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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February 14th, 2012

Is the Market Overvalued and Overbought?

I was struck by a post on Slope of Hope entitled “An Ongoing Balloon Ride” the major premise of which was that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.

I have my own database and decided to do my own research and gather my own facts to see whether I could replicate those results and come to the same conclusions.  My database goes back to 1963 and the moving average I rely on is the 300- rather than the 400-dma (but what difference does a hundred days make between friends).  The Slope writer visually picked the areas when the index diverged significantly from the moving average and eyeballed the subsequent change.  What I discovered was:

The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.  Actually,  it’s fairly typical.

One can look at both tails of the distribution as indications of how extreme the spread defining overbought or oversold situations, times when one needs to sell or has a true opportunity to buy.  In 2008 and 2009, at the depths of the Financial Crisis Crash, the market was over 35% below the 300-dma …. we should have all bought then but few had the nerve.  In August, 1987, the market was 24% above the 300-dma; a few months later, the market suffered it’s largest single daily decline in the October Crash …. we should have sold.

The market was more than 20% above the 300-dma also in 1983 as the market rocketed in celebration of its exit from the secular bear market of the 1970’s.  Rather than crashing, the market went into a horizontal consolidation lasting 15 months (just like the past 15 months?  I’ll leave that determination for you to make.)

So is the market now overbought?  Not if you use the 300-dma as a benchmark.  Did the Slope of Hope contributor select a seldom used 400-dma benchmark to prove his point?  It’s possible.  Where would the market have to be for it be overextended or overbought by these measures?  Somewhere around 1500-1550 …. interestingly, exactly the level of the market’s all-time high as measured by the S&P 500.

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February 1st, 2012

KISS in Market Timing Too

KISS is an acronym for the design principle articulated by Kelly Johnson, Keep it simple, Stupid!  Variations include “keep it short and simple”, “keep it simple sir”, “keep it simple or be stupid”, “keep it simple and straightforward” or “keep it simple and sincere.”  The KISS principle states that most systems work best if they are kept simple rather than made complex, therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.

Other forms of this maxim are “everything should be made as simple as possible, but no simpler” (Albert Einstein), and “”Simplicity is the ultimate sophistication” (Leonardo da Vinci).  The principle is true whether applied to the design of an airplane, conceiving the theory of relativity or developing a market timing tool.

The following statement was made in a post today entitled “Golden Crosses Can Lead To Golden Losses“:

“While both CCM [that’s Ciovacco Capital Management] market models have jumped back into bull market territory, the Bull Market Sustainability Index (BMSI) is approaching levels that are typically associated with market corrections.”

Stick a statement like that in front of me and I had to find out more about the BMSI to see how it compares with my MMM (Market Momentum Meter) which members know that it is serves as the barometer of my market timing approach and is previewed here.

About the only similarity between my MMM and the BMSI is that both are depicted on a scale that runs from Red to Green.  While my is a simple 5 traffic light approach, the BMSI looks like this:

But the similarity ends there.  Where the MMM uses 4 moving averages and the underlying S&P 500 Index, the BMSI is constructed with 30 different indexes as follows:

Complexity doesn’t mean precision and precision doesn’t mean accuracy.  It sort of reminds me of Cramer inferring in his “are you diversified?” segment that investors are safe and can generate high returns over the long run by merely diversifying their portfolio.  Aggregating a large and diverse number of indicators doesn’t necessarily give a better market timing signal than do a combination of four moving averages.

I’ve back-tested the MMM back to 1963 and am convinced that it performs well.  It got me out of the market in 2007, signaled reentry back into the market in 2009 and kept me safe through the fears brought on by last summer and winter’s worst European sovereign debt and US debt downgrades and budget debates.  It’s just issued a new signal indicating ….. sorry, that’s for members only.

