February 23rd, 2012

How Reliable is the “Stocks on the Move” Scan?

If you’ve explored this site you’ve learned that one of the benefits of a membership is access to Watchlists, lists of stocks culled from the 7000 or so publicly-traded stocks by way of scans whereby all stocks are filtered against combinations of different financial and technical parameters and by my visually scanning hundreds of stock charts for potential breakout potential.

One of my favorite scans is called “Stocks on the Move”, a filter that focuses on parameters defining outstanding fundamental operating plus strong technical performance.  I developed this scan a number of years ago while attempting to replicate similar lists published in Investors’ Business Daily.  My scan was modeled after IBD’s and frequently delivers many of the same names.

A subscriber wrote the other day asking whether I’d “performed any regression analysis to ascertain the relative predictability of these parameters?”  I had to confess I hadn’t performed any rigorous analysis and realized that I should …. for the benefit of both my subscribers and myself.

I had twice posted the results of “Stocks on the Move” scans (July 22, 2009 and March 2, 2010 ) and I made the most recent list available exclusive to subscribers on January 6, 2012.  But the question remains: on a back-tested basis how reliable were these scans?  If you had selected stocks from any of these three lists, what’s the probability that they would shown a gain? outperformed the S&P 500? would the performance be any different 100 days, 200 days, 300 days or 500 days in the future?

Some might argue that this is a limited sample but I believe it’s indicative of the potency of “Stocks on the Move” as a reliable source of investment ideas with a low risk and high probability of outperforming the benchmark.  Of the 7000+ stocks the scan picked up the following stocks more than once and all together 358 different stocks:

But the question asked whether it was possible to “back-test” the scan to determine how well the stocks captured in the Stocks on the Move scan performed over various time horizons:

The back testing was performed at intervals of approximately 100 trading days after when the scans were run against 2 measures: absolute performance and performance vs. the benchmark S&P 500 Index over the same periods.  Interestingly:

  • Stocks filtered out in the scans run on both days, more than 50% of the stocks filtered out by the scan appreciated above the price on the day of the scan for 300 or more trading days into the future (of the S&P 500 Index, half perform better than the Index itself by definition).
  • More than 60% of those stocks also outperformed the S&P 500 far after the Scan was run however that better than average performance occurred primarily shortly after the scan run date; by approximately after the end of the first year, those stocks  no longer showed superior relative performance.

Become a member now and you’ll have access to the archive of all the Watchlists, the Weekly Reports, the Model Portfolios and all the Instant Alerts since November to help you navigate this market as it moves higher.

 

 

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January 11th, 2012

The Breadline for Financial Bloggers

Time have been tough for hedge fund managers, big and small.  John Paulson, for example, needs to generate a 104 percent return to recoup a 51 percent drop in one of his largest funds after wagers on a U.S. recovery went awry.  Until he hits that mark, Paulson will have to forgo his 20 percent performance fee, and will collect only his 1.5 percent management fee.  According to the San Francisco Chronicle,

“Hedge funds are on track for their second-worst year in more than two decades. They’ve dropped 7.6 percent from their peak asset value in April, according to Hedge Fund Research. At the end of the third quarter, about 30 percent of the 2,000 funds that make up the firm’s benchmark index were below their so-called high watermark, or previous peak value.”

That’s the herd but what’s happening to the individual investor?  According to the NY Times, in an article entitled “Small Investors Recalibrate After Market Gyrations”,

“small investors withdrew hundreds of billions of dollars from American stock funds, and they kept bolting as the market rebounded sharply for much of last year….The timing for those people was off, and now they are being buffeted by the steep drops on Wall Street or bailing altogether. Still others who have been holding on in recent years have had enough.”

Some investors fear that the markets have become dominated by high-frequency traders blitzing in and out of stocks, or by sophisticated hedge funds running mind-bending algorithmic trading programs that can outsmart the ordinary investor.  After years of underperformance or losses, some individual investors are questioning whether the long-term outlook that has been drilled into them by Wall Street financial advisers and professionals is really the best advice.

As reported on Yahoo! Finance, “The WSJ says all this volatility is detrimental to the markets … Plus, the swings scare off individual investors, leaving only the big players on the field.”

But the high volatility and lack of trend is a double-edged sword for us financial bloggers.  Not only do we struggling like other individual investors to make a reasonable return on our own investments but we also suffer because so many individual investors have thrown up their hands and resigned themselves to sitting on the sidelines or exiting the market all-together and are, therefore, in no mood to plunk down a membership fee.

