October 21st, 2008

A Key to the IBD 100 "Black Box"

I discovered something really exciting while working on my book that I want to share with you. The chapter deals with identifying momentum-driven stocks at the cusp of a bull market, the time when you’re not absolutely sure whether the previous Bear Market has hit it’s lowest point and before the base/bottom patterns for individual stocks have had a chance to fully form. The period we’re now in feels like that.

When describing the earliest stages of the Accumulation Phase of the typical market life cycle (see “Early-Stage Momentum Stocks“), I wrote, “the common denominator of the early leaders in the early phases of the last bull market (2003-2007, as the Tech Bubble Crash was bottoming out), however, were stocks that formed “Golden Crosses” (where the 90-day moving average crossed above the 180-day moving average and closing price higher than both).” As of yesterday’s close, about 230 stocks have completed “Golden Crosses”.

Even more interesting, however, is that many of these “Golden Cross” stocks overlapped stocks in the latest IBD 100 list. Actually, the following 36 stocks in IBD’s top 100 leading stocks also formed “Golden Crosses”:


Consequently, these 36 stocks are blessed by two authorities: IBD and by the action of herds who are relentlessly driving these stocks to higher prices (at least in this Accumulation stage of the Market Life Cycle).

I’ve always wondered how IBD’s “black box” kicks out their top stocks. I know they focus on relatively new issues (IPO’s within the past 3 years), stocks that make new highs and stocks with positive relative strength (moving better than the market). But we may have come across a third – stocks that have formed a “Golden Cross”, where the 90-day moving average crosses above the 180-day moving average (or, conventionally, where perhaps the 50-day MA crosses above the 200-day MA).

I’m not saying that IBD actually uses this metric. What I am hypothesizing is that the factors leading IBD to select highlight these stocks (“institutional ownership”, the “I” of CANSLIM) are the same factors that bring about “golden crosses”.

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