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January 3rd, 2012

First Trading Day Facts

There’s always much said about the relevance of the year’s first trading day and what it might portend for the way the rest of the year ends up so I decided to do my own research based on the S&P 500 Index since 1963 and found what I consider to be some interesting factoids:


  • The market closed higher 36, or 78%, of 49 years since 1963.
  •  Of those 49 first trading days in January, about half (26) resulted in a higher closing for the day.
  • When the first trading day resulted in a higher closing, 60% (16) of those years also followed with a higher closing.
  • Of the 23 first trading days that closed down, only 6 years also closed down.
  • The first trading day with the greatest gain was 3.59% in 1988; the market closed 12.40% higher that year.
  • The first trading day with the greatest decline was 2.80% in 2001; the market closed 13.04% lower that year.
  • The best correlations between the first trading day and the rest of the year was when the first days trading resulted in changes of 1% or more.
    • Of the 10 first trading days that closed higher by 1% or more, 8  were followed by higher year-end closes.
    • Of the 8 first trading days that closed down 1% or more, 6 resulted also in lower year-end closes.
  • Of the 31 years when the first trading resulted in a less than 1% change
    • 9 resulted in a lower first day close and 22 with a positive close for the day but
    • more than half (19) of the years closed in the opposite direction as the first day of trading.

For whatever it’s worth, the Bulls must push for a positive close of 1% or more for Tuesday, January 3, 2012 to increase the probability that the year winds up on December 31, 2012 higher than it closed last week; an up close of less than 1% just won’t cut it. Those interested in the statistics can click here .

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December 21st, 2011

2012 Stock Market Predictions

‘Tis the season and predictions for 2012 abound.  Like the market, they are a confusing and contradictory bunch.  Here are a few that fell into my inbox just this morning:

  • According to the Wall Street professionals assembled by Barron’s, “all expect the market to rise about 11.5% next year, which is about what they expected to happen last year and in 2010.”  And in the next breadth, Barron’s seemed to undermine the prediction by inserting the following quizzical chart:What the chart says to me is that: 1) the divergence in Wall Street’s views are as wide this year as they had been the prior two years and 2) Wall Street is batting .500 by the average prediction being dead on correct once and being totally off the next year.  So how much credence would you give to Wall Street’s prediction for 2012.
  • USAToday also assembled their own, different Wall Street Crew for their views of what to expect in 2012.  “….a quick survey of New Year‘s prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks.”
  • If you want a fundamental-based set of explanations for why we’ve been experiencing such an exasperating market you can turn to IBT (International Business Times) who have assembled a Chinese menu sort of prediction for 2012.  Pick any predictions for column A (Bullish) an column B (Bearish) and come up with your own number:

I, for one, am not going to try to pick what I think might be the most probable outcome, I’m not smart enough for that. But I am going to stick with the long-term “reversion to the mean” projection that has been true since I first wrote about it here on December 9 2009 which you should read to understand how it was derived.  In short, the assumption is that we are at the end of a secular bear market similar to the one in the 1970’s and the path out might be similar to the last one.

It may be a queer anomaly but the market has been tracking fairly similar to the path laid out back in the 1970’s.  If it continues the path then the market might touch between 950-1000 sometime in the first half of 2012 and then begin and succeed in another attempt to cross into new all-time high territory in 2013: Would I be disappointed if this prediction failed?  Not at all; I’d be ecstatic.

December 3rd, 2009

Reversion to the Mean Still On Track

This morning’s Labor Report was a shocker but I’m not convinced that “pleasant surprise” expectation hadn’t already been baked into the market. Hasn’t everyone been talking, month-after-month, about labor market improvements in terms of continually smaller increases in the unemployment rate? So, if the numbers remain unrevised, then the risk has flipped from upside on pleasant surprises to now finally risk of downside move from unpleasant surprises.

I’m going to stick with the report I had drafted before the announcement because I believe it’s still relevant.


We’ve arrived here at the Southern Command Post on the West Coast of Florida, I’ve set up the wi-fi network, installed a new wide-screen second monitor to my system and am ready to go.