But having abandoned the market, those individual investors aren’t aware that what we may be witnessing is the withering end of a secular bear market that’s held us hostage for the past 12 years.  By remaining uninterested, uninvolved and uninformed, those investors could run the risk of missing out on the quickest and most inclusive of all stock market moves … the exit from a long horizontal trading range.

Rather than turning away, investors should be now looking for the most reliable and objective source for market timing.  I believe with our proprietary Market Momentum Meter, the Stock Chartist blog is answer.

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April 12th, 2011

Chernobyl, Fukushima Dai-Ichi and the Market

I’m always on the lookout for things to write about and subscriber questions are always an interesting place to begin. For example, someone wrote this morning asking the following:

“Japan has now raised their reactor crisis to Level 7, the highest level and equal to the Chernobyl disaster. Is there any chart information from the Chernobyl disaster that might help us?”

At first I thought linking a nuclear reactor disaster to the US stock market was unusual but, after giving it some more thought, I realized that actually there was value in looking back to see how the market reacted then and comparing it to what might happen in reaction to the current one. Understanding similarities and differences between the two events at the disaster and the market levels could, after all, be quite meaningful.

The Chernobyl disaster occurred on 26 April 1986 at the Chernobyl Nuclear Power Plant in the Ukrainian SSR (now Ukraine). An explosion and fire released large quantities of radioactive contamination into the atmosphere spreading over much of Western Russia and Europe. It was considered the worst nuclear power plant accident in history, and it was the only one classified as a level 7 event on the International Nuclear Event Scale until the Fukushima I nuclear accidents of March 2011.

The battle to contain the contamination and avert a greater catastrophe ultimately involved over 500,000 workers and cost an estimated 18 billion rubles, crippling the Soviet economy……Estimates of the number of deaths potentially resulting from the accident vary enormously: the World Health Organization (WHO) suggest it could reach 4,000; a Greenpeace report puts this figure at 200,000 or more; a Russian publication, Chernobyl, concludes that 985,000 excess deaths occurred between 1986 and 2004 as a result of radioactive contamination. (from Wikipedia)

The market’s reaction at the time was as follows (click on image to enlarge):

It might first appear as though the disaster damaged the market by stalling attempts to move higher as the S&P 500 Index began trading in an 11% range between 229 and 254. If Chernobyl did have a direct relationship to the consolidation pattern during most 1986 then it pales by comparison, however, with the market’s own melt-down and the largest one-day percentage point loss on Black Monday in October 1987 a little over a year later:

Put in an even longer-term picture, Chernobyl appears as little more than a bump in the road of the longest bull market in history that began when the S&P 500 successfully first crossed above 125 (Dow Jones Industrial Average above 1000) in 1982 and ended with the bursting of the Tech Bubble in 2000:

It’s difficult making “if-all-things-are-considered-equal” sorts of comparisons because Russia in 1986 was different than Japan and the world economy and trade are today. I would say, however, that the market today is at about the same early phase in coming out of the current secular bear market that begab with the Tech Bubble Crash in 2000 as it was in 1983 coming out of 1966-1982 secular bear market. If, in fact, we are in the early phases of this recovery then, over the long-run, the Japanese nuclear disaster will also appear as a blip on future long-term charts.

Thanks for the question, Chuck.

January 28th, 2010

Mirror, mirror on the wall …..

….who’s the most read stock market blog of them all? Well, it doesn’t come as a surprise that Stock Chartist isn’t; but, it’s not at the bottom of the list either. As a matter of fact, according to Alexa, the Google arm that measures website traffic, Stock Chartist unbelievably ranks 35th among the top 100 stock market focused blogs among US readers. Among readers from around the world, Stock Chartist ranks 40th.

The top 5 blogs are:

  • Calculatedriskblog.com
  • ritholtz.com
  • timothysykes.com
  • slopeofhope.com
  • traderfee.blogspot.com

Three of the top 35 are actually aggregation blogs, blogs that collect links to articles at various blogs and news sources the editors feel are important to investors; they are:

  • ritholtz.com (better known as The Big Picture)
  • theKirkReport.com (ranked 18)
  • AbnormalReturns.com (ranked 19)

To what do I attribute this blog’s success? Ever since starting Stock Chartist 4 1/2 years ago, I’ve tried to be honest, candid, direct and educational. As they say on the Street, I “sell my own book” …. in other words, I try to tell you the strategy I follow in my own portfolio, the stocks I own or would like to own, the market risks I see, the concerns I have and the opportunities I hope to take advantage of.

