Weekly Newsletter 07/31/09
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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

The markets have rallied over the last few weeks as earnings have beaten expectations. Bloomberg reports that "more than three out of four companies in the S&P 500 that released results since June 17 exceeded earnings projections for the second quarter. They’ve beaten forecasts by an average 10 percent, even as per-share earnings tumbled 32 percent and sales slid 16 percent".

Can this rally be sustained? As earnings season slows, the market continues to improve as a number of factors point towards a slowing of the rate of contraction of the economy. The markets are forward looking so they are anticipating that as we contract more slowly the rate of contraction will soon reach zero and expansion will then begin. The signs are certainly positive. Stimulus spending seems to be replacing what was lost by consumer spending and this should translate eventually into a decline in the unemployment rate. As evidence of the stimulus starting to we work it is notable that our best performing industry this week is auto-dealerships as consumers rush to buy vehicles partly financed by the 'cash for clunkers' program.

If the rally is sustained, it will be technology that benefits primarily as investment is made in new productivity tools. Companies prefer to invest first in technology to improve productivity rather than people so we can expect the NASDAQ Composite and technology firms in particular to be leaders in the coming months.

In the short term though we expect the NASDAQ to mark time until the gains of the last months are justified by results. The chart shows that a run up along the uppermost Bollinger Band may be ending. We often see that as the bands widen there is an 'elastic band' effect that eventually pulls them closer and we could be seeing the beginning of that effect now. If so, the use of tight stops becomes more important.

NASDAQ

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

Breakouts with High RS Rank Outperform the Rest

Each of our long position watchlists contains a Filter Settings tab which allows you to set filters to limit the alerts you receive to only those stocks that match your filter settings.

Naturally, you only want to receive alerts on stocks that have the best potential return, so how do you set the filters? To answer this question we provide a backtest tool which allows you to see which breakouts have outperformed all breakouts over whatever period you choose, up to 365 days.

We wanted to see which cup-with-handle breakouts had performed best since March 9 so we wrote a little algorithm to run the backtest over multiple filter combinations. We found that the best returns were given by breakouts with an RS Rank of 91 or more and a minimum daily volume of 40,000 shares. This combination beat the return for all breakouts by 22.7%. Here is our results table:

Filter settings: RS Rank >= 91;BoV>=40k
backtest results

In other words, values for technical score, fundamental score, industry rank and breakout price were not significant factors in selecting profitable breakouts from all breakouts. For some subscribers this may seem counter intuitive as they might think that stocks with a high fundamental or high technical score would perform better. In fact requiring a strong fundamental score severely limits the return. Here is the result with a minimum fundamental score of 4.

Filter Settings: Fundamental Score >= 4
backtest min fs 4

So filtering on fundamental score does improve returns, but only slightly.

Over the years, we have found that different filter values yield different results. Platinum subscribers have access to filters and the backtest tool so they can continuously refine what is working in the current market

Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 9171.61 0.86% 4.5% Down
NASDAQ 1978.5 0.64% 25.46% Up
S&P 500 987.48 0.84% 9.33% Down
Russell 2000 556.71 1.5% 11.46% Up
Wilshire 5000 10147 0.85% 11.66% Down
Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
1.5 %
NASDAQ Composite
15.08 %
NASDAQ Composite
34.01 %
NASDAQ Composite
25.46 %
Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Auto Dealerships Auto Parts Stores Auto Parts Stores Auto Parts Stores
Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 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 16 15.77 10.56% 4.55%
Last Week 19 16.15 13.26% 8.68%
13 Weeks 197 17.38 22.19%
11.59%
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
Category
Symbol
Company Name
Expected Gain1
Best Overall FEED AGFEED INDUSTRIES 128
Top Technical GPRE Green Plains Renewable Energy 119
Top Fundamental TNDM Neutral Tandem 67
Top Tech. & Fund. TNDM Neutral Tandem 67
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
Category
Symbol
Company Name
Expected Gain1
Best Overall NJ Nidec Corp Adr 61
Top Technical LZ Lubrizol Corp 60
Top Fundamental CMG Chipotle Mexican Grill 45
Top Tech. & Fund. CMG Chipotle Mexican Grill 45
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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