Weekly Newsletter 07/10/09
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  

On Wednesday our market trend indicator for the Russell 2000 turned downward leaving only the NASDAQ Composite in an upward trend. That looks at risk though as the index has fallen below its 50 day moving average and its trend line support. With investors seriously worried that earnings will not meet expectations, despite a better than expected performance by Alcoa, we will likely see further declines unless the expectation of weaker than expected earnings is reversed and the forward looking statements are more positive.

NASDAQ Composite

 New Features this Week Additional Value that we added this week
No new features this week.
This Week's Top Tip Tips for getting the most out of our site

Revised ZSB Results Deliver over 60% Compound Annual Returns

Our ZSB backtest tool uses a combination of our record of historical breakout price for each symbol and chart pattern, the corresponding alert prices and our price history database. When a stock splits, we adjust the historical prices by the split factor to avoid data discontinuities, and we also adjust the breakout prices so they will be consistent with the price history. Until we developed the ZSB backtest, we had not found it necessary to adjust the alert prices for splits, however. The code we developed to adjust the alert price was buggy and under some circumstances it adjusted the alert price to be lower than it should have been. This had the effect of increasing the profit (and minimizing the loss) on some simulated trades. Through the power of compounding this caused the backtest tool to report truly exceptional returns.

The data has now been corrected and although the backtest now gives lower returns than before, the returns are still exceptional when compared to the market indexes and mutual fund performance over the last 5 years.

The backtest tool allows you to test three scenarios:

  1. Buy at open when a breakout is confirmed.
  2. Buy on breakout alert and sell at next open if breakout is not confirmed else hold until stop loss is met or the stock loses the Zack's strong buy rating
  3. Buy on breakout alert and hold until stop loss is met or the stock loses the Zack's strong buy rating

We ran the backtest tool for these three scenarios using all possible combinations of stop loss and portfolio positions for the cup-with-handle watchlist and found the best returns were:

Compound Ann.
Return %
Max. Drawdown
Loss %
1. Buy on Confirmed Breakout
1.1 Best Overall Return
1.2 Best Reward/Risk
2. Buy on Alert, Sell if Unconfirmed
2.1 Best Overall Return
2.2 Best Reward/Risk
3. Buy on Alert, Keep if unconfirmed
3.1 Best Overall Return
3.2 Best Reward/Risk

Note that the best returns are mostly when you allocate all your portfolio to a single position. This is because more of your money is invested at any one time, whereas with two or more positions there will be times when you are invested only partially and you are not maximizing your return.

For any trading (or betting) system, the participant must have the temperament (and resources) to withstand a succession of losses and the potential for a large drawdown. For this reason, we personally prefer scenario number 3.2 with the 3% stop loss and 2 position option. However, one can argue that the large drawdown was exceptional in all cases due to the biggest market decline since the 1930's and such large drawdowns are unlikely to be repeated in the next few years. If so, you can choose option 3.2.

Here are the detailed results for option 3.2. You can verify them and run other scenarios with the ZSB Backtest Tool, which is freely available to all.

Backtest Results

Backtest Chart

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 8146.52 -1.62% -7.18% Down
NASDAQ 1756.03 -2.25% 11.35% Up
S&P 500 879.13 -1.93% -2.67% Down
Russell 2000 480.98 -3.52% -3.7% Down
Wilshire 5000 9000.28 -2.18% -0.96% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-1.76 %
NASDAQ Composite
6.21 %
NASDAQ Composite
11.74 %
NASDAQ Composite
11.35 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Auto Parts Stores Auto Parts Stores Auto Parts Stores Auto Parts Stores
 Most Improved Industry (by change in technical rank2)
+ 54
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
Charts of each industry rank and performance over 12 months are available on the site

1The Market Signal is derived from our proprietary market model. The market model is described on the site.
2The site also shows industry rankings based on fundamentals, combined technical and fundamentals, and on price alone. The site also shows daily industry movements.
 Weekly Breakout Report How confirmed breakouts performed this week
# of Breakouts
Period Average1
Max. Gain During Period2
Gain at Period Close3
This Week 7 14.69 5.07% 1.68%
Last Week 4 15.69 6.95% -5.85%
13 Weeks 191 16 19.97%
1The average number of breakouts in each week over the previous 13 weeks.
2This represents the return if each stock were bought at its breakout price and sold at its intraday high.
3This represents the return if each stock were bought at its breakout price and sold at the most recent close.
 Top Breakout Choices Stocks on our Cup-and-Handle list with best expected gain if they breakout
Company Name
Expected Gain1
Top Fundamental RGR Sturm Ruger & Co Inc 71
1This is the gain predicted by our Expected Gain model if the stock breaks out. Expected Gains for all cup-and-handle stocks are published on our site.
 Top Second Chances Stocks that broke out this week and are still in buyable range
Company Name
Expected Gain1
Best Overall TRW Trw Automotive Hldgs Corp 96
Top Technical TPP Teppco Partners (L.P.) 61
Top Fundamental ORLY O'reilly Automotive Inc 51
Top Tech. & Fund. ORLY O'reilly Automotive Inc 51
1This is the gain predicted by our Expected Gain model after the stock has broken out which uses the volume on breakout as a predictive term. Because the model variance is +/- 38% the expectation can be negative.

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