What a fantastic year in the U.S. stock market. Bullish investors are jumping with joy as the bear brigade has gone into hibernation. The Federal Reserve, showing signs of slowing down its interest rate hike program, has removed a significant headwind to continued advances.
Despite the naysayers trying to tell you otherwise, I think the market will continue surging this year and the top performers will keep pushing higher.
Even better, there's a proven strategy for capturing profits from soaring stocks.
What Is Trend Following?
Trend Following is a simple yet highly effective method of earning huge returns in the stock market.
At its most elementary, trend following is buying new highs and technical breakouts with the expectation that the upside momentum will continue.
The object in this case is price, and the higher it goes, the more investment it attracts, reinforcing the upside momentum.
Buying breakouts and new highs are not the only way to trend follow. Many trend followers believe in waiting for a short term pull back to enter a longer term trend. The key here is to identify short-term pullbacks within continued, long-term appreciation.
I know this may sound complicated, but it's actually very straightforward. For example, if the stock has moved higher for nine days in a row and it drops on the tenth day, that can be a signal to enter the trade. There are many variations on this theme, and every trend follower has their own system.
Getting The Whole Picture
The majority of trend followers believe that price is the only thing that matters when making trading decisions. Therefore, most are pure technical analysts when it comes to making trading decisions. While it is true that all fundamental data is reflected in price by default, this is where I part ways with the trend following investing crowd.
The way I see it, buying into trends with technical analysis as the only guide is foolhardy.
One must understand why the price is moving, which means fundamental and economic data need to be considered.
The way I use trend following is to first identify strongly trending stocks via technical analysis. Scanning for the top performing names of the year is the fastest way to determine reliable trends. Ranking top performers in individual sectors is also a quick method to find ideal stocks.
Next, drill into these trending stocks to determine why the shares are outperforming the market. Make sure it is not a one-time, short-lived occurrence that is driving price. Maybe it is a takeover offer that will soon take place or another corporate action that will quickly fade. These are not ideal candidates for trend following. Trend followers need stable, long-term, bullish fundamentals combined with a technical price trend to create substantial odds of a winning investment.
Look for metrics like consistently improving earnings and cash flow supporting the climbing price. Fundamentals are especially critical for trend followers who enter on price pullbacks. The pullback must be due to mere profit taking rather than a bearish fundamental change in the company.
3 Top Performing Stocks In 2017
1. Align Technologies (Nasdaq: ALGN)
Align Technologies solves a vexing problem in orthodontics. Anyone who suffered from bulky and ugly metal braces as a teenager or adult can relate to the need for a lower profile and aesthetically pleasing teeth straightening products. Align solves the issue with custom made, clear aligners.
A member of the S&P 500, shares are higher by nearly 59% so far in 2017. Revenue, product shipments, and customers are up trending along with the share price, making ALGN an ideal stock to buy right now.
2. Wynn Resorts (Nasdaq: WYNN)
The resort and casino operator has posted 11 consecutive months of revenue growth, pushing shares to a yearly gain of 49%-plus. It's truly the comeback story of the year after the company suffered multiple months of declining revenue.
Wynn is a direct play on China's improving economic picture, as operations in Macau are a major profit driver. Although gaming revenue has been soft in Macau, June posted a nearly 26% gain and July is expected to continue the improvement. The company has a hold on about 16% of the Macau gaming market. I am very bullish on China, so Wynn is my favorite stock on the list.
Despite improving numbers, the stock price has just pulled back to support at the 50-day simple moving average, creating an ideal pullback entry near $130 per share.
3. CSX Corp (Nasdaq: CSX)
I did not expect a Railroad company to appear on a screen of top-performing stocks. It was a delightful surprise to learn that the shares are higher by over 53% in 2017 on the heels of solid fundamental support.
The company is riding steadily increasing freight activity, with coal revenues soaring over 30% in the first quarter of 2017 on a 3% volume increase. The company has projected 25% bottom line growth in 2017, which will continue to drive the share price.
Combine the improving freight numbers, a new, highly-respected CEO, and an 11% quarterly dividend increase with a billion-dollar share buyback program, and it paints a very bullish picture for this top performer.
Risks To Consider: Always remember this stock market maxim, "the trend is your friend until it bends in the end." Even sharply upward-trending stocks with solid fundamental support can become overextended, resulting in losses for trend following investors. Always use stop loss orders and position size properly when investing.
Action To Take: Consider adding one or more of the top performing stocks of 2017 to your investment portfolio
Editor's Note: When a group of millionaires and billionaires gather in one place to reveal their favorite investment, you need to know about it. So our Chief Investment Strategist, Jimmy Butts, investigated what they discussed, including where they recommend you put your money in 2017... His full findings here.