I had a lot of time over the past several days while driving to ponder where this market may be headed and my thoughts often drifted back to where we have come from. During the depths of the Crash from October to April we continually looked for precedents to divine what the future. We looked to the 1929-32 Great Depression Market Crash and the 2000-03 Tech Bubble Crash. We also dissected the 12-year secular bear market of the 1970’s looking for similarities between that era’s oil shortages, politics, currency situation and stock market and the present situation.

Along with the Coppock Curve, a very long-term indicator that gave me some confidence in March that we had reach the bottom was something I labeled “Reversion to the Mean”. The Indicator statistically determines through regression analysis of the S&P 500 Index since 1939, the market’s growth and the upper and lower boundary (at two standard deviations) of its volatility around the mean. In a May 1 piece entitled “Measuring Market’s Health: Moving Averages, Coppock Curve, Mean Reversion” I wrote:

“….while we’re holding our breath that all these signals ultimately follow through with a promise similar to past experience, it could also mean that we’re not going to see the all time highs of 1500+ for some time. If the market follows the track of the 1974-75 Bear Market, the highest we might see the market by Year-End 2009 is 1050-1075 and 1250-1275 by Year-End 2010. While that’s a respectable 20+% gain for next year, it’s not the sort of volatility we’ve grown accustomed to over past several months. But then again, who needs that level of volatility.”

Flash forward seven months and we see that the market has actually followed fairly closely the trajectory of the 1974-75 Bear Market.

The high so far this year was today’s intra-day high of 1119.13, marginally higher than the 1075 forecast on May 1 when the Index as 877.52. If the market continues on the 1974-76 track then we should look forward to a minor correction back to around 1000 followed by another upleg carrying the Index above 1225 by next year-end:

The projection is calculated simply by applying the ratio of the 1974-76 index to the extrapolated lower boundary of the long-term regression line so the Index’s future path is a copy of the path it traced in the prior period:

Last May, I thought there was a slim chance that the two recoveries could follow nearly identical paths. It will be amazing to see whether the correction on in the forecast actdually materializes.

May 1st, 2009

Measuring Market’s Health: Moving Averages, Coppock Curve, Mean Reversion

The market has only two more hurdle to cross before that long-elusive “all-in” green light (see them all in the chart of the March 18 post, “8 Hurdles to Cross“). One of those hurdles, a trendline going back to the neckline of the 2002-2003 Tech Bubble Crash bottom, was taken out by the rapid descent of the 180-day MA which crossed-below it. We haven’t felt this much excitement in a long time and it feels sort of scary. Perhaps the whole thing is just an illusion and it will soon all go crashing back to the mid-700’s on the S&P.

However, I don’t think it will because so many stocks are now participating in this rally. Take, for example, the readings of the market’s pulse that I’ve been tracking since the beginning of this year, the number of stocks crossing above various moving average benchmarks:

These measures have never (since I’ve been tracking them) looked better. As of yesterday, over 70% of stocks were above their 90-day moving averages and 37% above their 180-day. The number of stocks having created “Golden Crosses”, in their moving averages an even more stringent benchmark, has increased more than five-fold since the market’s low just back on March 9 and equals that of the last Bear Market Rally last March (what I kept calling back then a “Suckers’ Rally”).

How are the other broad market gauges we follow doing:

  • Coppock Curve: I described the Coppock Curve on March 29 in “Another Constructive Indicator“. The indicator hasn’t turned positive yet, as I thought it might, but will do so in May if the S&P 500 closes May at or above 900.
  • Reversion to the Mean: A very long-term regression line of the monthly closing S&P 500 Index, bounded by upper and lower trendlines (one reader took exception to the fact that I started the chart in 1939, a Market low):

