EXCLUSIVE: How To Know When It's Time To Pull The Trigger And Buy A Stock

The core elements of every investing strategy consist of buying rules, selling rules, risk management and portfolio management. 

Matt Caruso, trader and teacher at Caruso Insights, focused on rules for buying in a presentation at the "2022 FinTwit Conference" hosted by Benzinga and Lupton Capital.

"People just think of ... what triggers execution? You know, when do I hit that buy button? But it really goes much further than that," Caruso said.

Selecting Stocks: It starts with picking the right stocks, he said. In order to find the right stocks, an investor must identify what drives price action.

The first is the fundamentals of the company, Caruso said: "I don't care what company it is. If you don't eventually turn a profit or have a path to profitability that investors believe in, the stock is not going to amount to anything."

Although technicals can help investors pick entries and exits, the fundamentals drive the stock, he said. Other stock price drivers include the Federal Reserve and institutions, he added. 

Market Conditions: Deciding when to buy starts with selecting the right stocks, but it also comes with understanding different market environments, Caruso said. The market environment is dictated by the supply and demand of money, which is controlled by the Fed, he added.

"Don't fight the Fed, because the Fed is what sets that cost of money and that will be what will lift the tide or lower the tide for all the boats and all the stocks," Caruso said.

As interest rates rise, future earnings are diminished, but as interest rates fall, a company's future earnings potential increases. 

"You have an increase in interest rates, which over a longer period of time has a big impact on what your future earnings are worth and then after on top of that maybe this higher-rate environment makes it a lot more expensive and difficult for you to operate, so you're going to have lower earnings as well," Caruso said. 

This explains some of the massive downside moves in the market this year, he said: "The power of the Fed and the cost of money: that's really what drives everything."

What Triggers Execution? Understanding how to select stocks and what market conditions mean for the future earnings of those stocks can help investors decide when to pull the trigger and buy. 

A good buy signal is institutional buying, Caruso said.

"Institutions have the best research. Institutions are forward-looking. Institutions are strong hands. They're not going to be selling a stock just because of a little wiggle in the stock chart, but the charts do show their footprints," he said. 

If you overlay a given stock's chart against an overall market index like the S&P 500, you can often see points of relative strength, which can show institutional involvement, he said. 

"That relative strength, that chart of the stock not breaking lower with the market, that doesn't happen by chance. That's an institution who has a good forward view of the stock stepping in and putting its money where its mouth is and accumulating that stock," Caruso said.

See the full presentation below:

Photo: geralt from Pixabay.