I believe a picture is worth a thousand words so I usually try to accompany my message with a chart or table so you can see exactly where I’m coming from.

Stock Chartist may be the only blog on the web that approaches the market from a strictly technical perspective, focusing on the market backdrop first and then on individual stocks. But I guess it seems to have resonated with enough readers such that it has risen from nowhere to number 35 among hundreds of stock oriented blogs.

You may ask why someone would put in the time and effort. All I can say is that reason is similar to the reason that missionaries go out into the world. They believe it what they are preaching and want others to believe it too. I believe that individuals should take responsibility for manage their assets but that the best way for them to do this is not by out-smarting the big guys (the herd) but by following their tracks (as revealed in the charts). But by being smaller, individual investors are more agile and spry and, thereby, can more easily out-maneuver them.

So I’m not sure how Stock Chartist got to the 35th spot or when it happened, but it’s gratifying to knowing that hard work is appreciated by a loyal and continually growing readership base. Thank you all for your loyalty and support. I hope we all avoid the pitfalls, take advantage of the opportunities and continue to beat the averages together in the future.

By the way, a list of the top 100 stock market blogs …. the competition ….. is available to those interested by clicking here. And if you know or others or your favorite isn’t on the list, just let us all know in a comment.

April 16th, 2009

Comments from Readers and an Announcement

If you’re a regular reader, you see that my focus has started to shift as the market’s action turned decidedly different. During most of last year, my emphasis was trying to persuade you to move into cash (my first such comments were back in February 2008). And since early March, I’ve been trying to point to stocks or industry groups that appear to begun forming clear reversal patterns and started moving higher smartly.

I takes nearly 2 hours daily to write these columns and when I’m not writing I’m thinking about important things you need to know or understand and how best to communicate them to you.

It’s gratifying to know that my daily labors have helped people to weather this Bear Market over the past 16-18 months. As a reward, I receive some very nice comments from readers like you over the past year, through emails or in comments on this blog. If you don’t mind, I’d like to share some of them with you (and if you are the writer, thank you again):

  • Thanks for all the work you did on this post. Very interesting how often analysts are wrong! From Coyote 4/15/2009
  • Thanks for the post about whether this is the bottom or a trap. I tend to agree with you, that we will retest successfully. But is it possible we are NOT going to retest? I’m waiting to pour a good dose of money into the market (as are you, I see), but I worry that the time to dive in has passed. From Eric 4/13/2009
  • I’ve added your blog to my gmail reader and appreciate your reasoned approach to the markets. The charts that you include clearly illustrate your points without looking complicated. I’m having trouble deciding on which charting site to use on a daily basis . I’m overwhelmed by all the choices and wonder if you have a recommendation for a beginner. From Jim April 10, 2009
  • Thanks for you insight into the market. From Robert 4/9/2009
  • I’ve only been reading your page for a few weeks…I was just going through your spreadsheet you posted, and I have to say it’s quite impressive. From Tim 4/4/2009
  • I recently came across your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often. From Miriam 4/2/2009
  • I am fairly new to studying the stock market and I know that if I am to ever become a decent trader I have to understand technical indicators. I recently added your feed to my homepage and I have now read several of your posts. I see the logic in what you report and it is a refreshing difference from the media. From Robert March 21, 2009
  • Thanks for your help separating the day-to-day market drama from more significant trend developments. From Pete 3/11/2009
  • I recently saw your blog which offered your industry ranking spreadsheet. Since I believe your work deserves merit. From Martin March 05, 2009
  • Your posts are generally simple and to the point and very profound in its contents and messages. Today’s post bring in such clarity and the correct way of using TA to gain in stock picking by correlating the major indices. Highly appreciative of your good works. From ilango 1/26/2009
  • I had to laugh when Cramer rolled out his “Tech Week”. I thought of you, Guru, and was hoping you’d have some fun with this! I would love to see some of the chartists that come on now take your longer-term perspective. Seems like charting the last few months action is just getting confusing with wedges, pennants and channels all converging. Hope someone from CNBC pops in here, I’d watch your idea for a show! From Chad Wed 1/14/2009
  • Articulating clearly and concisely what the various charts reflect is most appreciated. That alone provides a current and relevant snapshot, providing confidence and a better understanding of what is depicted as being a possible trend to be aware of. Thanks. From rbblum 1/11/2009
  • Your work/blog is really appreciated. From Ajay 1/5/2009
  • Just wanted to drop you a note and let you know I have thoroughly enjoyed reading your blogs, they are very insightful and interesting. I certainly hope you continue to post them, thanks for all the valuable information. From Chuck 1/2/2009
  • I was doing some research and came across your blog – very nice! I work in the field of technical analysis. From Gentry January 01, 2009
  • Your blog is impressive and should have a larger audience. From Kirk December 24, 2008
  • I just stumbled across your blog for the first time today…and discovered that there are quite a few interesting nuggets in here. I’m now subscribing to your feed and looking forward to more. From Bill May 05, 2008

