a fact. All information should also be considered as strictly educational. While I would love to claim I have all the answers to cracking the stock market, I simply do not. Invest at your own discretion!

The Tech Sector on June 11th After CPI Information Was Released

Happy Tuesday Investors,

The winds of change are in the air. Investors are beginning to move their money away from the tech sector and into investments more suitable for a deflationary environment.

More information has been released that signals definitive cooling in the market. With the CPI for June indicating that prices consumers are experiencing could be falling soon and unemployment ticking up another tenth of a percent, some economic metrics are pointing towards one thing, a possible interest rate cut by the end of the year.

This is the sign that investors have been waiting for. Plagued with consistent inflation over the last couple of years, investors have had to navigate the intimidating world of high interest rates, making it difficult to project where many U.S. companies will be in the near future.

Because of this large market shift, this week’s newsletter will be a bit more hands-on.

We’ll start by explaining the current market conditions and what these economic indicators could tell us moving forward.

Once we’re done covering the current state of the economy, we will review the stock-picking toolkit that I use to make investment decisions. Now is the time to be prepared with the right tools so that when the opportunity comes to invest you will be ready!

Index metrics are weekly values and based on 07/12/2024 data.
Economic metrics vary depending on release schedule.
For metric definitions reference this newsletter.

The first major adjustment that the market had this week happened on Thursday, July 11th when the S&P 500 shifted from $5,638 in the morning to $5,584 by the end of the day. All eyes were on CPI reports as investors would use this to determine if we can expect to receive an interest rate cut by the end of the year.

Last week I mentioned that the CME group had raised their likelihood of an interest rate cut from 74% to 78%. This week, the possibility of an interest rate cut has increased to 93.8%.

So how can they be so sure that we will receive an interest rate cut and what does this mean for you moving forward?

There are a couple of economic metrics that stand out above. One obvious indicator that shows increased interest rates are finally doing their job is the U.S. Inflation Rate. Inflation decreased to 2.97% in June from 3.27% in May marking the second consecutive month that inflation has decreased.

If this wasn’t already enough, the 10-year continues to decline, indicating that the U.S. has less of a need to remove money from circulation within the economy.

The topic of the week however was the CPI numbers that were released on Thursday. The updated information indicated that CPI had decreased to 313.05 meaning the prices consumers are experiencing are indeed falling. Don’t start getting too excited and jumping for joy just yet. You’d think that this information would have been great for the market and that tech would have boosted to new record highs. That couldn’t have been further from the truth.

While it is great news that the market has slowed down and many economic indicators are showing signs of inflation coming to a halt, our market will most likely be experiencing a season of deflation over the next couple of months if this trend continues.

With this in mind, many investors packed up their belongings in the tech sector and moved the whole family to defensive sectors like healthcare, utilities, materials, consumer staples, energy, and REITs. Many of the sectors that have seen little love throughout the year (specifically the REIT sector) finally got their big debut. The S&P 500 closed out last Friday with mixed results, some still investing in tech, while others moving their money into these deflationary sectors.

Moving forward, it will be interesting to see how the majority of investors react to deflationary news. On one side of the coin, many will invest in tech or the financial sector with optimistic beliefs about what will happen to the economy in a couple of months with an interest rate cut.

On the other side, investors could predict that there will be a lot of volatility as the market cools down and prices drop (not to mention, who knows what will happen with this presidential election). This will be a good opportunity to invest in defensive sectors if you find yourself wanting to protect yourself from the possibility that companies could start to contract or fall short of revenue estimations with prices decreasing.

As promised, this newsletter will be a bit more hands-on. A crucial part of developing a sound investment strategy is creating a system that allows you to find the stocks that you should invest in. There’s no need for you to rely on the Motley Fool or that one friend who knows everything about stocks. Instead, this section will go through the websites I use to find investment opportunities that align with my investment strategy.

A quick aside before I start to dive into the different websites. Many of these services you can use for free however some require payment. These are the best alternatives I have found from using a clunky Bloomberg Terminal. They are user-friendly, cheap (sometimes free), and provide the information necessary to make sound investment decisions.

I also reference multiple economic websites to determine the current state of the economy and the direction that it may be going. To save you the headache, I include all of the metrics above under "Market Movement” so you don’t have to do all the research.

If you combine the metrics above with these services I am about to discuss, you will be so far ahead of most retail investors.

FINVIZ - Stock Screener

One of the number one questions I get asked is, “How do you find the right stocks to invest in?” Most people think that the process of finding the perfect stock is some crazy hard treasure hunt. I have good news for you, you don’t have to become Nicholas Cage to find profitable companies to invest in.

FINVIZ is a stock screener tool that is completely free and is an amazing website to use when trying to understand how the monetary flow of the market is shifting and which companies you should invest in.

