February 9th, 2011

Assembly and Using Watchlists – Part 3

This is the final installment on the series about Watchlists. Previous postings were about Assembling a Watchlist and Acting on the Watchlist.

Stock Selection Using a Watchlist:

We’ve created a Watchlist, but how do we select which stocks to buy from that list. As discussed in the previous post, we’re almost indifferent as to which specific stocks we own other than our goal that any stock we own should grow at least as fast as (actually, faster than) the S&P 500 accompanied by an acceptable level of risk. Our operating premises are that:

  • Most stocks move in sync with the market,
  • Since most stocks with the market then a stock that’s in consolidation is doing so, in all likelihood, because the market is also consolidating
  • Once a stock crosses above a resistance level and out of a consolidation it is likely launching a new trend with reduced risk of its moving against the market trend
  • The first stocks that cross above recognizable resistance levels ahead of the market are likely to be in leading industries for the next market uptrend move and leading stocks in those industry groups
  • We look for stocks with higher than average volatility
  • We monitor the performance of stocks in the portfolio for stocks that underperform the market and consider swapping them for better performing stocks from the Watchlist.
  • We don’t need to and can’t buy every stock that triggers but will buy those stocks that trigger when there is cash available or when a triggered stock replaces a currently owned stock (that’s either under performing or has significant gains and will be sold to lock in profits).

So our stock selection process is almost on a “first-in” basis. Stocks that are triggered first (first to cross above a resistance level) will be considered first for purchase. The following table presents the first stocks triggered after launching the watch list; stocks highlighted in yellow were stocks that I purchased for the Portfolio:

Remember, the stocks in the Watchlist were all selected exclusively from a technical perspective. Each appeared to be close to moving out of relatively clear consolidation patterns (some had already crossed above those resistance level). What the Watchlist is, therefore, is a selection process for identifying stocks with recognizable chart patterns. Triggers levels are the moves the stocks would have to make to represent breakouts from those consolidation patterns. If the market continues moving higher then there’s a high probability that those stocks will appreciate along with the market.

This process worked in practice to identify most of the stocks that have generated a 33% gain for the Portfolio since August 30 while the market has risen 25%. Will it work as well moving forward as the market advances, as I believe it will, to 1550 by end of the year? I certainly hope so and you can follow it each step of the way by subscribing to Instant Alerts.

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  • Anonymous

    Guru,
    another optics company (EMKR).. where will you sell this?

    http://finviz.com/quote.ashx?t=EMKR&ty=c&ta=0&p=m

  • Joe

    Optical cable seems to be a leading industry group and a top doesn't seem to be developing. You're fortunate if you have EMKR; I would try to hold it until it reaches 4.00 and then skim some off.