May 1st, 2012

Don’t Let the Train Leave Without You

At the beginning of the year, I outlined my process for assembling an Watchlist of stocks that look like suitable candidates for purchase (see “The Challenge of Assembling a Watchlist” of January 18, 2012).  In short, the process involves running four scans that identify stocks meeting certain fundamental performance and technical momentum criteria and then manually looking at the stock’s charts to identify those that: 1) look as though they are about to cross above the apparent upper boundary of a congestion zone (either reversal bottom or consolidation chart patterns) or 2) haven’t moved too far above the previous congestion zone increasing the risk of the stock being susceptible to succumbing to a downdraft in the event of a market correction.

The market has been trapped in a very narrow trading range since mid-February and is again approaching the upper boundary in another attempt at breaking above and continuing to drive higher.  Therefore, it’s time to assemble another watchlist.

This time, using the process described above, I culled a list of 132 stocks that, in my judgement, meet the criteria.  The four scans delivered an additional 346 stocks  but most of those stocks have already had huge runs and are far above their most recent previous congestion zone.  Many of the names on the larger list of momentum stocks contains the names of stocks that are now familiar leaders; 71% have increased 10% or more since the beginning of the year while 35% are up 25% or more.  I was fortunate in having added 26 from the list to my Model Portfolio and show gains on them.

My most recent Watchlist consists of 26 healthcare, 24 tech and 30 resources and manufacturing stocks:

It’s from this list I suspect (it’s probably safer to say “hope”) that the momentum leaders in the market’s next up-leg will come.  That’s not to say that the movers since the beginning of the year won’t lead also in the next leg; I only say that if you are afraid of buying into such high fliers as AAPL and PCLN, then you can probably get some nice percentage moves in some of the new comers without at the same time suffering acrophobia.

Members have access the list and now you can also (click here).  Be prepared for the next leg higher.  Learn the price levels that signify a breakout and trigger a purchase.  Know when a stock may have run to far ahead to catch without risk.  Don’t let the market’s next move leave you standing on the sidelines watching as others make money.  Act now!

January 18th, 2012

The Challenge of Assembling a Watchlist

Since the market looks like it’s firming (my opinion and, yes, I’m aware that many believe the market is actually topping out and will soon be making its final leg down to new lows), now’s a good time to begin assembling your watchlist of stocks that may be ripe for the picking as soon as a bull market begins unequivocally.  I’ve assembled four such Watchlists for members of Instant Alerts, each based on one of the following four scans:

  • 5-yr Highs(scan run on December 23): a truly momentum-based scan that produced a list of 51 stocks that crossed into all-time new-high territory .  The premise is that a stock that has made “all-time new highs” has a low risk of reversing course and is likely to continue making new highs.
  • Relative Strength (scan run on December 30): another momentum-based scan that produced 22 stocks that had a the top 10% relative strength vs. the S&P over the past year plus were in the top 10% in shares traded over the previous five days.
  • “Stocks on the Move (scan run on January 7): a scan that produced 53 stocks based on a combination of both fundamental and technical indicators as follows:
    • Price > $15
    • Price % change today > top 25%
    • Relative Strength Indicator (RSI) > top 50%
    • “Moneystream” Surge for past week > top 50%
    • EPS % change for past 4 qtrs > top 50%
    • Volume Surge today > top 50%
  • Momentum (scan run on January 13): another stab at a combined fundamental and technical scan that produced 128 stocks
    • Earnings Growth Rate over 5-years – top 25%
    • Sales Growth Rate over 5-years – top 50%
    • P/E Ratio – top 50%
    • Price > $10
    • Volume ($) for the day – top 50%
    • Relative Strength vs. S&P 500 past year – top 50%

You would expect that the same names would appear on multiple lists because the criteria overlapped to some extent. Interestingly, that didn’t happen.  While 254 stocks appeared on all these lists, there were 237 unique stocks …. only 17 names appeared multiple times.  In other words, each scan produced pretty much different names.

To see how this list compared to stocks that have performed well, I produced another scan: stocks whose four moving averages (50-, 100-, 200- and 300-dma’s) were in a perfectly bullish alignment from the fastest on top to the slowest at the bottom.  Out of 5100 stocks,  436 met this criteria.

You would expect that many if not all the stocks in the previous scans would be on this broader list of stocks with favorable price momentum but this wasn’t the case:

  • Only 89 of the 237 stocks in the previous scans, or 37% had bullish price trends as indicated by their moving averages.
  • Fully 80%, or 347, of the 436 stocks with bullish price trends weren’t caught in the previous technical/fundamental scans.

There actually was little correlation or overlap between the different scans.  It’s actually very difficult to narrow the field down:

The conclusions I draw from these statistics are that:

  • scans are a good place to begin but there’s no substitute for good judgmental chart reading and
  • good market timing always trumps stock selection.

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