One of Mark Minervini's key strategies is not letting the overall market tell him which stocks are winners, but letting the winning stocks tell him how the market is acting.
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"I would find that when I started getting bullish on the sector and bullish on the market and buying stocks, all the stocks that were the real great names, that had the earnings, had characteristics — they've already gone up," Mark Minervini, founder of Minervini Private Access and U.S. Investing Champion, tells Investor's Business Daily's "Investing with IBD" podcast. He says he realized afterward that such stocks would perform well and looked attractive in hindsight at that critical moment.
Mark Minervini Flips The Script
For Mark Minervini, the question was how to capture the best stocks before they made their big moves. He took a hard look at his trading patterns and says he had missed the proverbial forest for the trees: by trying to form an opinion on whether a market was bullish or bearish, Minervini didn't see the stocks for what they were — indicators of where key performance and strength lay.
"I flipped that completely around and I went bottoms up," says Minervini. "I'm going to let the stocks lead me to the sectors, and when their stocks and their sectors are acting well, I'll know it's a good market."
That lesson, which Minervini learned in 1984, remains a mainstay of his investing arsenal. "The crazy thing about 2021 is it was an amazing opportunity because — and this doesn't always exist — there was lots of stocks setting up and breaking out, running up for one, two, three, sometimes five or seven days," says Minervini.
A Modern Example: Uber's VCP
Another more recent example comes from shares of Uber, a stock that's currently entering a volatility contraction pattern, or VCP. The trading pattern, revealed by contractions in the stock price and reduced volatility, indicates a rising stock that's set to see higher demand from institutional investors.
But to capture these opportunities, investors need to be quick and keep losses tight compared with gains, gauging the market the way Formula 1 racers follow a pace car. "He speeds up, you can speed up and still maintain that car lead," says Mark Minervini. "It slows down, you've got to slow down and still maintain those car lengths."
Keeping pace keeps risk minimized. "If I feel I can make 10%, I'm not going to risk more than 5%, and so I'm always maintaining at least a 2-to-3 or 4-to-1 reward-to-risk ratio," says Minervini. He uses ETFs to remain invested in volatile or cyclical groups like steel, energy and semiconductors, investing only if he can obtain upside and limit risk.
"When their stocks and their sectors are acting well, I'll know it's a good market," says Minervini. "Once I flipped that around, my whole trading career — my whole life changed."
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