The past has been painful, frustrating and, even sometimes, boring. But I think we may be moving to a much more interesting and, in some ways, more challenging period. It’s not difficult outperforming the market when it’s imploding. All you have to do is to move into cash. But when the market’s rising (as it has with this more than 25% gain since March 9), outperforming the Index becomes harder because you have to avoiding losers, find not only good stocks but those stocks that are leading the market.

To get a sense of how difficult that is, look at the fascinating chart in this Seeking Alpha article (I’m not reproducing it here because of copyright ristrictions) from a book by Mebane Faber (also the author of the World Beta blog. The point made is that between 1983 and 2007, 60% of stocks produced a 0 return; all the returns from stocks were made by the 25% of the remaining. In addition, 25% of stocks had 300% or more over the period … but 25% had losses of 75%.

So stock selection is going to be critical for success as the market starts moving ahead. And my challenge will be to try to help you find those winners. One way of doing that is an idea I’m toying with …. I’m thinking of offering on a first-come-basis, the opportunity to have face-t0-face training and discussion sessions about stock chart techniques, industry group rotation and market timing. Since I’m not certified, I won’t be able to advise you on portfolio, investment or tax matters. All I’ll be able to do is to teach you my techniques, the things you’ve been reading about here, and also discuss my opinion concerning some specific stocks that may be of interest to you.

I envision doing this via Skype for a limited number of you, probably not exceeding 100. Of course, because of the additional time commitment, it will have to be on a subscription basis. For either a monthly, quarterly or annual subscription fee, you’ll have access to “the Guru’s” undivided, face-to-face attention for 10-minutes or an hour (the monthly subscription, for example, will be $100). I’ll be working for you. In the meanwhile, I’ll continue writing this blog and sharing with you my observations, ideas and insights.

I’m working out the specifics but if you’re interested to learn more, send me an email directly at the address in the side panel rather than through the blog comments; that way it’ll be more private and confidential.

October 20th, 2008

Readers’ Questions Answered

Some readers have asked some interesting questions that I need to answer:

  • Q: Since your explanation is based on the cross of 90 mva over the 180 mva, do you look at the daily or weekly chart? Based on FDO, QSII… they are weekly charts.

    A: I’ve been looking at the daily charts. Each bar on a chart represents any span of time (1-day, 2-day, 5-day or even a 9-day for extremely long time horizons, for example). The moving averages, however, are converted for the appropriate number of trading days (the 60-day MA is converted to a 30-bar MA on a 2-day bar graph).

  • Q: What is the reason behind using oil companies as an indicator? Would it be “normal” for them to reach the bottom of the channel before other sectors? Do they have a different time horizon in their outlook?
  • A: I only want to highlight a sector that I though might be relatively safe when I focused on the integrated oils. There was no intent for them to take on the role of “leading indicators”. I guess I fell back on combining technical and fundamental analysis by looking at some compelling charts overlayed by the strong cash position and earnings prospects of these stocks.

  • Q: I’ve used daily and weekly but never monthly. It seems to use a monthly chart you would have to be extrememly patient as each bar is 30 days. Which seems like an eternity to a guy who used to buy and sell 50 times a day… is it safe or okay to focus on one timeframe ? I’m looking for a process for TC2000.

    A: My TC2000 screen almost always displays 3 time horizons simultaneously:With the three simultaneous views, I can see not only what’s happening today but how short-term action might be potentially impacted by historical support and/or resistance levels and trendlines.

  • Q: I know we focus on the US but i’m curious in all your research if any foreign exchanges look better to you then the US. Japan? Brazil? Etc.
  • A: I don’t usually but it’s getting easier to do all the time with etf’s. There’s just to much to look at just here in the states but, if it looks like an clear and compelling opportunity opening up somewhere else in the world, I wouldn’t pass it up. In all honesty, I’d usually find these through press reports and “talking heads” rather than through scanning the charts.

Thanks for the questions and the support. It’s good to know that time taken is appreciated by others and not just an exercise to clear my head.