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When you are investing, it can be very tempting to buy up shares of something that is “hot.” However, these fad stocks have a way of dropping as suddenly as they rise. The problem is that eventually people will start selling these stocks to make their profit. If you are getting in just before the fad ends, you will lose. A fad stock is also often tied to a passing trend, such as Crocs. The Street offers 5 signs that you may be investing in a fad stock:

1. Narrow business model: Does the company have a limited product offering? Crocs is a good example, since the company had one product. As soon as the boom associated with Crocs died out, the company began losing value at a rapid rate.
2. Momentum volume: If it appears that the volume the stock is trading at is large in relation to its stock float, you might be looking at a fad stock.
3. Product replication: Can someone else make the product? If it easy to make a similar product, then the company could easily start losing out as market share goes to other similar products — especially if they are cheaper.
4. Financial deterioration: A company can appear flush right after a successful IPO or some start-up capital. But once that starts to disappear and the margins diminish, it is a sign that trouble could be on its way.
5. Technology: Watch out for “cutting edge” technology. In today’s world, it is important to realize that what is state of the art today could easily be old news by tomorrow.

It is important to differentiate between a fad stock and a stock with staying power. Fad stocks can be okay for day traders and active traders who have a knack for exiting before things go south, but for most average investors it is best to stick with the “boring” stocks that have staying power year after year.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Are the bulls ready to take charge?

It certainly looks like it. The Dow has had its best month since 2002, posting a dramatic monthly gain for the month of March. The Dow is up 8% for March, and the Nasdaq did even better with 11% gains. However, those gains were not enough to erase a loss over the course of the first quarter of 2009. But more good news could be on the way if optimism manages to turn the month’s modest gains into a true stock market rally.

Buying now, before things really heat up on the stock market

For the bulls, now is a great time to buy. The stock market is up just enough to lend some confidence to investors, but it is still low enough that there are some super bargains to have. Indeed, there are plenty of value stocks at great prices, and one can get in on index funds while they are still cheap. And that is the fundamental investing strategy for buy and hold investors: Get things while they are at low prices, and then hold them for years and watch your portfolio grow.

Another reason that the stock market is rallying right now is to do with the fact that mutual funds are stocking up on March’s winners. MarketWatch reports on this strategy by mutual fund managers:

Portfolio managers often engage in “window dressing,” or buying stocks that make quarter-end statements look good late in a quarter.

“A lot of people were scared to do anything early in the quarter, and then they were looking at their portfolios and thinking, ‘Wait, the market’s gone up,’” said William Lefkowitz, chief derivatives strategist at vFinance Investments.

No matter the reason for the stock market rally, though, it is nice to see the bulls starting to come out. Now, the real test is whether or not the bulls can hold off a return of the bears.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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This week saw a rather spectacular rally on the U.S. stock market. Friday, though, saw a major pull back — with the Dow Jones Industrial Average falling nearly 150 points. As a result, it is not very surprising that there are some skeptics returning to the stock market. After a week full of optimism, it’s time for a little pessimism.

Right now, questions are being raised about the long-term fundamentals of the U.S. economy. Wall Street was ecstatic about recent measures announced by the U.S. government — measures designed almost exclusively to help the stock market. Especially well-received was the latest bank rescue plan aimed at buying even more toxic assets from struggling financial institutions. This plan was tempered by comments from Secretary Treasurer Timothy Geithner about regulation, however.

All of the speculation about the speed of the economic recovery (it’s expected to be relatively slow, taking until the beginning of next year to get solidly underway) is creating an aura of skepticism about the future and how well government policies will work. Another issue is that there is some concern about economic fundamentals. The money supply is being increased, along with our national debt. This has some worried about the long-term, overall health of the economy.

Profit taking on Wall Street

Another reason that stocks dropped yesterday is probably profit taking. After seeing gains all week, it’s hard for investors to not cash in. And profit taking is a pretty good strategy for many stock investors — especially day traders. The idea behind profit taking is that you sell your stock when it becomes profitable — when you have made profits that overcome fees and commissions and leave you with something approaching “tidy.”

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.