Weekly Newsletter 08/28/09
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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 edged higher this week with the Russell 2000 being the only major index to fall, but only slightly. The overall impression is of a market that wants to move higher but is fearful that the six-month rally has left the market over-bought. While the recovery since March 9 has certainly been unusually strong, it is also true that the fall was extremely steep. It could be that what we lost on the roundabouts we have now regained on the swings and that market values are, as a result, about where they should be.

We have continued to work on our Zacks Stong Buy Strategy this week and the results are presented below. We were concerned that the results since we launched the strategy two months ago were not consistent with the five-year backtest but after bringing the backtest up to date we are satisfied that this strategy still has strong potential. Although the results since March 9 show only a gain of 30% compared to the S&P 500's 48% gain we think that's quite a good result considering the uncertainty and perceived risk in the market in that time frame.

To participate in this strategy you must first take out a 30 day trial with Zacks Investment Research. You can do so by clicking the Zack's Logo:

 New Features this Week Additional Value that we added this week
Enhanced Zacks Strong Buy Reporting

We've tweaked the reporting for this watchlist by adding an ability to filter the report by watchlist and also set the stop loss for reporting purposes.
There are now two drop downs at the top right-hand corner of the ZSB report page. After selecting the values, click the Go! link to regenerate the report.
wlist select

Enhanced Zacks Strong Buy Backtest

The backtest database has now been updated to include data through August 14.

We've added a trailing stop loss factor to the backtest. This works by comparing the closing price each day to the highest intraday high since the stock was bought. If the close is less than the highest intraday high multiplied by the trailing stop factor, then the stock is presumed sold at the close.

To apply the stop loss factor in the real world, one would have to monitor the stock in real time or place a sell at close order.

The backtest can now be run with a stop based on alert price (the price at which it is assumed the stock was bought) and a trailing stop. Some examples are shown in the Top Tip section.
This Week's Top Tip Tips for getting the most out of our site

Using Trailing Stop for Enhanced Returns

Using the backtest tool to test the effect of using trailing stops is an interesting exercise which shows both the benefits and risks of using a trailing stop

Lets first consider ZSB alerts from the High Tight Flag watchlist. We saw a plethora of HTF chart patterns after the March V-shaped bottom and ZSB alerts from this watchlist have done quite well this year.

ZSB HTF No Trail

Here is a segment of the backtest results block and chart showing how a portfolio would have grown since the start of year using a stop pf 4% below the alert price and no trailing stop.

There were few HTF choices until after the March 9 recovery which allowed several of these patterns to form. They then made some nice gains but market volatility also led to some sharp falls erasing much of the gains. The chart shows the sharp gains and losses clearly.

ZSB HTF No Trail Chart
Now we consider the same HTF alerts but apply a trailing stop of 4%.
ZSB HTF 4% trail

The backtest results show that the effect of the trailing stop is to conserve our gains and yield a return that more than doubles the return without a trailing stop.

The chart below shows how much smoother and profitable the yield curve is.

ZSB HTF 4% Trail chart
In contrast, using a trailing stop with ZSB alerts from the cup with handle list, even after March 9, left us with a loss because volatile market conditions created pullbacks that caused an early sale, often for a loss and reducing the capital available for the next position. These two tables show the results since March 9 using no trailing stop and a 4% trailing stop. The stop below BoP was 4% in both cases. Should you wish to se the corresponding charts, you can generate them yourself, and have fun with the backtest tool on the site.
CWH ZSB Alerts since 3/9/09, No Trailing Stop CWH ZSB Alerts since 3/9/09, 4% Trailing Stop
ZSB CWH No Trail ZSB CWH 4% Trail

Although we take great care in producing these results, the introduction of any software change can have unexpected consequences on the rest of the software. For this reason we always provide transparency through the publication of the underlying assumptions and individual trades in the backtest. We invite you to verify these results for yourself with the backtest tool and we always welcome constructive criticism on the Support Forums.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 9544.2 0.4% 8.75% Down
NASDAQ 2028.77 0.39% 28.64% Up
S&P 500 1028.93 0.27% 13.91% Up
Russell 2000 579.86 -0.28% 16.1% Up
Wilshire 5000 10579.6 0.26% 16.42% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
0.4 %
Russell 2000
15.61 %
Russell 2000
49.06 %
NASDAQ Composite
28.64 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Auto Dealerships Auto Dealerships Auto Dealerships 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 9 12.92 9.41% 4.2%
Last Week 10 13.31 10.58% 5.81%
13 Weeks 160 14.15 24.71%
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
Best Overall TLB Talbots Inc 124
Top Technical PRSC Providence Service Corp The 75
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
Top Fundamental SDXC SWITCH & DATA FACIL 80
Top Tech. & Fund. SDXC SWITCH & DATA FACIL 80
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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