Use a Trading Cube to Find Great Stocks
12/31/2012 8:30 am EST
A trading cube is like an accountant's balance sheet, and it gives investors a top-down and bottom-up view of the market, sectors, and stocks, explains L.A. Little.
Today, L.A. Little joins us to talk about a unique way to identify a leading stock within the context of its sector and the general market. So, tell us how you're doing this.
Well, there's something I call the trading cube, and here's an example of it. This particular one is eBay (EBAY), and if you look at eBay and if you think about how stocks move, stocks are set up in tiers. There are stocks that make up sectors and there are sectors that make up the market.
There is an influence between those: the sectors influence the stock, the market influences the sectors and the stocks. So, when you're looking at a particular stock that you may want to buy, you really want to know if the sector is strong, because there is a relationship. I would rather buy a stock like eBay that's a strong sector, versus something like Applied Materials (AMAT) that has a weak sector.
If you're trying to measure up a stock's potential, one of things you want to do is look at the sector, and of course you want to know that the general market is supporting it as well. So the trading cube, because it looks at nine different charts basically, it's looking at three time frames across three instruments-the qualified trend for all of those.
It's a snapshot view, almost like an accountant's balance sheet. It's a snapshot view of the qualified trend for the stock, the sector, and the general market in one shot.
Now a lot of investors and traders both kind of tend to take to either a top-down or bottom-up view. Where would you say the trading cube fits into that?
That's an interesting idea, and in a way the trading cube does both, because you can see the top-down starting at the general market down and you can see the stock going back up. So it really encompasses both when you present it that way, and that's an interesting question because nobody has asked me that before.
Well how would time frames fit into this? You mentioned that a moment ago.
Well, the time frames are important, because in particular the trading cube is looking at three months for the short term, it's looking at a year for the intermediate term, and it's looking at five years for the long-term.
So the timeframes are important because when you're looking at a stock, if you're looking at a chart, you're looking at a snapshot time of that chart. That really is just that, if you're looking at the short-term time frame, if you look at the intermediate-term time frame it may look very different, and so you really need that context. You can flip through the charts, or you can just pull up the cube and see what it is.
Okay, so it's kind of just a quick at a glance way to identify some of these.
If I have 100 stocks I want to look at, I will flip through the cube on all 100 in about ten minutes and I'm done. I will have the three or four I really want to look at more.