The image above is the treemap that I use often when finding investment opportunities. Here’s how it works. The larger the square, the larger the market cap. This means that the largest companies will have the largest squares on the map, and you guessed it, the Technology sector is the largest sector on the graph.

A square will gradually turn green if the company is trading profitably for the day, or it will turn red if it is trading negatively. The more vibrant the color, the more a company is experiencing a gain or loss.

By clicking on any of those squares, you zoom in to a more detailed view of the stocks that are responsible for the changes that you see on the tree map.

This is how I was able to see that many investors were starting to switch their money to more defensive sectors after U.S. CPI information was released on June 11th. If I didn’t have a tree map like the one FINVIZ provides, I would have been completely in the dark about the movement of money in the market.

For someone who is trend investing, this information is everything. You wouldn’t continue to invest in tech if most investors started to shift their money to healthcare. A stock could have been trading in an upward trend for weeks and then investors decide that they want to become more defensive in their trading strategy and the stock falls out from under itself.

Whenever I am starting my search for equities, FINVIZ is the first step in my process.

Thinkorswim - Trading Platform

Thinkorswim is the best trading platform for retail investors who want a little more freedom in their trading strategy. It is the most comprehensible platform that I have found that allows me to integrate both fundamental and technical analysis.

Don’t get me wrong, I used Robinhood for the majority of the first half of my investing endeavors, I think it is an amazing platform. I just wanted something that could provide me with more information.

I’m a firm believer that a hybrid trading strategy that uses both fundamental and technical analysis is essential to getting the whole story when searching for investment opportunities.

Take this graph of American Tower Corp’s (AMT) stock movement for example. I know it may look complicated now, but with a little explaining, it won’t seem like that bad of a beast.

This graph above is what is known as a candlestick chart. I’ve provided a picture below that explains how to read a candle. Keep in mind, that one candle shows the price information for one day’s worth of trading.

The open is the price at which the stock started for the day, the low is the lowest price of the day, the high is the highest point of the day and the close is the price that the stock stopped at by market close. Not too intimidating once it's all explained right? Understanding candle charts is a right of passage in the investing world so congratulations, you are well on your way.

If you look in between the candles on the chart above you’ll see a green line moving from left to right. This green line is what is known as the moving average or MA. The MA will tell you what direction the trading trend is moving.

This is important for trend investors who try to make all of their money when the direction of the trend starts to move in their desired direction. The MA could be a great indicator that the stock is experiencing more purchases (or fewer purchases), resulting in a higher (or lower) stock price.

The last indicator that I use is the MACD. I know four-letter acronyms can be scary, but stick with me, it isn’t so bad once it's explained.

The MACD stands for Moving Average Convergence Divergence. It is used as a momentum indicator to show traders when a stock is moving in a particular direction and how quickly the price is moving in that direction. If you look at the graph above you’ll see little green and red bars at the bottom which look like a mini rollercoaster. This is the MACD indicator, and as you can see, when the price increases dramatically, so does the MACD.

I use these two technical indicators to be able to understand the direction the stock is moving and the momentum at which it is increasing or decreasing. You don’t need to have all the indicators in the world. The rule that I was taught was to pick two or three that you like and always stick to them. Less is more in this situation.

As a bonus, Thinkorswim also provides relevant news articles for every stock that you are interested in. This makes it nice to stay up to date with current news and get a grasp of where the company could be moving towards.

There’s a lot more that Thinkorswim offers, but these are some of the highlights that I use regularly when trading.

Robinhood is great for beginner investors, but if you’re looking to take off the training wheels and move to the next step of your investing journey, Thinkorswim is the way to go.

Fey.com - Stock Analysis Platform

A Bloomberg Terminal is $2,000 a month. Fey, a more user-friendly and similarly accurate data alternative is $30 a month. A majority of the services that I use are free, but Fey is well worth the $30 a month.

Fey gives me everything that I need to perform the fundamental analysis portion of my investing strategy. It provides earnings for previous quarters, P/E ratios and comps, every news article that mentions the stock, and analyst ratings on the price movement of the stock. It is single-handedly the best tool a retail investor can have to do real research into a stock.

Most retail investors don’t have time to consistently track a company’s earnings calls or read the letters to shareholders to understand the company’s strategy moving forward. Fey provides an easy-to-understand user interface with information about all of that and more.

Below are some examples of the analysis that Fey provides. They are not exhaustive, but are some of the key tools that I like to use.

If you are serious about moving forward in your investing journey, I highly recommend paying the $30 a month and gaining the information that will give you the edge when making investment decisions.

That completes my stock-picking tool kit! Contrary to popular belief, you don’t need six monitors constantly updating with market information to be a good investor. These three tools combined will provide everything that you need to find stocks, perform your analysis, and make a profit.