    I’m fascinated (and take comfort) by the fact that the Index barely crossed the lower boundary before it turned to cross back above, as it did in September, 1974. Since 1974 was my model for the current bottom, it’s constructive projecting from here the same path as the market took back in 1974-75 (that projection is indicated by the dashed line). If the current crash bottom follows close a path similar to the 1974-75 bottom, we can expect S&P 500 closing prices something like the following:

So while we’re holding our breath that all these signals ultimately follow through with a promise similar to past experience, it could also mean that we’re not going to see the all time highs of 1500+ for some time. If the market follows the track of the 1974-75 Bear Market, the highest we might see the market by Year-End 2009 is 1050-1075 and 1250-1275 by Year-End 2010. While that’s a respectable 20+% gain for next year, it’s not the sort of volatility we’ve grown accustomed to over past several months. But then again, who needs that level of volatility.

December 10th, 2008

Revisiting the Early Phase, Low-Priced Stock Strategy

I was somewhat disappointed by the lack of reaction from my loyal readers about the “Perpetual, In-the-Money Call Options“article I wrote on November 15. Why? Because of the relatively benign response. The only comment (skeptical, I suppose) was

A valuable analysis to do would be to take the entire basket of sub $5stocks at a point in time and see the worth of the portfolio after 5 years. Repeat that exercise for $5-10, $10-20, etc. tranches. That will provide you and us with the necessary analytical horsepower to make the investment decisions.

I responded was that the major weakness in back-testing this sort of strategy is

that it includes a bias; some stocks that actually were on the list in 2003 are now off because they actually did go belly-up, or were acquired or got delisted. I just don’t have price data if they’re not listed today.

My hypothesis in the “Perpetual In-the-Money Call” strategy is “put together a speculative basket of some low-priced stocks, put them away and lock them for some time far in the future. Obviously, some will wind up being worth nothing but the % gain on the others would be more than enough to absorb those loses and still generate a very nice profit”. I couldn’t go backwards but can go forward from November 14, the Friday close before that Saturday post to today with these results:

These were the stocks I picked randomly among the 1960 stocks under $5 on that date. The average return for equal $amounts put into each for the past 3 1/2 weeks is 18.4%; the S&P 500 is up 3.0% (unbelievable, considering that the market is up nearly 20% over the past 12 trading days).

But how typical is that sort of return? Perhaps I was lucky or perhaps it wasn’t as random as I thought and there was some sort of subconscious bias working in my selection process. Here are the results for the whole group of 1960 under $5 stocks:

Of the 1960, almost precisely a half at least broke even but 44% had more than 3% beat the S&P 500. The average return for all 1960 was -1.255%

Does this prove that the strategy isn’t viable? I believe these preliminary results are mixed and conflicting. For example, none of the stocks I selected were under $2.00 but 30% of the total were under $2.00 …. and these 588 stocks collectively had an average loss of 7.7%.

It needs more work and I’m not giving up. It is early in this correction and there will be a retest of the lows so it’s not too late.

June 14th, 2008

Again, the S&P Oscillator

For all of you out there searching for the S&P Oscillator that Cramer talks about on Mad Money, stop looking, you won’t find it. About the only thing that happens whenever Cramer “S&P Oscillator” is my traffic stats get a huge boost. He mentioned it first in February, then again in May and now, according to all of you, again tonight.

But either Cramer doesn’t know what he’s talking about or S&P doesn’t since the S&P 500 Index closed today just about spot on to where it was back in February and in May.

On May 24, after the previous flurry of activity, I wrote:

I have 44 years worth of S&P Index closing data and have tried to replicate their Oscillator using methodology described in an excellent article entitled The Relative Strength Index (RSI) at the StreetAuthority.com. Needless to say, it’s been a waste of my time. I’ve tried all sorts of variables (for example, the traditional 14 day, 30-day, 60-day, moving averages of each) and have always found it too volatile and giving too many false signals. I believe I read somewhere that S&P charges $1000 for access to their oscillator data.

