Three signals to watch for safer investing

published 11 March 2010

All investors live in fear that there are important things going on about which they are unaware. As soon as they buy a share they start to wonder whether they have done the right thing. Suddenly all their optimistic justifications for buying the share are replaced by a host of doubts. They watch every tick of a share price, hoping to find some clue about what's going to happen to their money.

The problem is, most investors don't know what they're looking for. But when you've been in the game for a while, you come to understand that the stock market does throw off some 'action signals' that can help you to sidestep these anxieties

A valuable lesson from an old stockbroker friend

Years ago I worked with a stockbroker who taught me a useful lesson. He had an order from a client to sell 100,000 shares of a certain company. Rather than try to sell them all in one go, he first sold 25,000. Then he sat back and waited to see how the price reacted.

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Did that sale knock the price? Or were those shares snapped up eagerly without affecting it? If the latter, he would place an order to sell the next 25,000 but at a higher price. He was using his first sale to pick up a signal from the market which he could then use to his advantage.

Three 'action signals' to keep you one step ahead of stock market movements

There are three more stock signals to which I pay special attention. Learn these and you'll greatly improve your chance of stock market success.

1. Pay attention to volume

Shares move for a reason. It may be because a new director is buying his obligatory shareholding. It may be that some private investor is selling to book a capital gain. In these instances trading volumes will be light, but may still be enough to move a share price.

Such a move tells you nothing about the underlying business. But when prices rise in high volume, it indicates that several buyers are chasing the shares at the same time. There is likely to be a good story going around that has not come to public attention.

If a business is doing well or if a big deal is in the offing, it's very rarely a total secret. One way or another, word gets into the market and buyers chase the shares. When share prices are driven up in high trading volume, this carries more significance than low trading volume.

Here are three penny shares that were rising in high volume today: Victoria Oil & Gas (VOG), Provexis (PXS) and Circle Oil (COP).

2. Look at the new highs column

There are plenty of dedicated chartists who will tell you to ignore 'the fundamentals' of profits, earnings and dividends and focus on the trend of the share price.

For me, charts can give as many misleading signals as helpful ones. But there is one signal that I do look for. That is when a share hits a new high.

Suddenly everybody who holds the share is in profit. Nobody is left who might be tempted to cut a loss or give up on share that is going nowhere. There is no fear, only greed. There are no obstacles in sight and the share price is free to move to a new higher plateau.

Penny shares hitting a new high today include Surface Transforms (SCE), Advanced Medical Solutions (AMS) and Lifeline Scientific (LSI).

3. The message of the share issue

Here is my third signal perhaps the best of all. Pay careful attention to what happens when a company issues a pile of new shares. Whatever the reason, the share price should fall. This is basic supply and demand. Just look at the how shares in the Prudential have plummeted since it revealed plans to issue $20bn of new shares.

But every now and then a company will issue new shares and yet its share price will go up. If these shares have been issued to finance a deal, the City will have looked very closely at the details. If it has accepted all the newly issued shares and then waded into the market to buy even more at a higher price, you can be certain that it likes what it sees.

This article was written by Tom Bulford, and is taken from his free twice-weekly email the Penny Sleuth . It was first published on 9 March 2010.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.