The major indexes ended a run of four straight weeks of gains with across the board losses this week. There is increasing concern that the recent rally has put stock valuations ahead of where they should be in relationship to the economic recovery and that a correction is necessary. These worries tend to be self-fulfilling so we see a period of consolidation and possibly correction ahead.

Even during periods of correction there are still stocks that go counter to the prevailing trend although they tend to be fewer and less frequent. As the analysis in our Top Tip this week shows, even while the markets were falling in 2008 there were still a sizeable number of stocks breaking out and making excellent gains. The analysis shows that stocks with good technical strength will significantly outperform those with sound fundamentals, so watch for potential breakouts with strong technicals, particularly RS rank.

No new features this week.

CE Zones, Strength Rankings and their Significance

When we introduced our new watchlist formats, we also introduced a new technical and fundamental strength ranking scheme. These were based on our CET and CEF metrics with the idea to convert both metrics to a 1-5 scale of strength with 5 being strongest. This seemed like a good idea at the time but it has also introduced some confusion that we would like to clear up.

First, let me explain the origin of the terms CET and CEF. When we started our site in 2001, we developed a tool we called the CANSLIM Evaluator (CE) which was designed to use the CAN SLIM® method to rate stocks on both technical (CET) and fundamental (CEF) strength. We found there were 7 points that could be earned for technical merit and 11 points that could be earned for fundamental strength so our CET score could range from 1 - 7 and our CEF score from 1 - 11. In 2007 we were forced to abandon the CANSLIM term and instead renamed the CE to CANTATA Evaluator standing for Current and Annual Earnings, Technical Analysis and Timing Assistance. This name change meant we could still use CET and CEF to refer to our technical and fundamental scoring scheme.

Recognizing that the scoring schemes were a little hard to grasp, from the  beginning we introduced a scheme to convert the CET and CEF scores to zones as shown:


The zones under this scheme were labeled CET- CEF so a 4-4 zone was actually a CET  >= 5.25 and a CEF >= 8.25. We still use the zone notation in our email alerts and performance reports. Note that where we don't have fundamental data for a stock it gets an "n/a" whereas we always have technical data for a stock. Hence we never have 0-n zones but we do have 1-n zones.

When we introduced the new watchlist format we converted our zones to new technical and fundamental strength scales from 1-5. The equivalence to the zone notation is shown here: