September 30th, 2010
I was challenged the other day by my focus and emphasis on what appears to be a narrow range of stocks. The stocks I buy (and therefore the ones that appear in the Daily Alerts sent to subscribers) are often stocks that are making “all-time” (because of the constraint in my system, usually actually 5-year) new highs.
Whenever the market is accommodating and the time is right to begin putting your hard-earned cash to work, it always boils down to a question of selecting those stocks with the greatest potential having the lowest risk. There are potentially 5-7000 stocks to pick from (US and ADRs) plus up to 2000 ETFs. You can’t start with symbol A (Agilent Technologies) and work your way through to ZZC (Sealy Corp). There just aren’t enough hours in the day or days in the week to look at all those charts (or listen to conference calls, read annual reports and do all the other homework that Cramer requires). Another approach is just going to a relatively reliable source like IBD and throwing darts at their list of top 100 picks.
I spent many years watching the performance of the IBD 100 list and wanted to emulate that in my own portfolio … who wouldn’t. I dissected the IBD picks, tried to emulate the CANSLIM process and decided I was basically trying to “reinvent the wheel”. I discovered that a large percentage of the IBD 100 was actually comprised of stocks that had recently (within the prior 5 trading days) made all-time new highs. The interesting thing was that many making it to the list for the first time, did so when they made that all-time new high and once they were added to the list they tended to stay on the list …… and, more importantly, continued making all-time new highs. These stocks had momentum.
Among the current IBD 100 stock list, 43 are on the all-time new highs list (remember, my definition is making a new high for the first time in 1250 trading days, or roughly 5 years). Stocks meeting that definition on the current list include:
If I were to expand the definition to include stocks that may have made an all-time new high sometime with the last two weeks but have retraced a bit, then about 20-30 more could be added to the list. My take away from this was:
- IBD’s approach sounds like a combination of technical and fundamental but it’s mostly a momentum-focused strategy.
- There can be all sorts of fundamental reasons that a stock is selected like institutional following, earnings growth, sales growth, good industry, etc. But when you boil it all down to what the effect of all this is on a company’s stock, it’s to cause demand to outstrip supply and its price moves up.
- I could sidestep the whole process by scanning for those stocks that were making all-time new highs. Since that list would have new additions all the time, continuous scanning was necessary.
- A great strategy (if you get out of the way in a market downdraft) is to “buy high, sell higher”.
What IBD didn’t do well was to tell me when the sell those stocks (see “Tech Stocks In Parabolic Moves: When to Sell“). Also, because IBD always had to have their list of top 100 stocks, they didn’t do a very good job of telling me when the market was in free fall and, no matter how good the company or the stock, you were going to lose money owning it (that’s why I developed my own Market Timing Indicator … more on that later).
When the stock market is moving from a trough or consolidation into an uptrend and I have cash to invest then one of my primary means of employing that cash is to buy stocks making all-time new highs. Let me give just one example, OPLK (click on image to enlarge):
Millions of investors around the world are looking at this chart, waiting to see if it crosses 22.25, an all-time high going back ten years. Some are technicians and others are fundamentalist (like Cramer) who will cook up some story for making it sound like there are outstanding business and financial reasons for owning the stock. No one knows where the stock will be in 2015, but we can be fairly sure that if and when it does cross 22.25 it may attract a following (i.e., increase in average trading volume). At that point, no one who’s owned the stock since 2001 will be losing money on it.
There may be some hesitation or retreat as buyers who were in for a quick flip will cash out for a 20-30% profit but afterwards the stock will continue moving ahead. So there’s plenty of time to jump on board. If the market doesn’t tank in the interim, those who hold for the long run could see some really huge percentage gains further out in the future.