March 19th, 2010

Using Scans to Hit the Bulls Eye

A reader asked a fair question: “You give us a lot to choose from but which do you think is the best?” That’s a question we’d all love the answer to. But no one can predict the future with 100% certainty, even me. And if I could, I probably would be on the beach on my own private Caribbean island instead of writing this blog.

What we can do, though, is try to reduce the risks involved in stock investing while at the same time maximizing the probabilities for profit. I do this by: 1) timing the market and trying to avoid major down drafts but ride big up trends, 2) trying to make sure I invest in the same industry sectors favored at the time by institutional investors and 3) picking stocks that appear to have momentum.

To further complicate the matter, the reader’s question can’t be answered without specifying the time horizon (which is different for each investor): the “best” stock over the two weeks, over a month, over six months or over a year? I consider my time horizon to be the very non-specific “until the market trend turns again” (if you actually believe an uptrend has already begun).

Over the past couple of weeks, I offered four different lists comprising 491 different stocks meeting the criteria of low risk and high reward. I can’t tell you which specific ones will wind up having the greatest return over the next month, quarter or year. But I believe you can assemble a basket of them and find, over the long run (3-6 months), that basket will perform better than the index. In other words, you should be able to throw 6-10 darts, let’s say, at the list to pick from the list at random and the majority of them will wind up beating the Index. If not, you should have put your money into the SPY etf.

The performance of each list since the date they were posted has been as follows (click on image to enlarge):

On the plus side, more than 80% of them have appreciated in price. On the other hand, only two of the scans has produced a majority of stocks that significantly outperformed the Index (the last list of 87 has so far shown a loss since March 12 vs. a 1.4% gain for the market primarily due to the significant losses on 2 stocks, GKK and SQNM).

I run these scans nearly every day so when I do decide it’s time to put more to the money at risk in the market (i.e., buy some stock), I go to these scans for names of stocks to buy.

You can par the lists down by adding additional criteria such as: beta, volatility, relative strength, stochastic or moving average trends. You might even use some fundamental indicators like P/E or dividend yield. Sorry, however, I’m not allowed to be more specific.

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  • Zetetic

    What do you mean "not allowed" to be more specific?

  • Joe

    "An investment advisor is an individual or entity that (1) provides advice or analysis by making direct or indirect recommendations regarding securities or securities markets; (2) for compensation in any form; and (3) engages in the regular business of providing advice regarding securities……An investment advisor is exempt from SEC registration if it (1) had fewer than fifteen clients during the preceding twelve months, (2) does not advise any registered investment companies or companies electing to be regulated as business development companies, and (3) does not hold itself out generally to the public as an investment advisor."

  • Anonymous

    I was looking at steel & coal , they all uptrend during 2004. so my stragy is buy on the dip to those. comments? thx!

  • Anonymous

    could you tell me what your criteria is for

    1. stocks on the move?
    2. stocks with good charts

    thanks

  • Joe

    "Stocks on the move" meet following criteria:
    1) Price per share>$15
    2) Price percentage change today>0.5%
    3) Relative Strength Indicator today>top 50%
    4) MoneyStream Surge for past week>top 50% (proprietary to Telechart grew out of joint venture with a large regional brokerage firm to develop a price/volume indicator. The result is an indicator with much the same objectives as OBV and is interpreted in the same way you would interpret OBV. Generally, you look for divergences.)
    5) EPS percentage change from 4 qtrs back>top 50%
    6) Volume surge over past 5 days>top 50%

    "Stocks with good charts" is subjective. They're stocks that:
    1) completed a base reverasl pattern,
    2) broken above that pattern,
    3) formed a pattern while testing support at the top of that reversal and
    4) have not begun an extended move.

  • Anonymous

    guru, what is the tool you use to scan stocks? thx!

  • Joe

    I've been a Telechart Gold subscriber for more years than I can count.

  • Lewis

    Hi, does Telechart scan for % increase in EPS by quarter and annually too?