People, you have to stop being afraid of missing the S&P 500 train should it leave the station. Stop hoping and praying that today’s 1.5% increase in the S&P 500 was a turning point and bulls are going to charge from here on.

From a technical perspective, nothing much happened today. And from a fundamental point of view, you need further confirmation before acting than: a slight firming in the $US, a relatively benign CPI report, a slight down tick in commodity prices (just think back to where they were 6 months ago to see where we came from), no new financial institution crises or any other news you wishful-thinkers might have heard today. Here’s the picture I look at:

For those familiar with this blog, the above chart will be familiar (see May 31, S&P 500 “Video”). The only time when my Market Timing Indicator (MTI) even got close to signaling a buy was May 16, the day the Index crossed above the 180-day moving average. Yes, like you I was excited but the euphoria lasted merely two days because the Index crossed back below the 180-day moving average and has been careening lower ever since.

Some of you have asked for more information about the MTI. What I can tell you is that it’s the product of 3 months of work, back-testing 45 years of market history. While similar to other oscillators based on MACD’s (the diverging and converging of multiple moving averages), the MTI is a refinement in that it incorporates the position of the Index itself relative to those moving averages. By back testing, I found the conditions (uniquely different in bull and bear markets, by the way) under which, historically, there were probabilities of either high and low market risk.

The MTI has indicated an “all-cash” posture consistently since Dec 28, 2007 (with the exception of the two days noted above). The Index must rise a minimum of 5.3% to 1415 and stay above that level for several days before the all clear signal will sound. You can try to pocket that 5.3% but, I for one, would rather let others do the heavy lifting.

(To be absolutely truthful, I’m violating the MTI call with only about 50% cash and the rest in coals, energy, some momentum stocks making new highs and hedges like silver and PowerShares UltraShort ETFs.)

Thank you to all those who expressed interest in buying my forthcoming book. It’s in the final editing stages and I hope to have it published before the end of the summer …. just in time, perhaps, for the break out one way or the other from this nearly 6-month 1300-1400 range.

May 15th, 2008

What to Expect with a 180-day Moving Average Crossover

At the risk of sounding risque let me just say that we seem to kiss the 180-day moving average line every day and not being able to get to “second base”; the market just hasn’t been able to cross over that line.

But what if it does. What happens if we do cross above the 180-day moving average and enter the next plateau, the land between the 300- and 180-moving averages. What’s happened in the past when this has occurred? How long has the market stayed in this sort of purgatory, someplace between the MTI signaling it too risky to be in the market and it giving an all-clear signal to be “all in” (when the index finally crosses over the 300-day moving average).

The market has been in this same situation 25 times over the past 45 years:

Here are points you should take away from this data:

  • Reversing and dropping again back down bellow the 180-day moving average happened nearly a third of the time; the Index continued to move up and crossed over the 300-day moving average 8 times.
  • When the average reversed and crossed back down over the 180-day, it did so fairly soon after entering the zone, on average within 2.57 trading days. If there was sufficient strength to stay above the MA for more than 5-6 days, there’s a good chance of a move above the 300-day within an average 7.25 trading days.
  • Regardless of the direction the Index exited this zone, whether exiting up or down, the Index rose each time with an average gain of 2%. The maximum gain was 7.5% during 2003 as the market was emerging from the Tech Bubble Crash over 19 trading days; the second largest gain was 5.93% over 11 trading days at the end of the previous oil crises crash of 1973-75.

I can’t predict what will happen this time, no one can and anyone who claims they can is a charlatan. But these statistics give us one frame of reference for understanding what has happened in the past and what might happen this time.

In my back-testing of my Market Timing Indicator, however, a move above the 180-day moving average is a call to be “all in”. I’m jumping the gun by having reduced my cash position to around 50% by purchasing positions in many of the stocks I’ve mentioned here over the past several weeks (more on the performance of those recommendations tomorrow).

In the meantime, we’ll just take each day as it comes and follow the game plan outlined earlier (see May 8).