|Weekly Newsletter 02/05/10|
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The markets were initially unimpressed with the latest employment numbers and still fretted over the financial condition of the PIGS (Portugal, Ireland, Greece and Spain) so the slide continued on Friday until mid-afternoon when a massive rally allowed the DJI, S&P 500 and NASDAQ Composite indexes to close with an accumulation day. The reason given for the rally was fear of being short over the weekend if the European Union announced supporting measures, and reasons for optimism in the employment numbers which showed 11,000 manufacturing jobs created in January.
Friday's intraday bottom with a higher close could be considered the first day of a possible rally. We should wait for a follow through day beginning as early as next Wednesday before considering the current slide is over. We anticipated last week that the NASDAQ could correct by 12% to around the 2060 level and that can't be ruled out yet.
|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|
|We continue with our analysis of factors that can contribute to breakouts making at least 25% in the six months after breakout.
We showed previously (Newsletter 01/09/2010) that while daily volume at breakout is helpful, it must be at least 2.25 times average daily volume to be a useful factor in selecting a breakout to trade.
We went on to show (01/16/2010 and 01/30/2010) that RS rank values above 92 were very helpful in selecting breakouts that exceeded our target.
This week we look at the contribution of CEF, Rank in Industry and Industry Rank.
Our CEF metric is the result of measuring a stock's performance on eleven measures of fundamental performance to give a maximum possible score of 11points which we normalize on a scale of 1-5. The methodology is described here.
We find an analysis of scatter plots useful in giving a visual presentation of the degree to which there is a relationship between maximum gain after breakout and any one variable. Here is the plot of max gain against CEF score.
The orange line is the line of best fit (regression) through the data and we see it intersects our target 25% max gain at about CEF 8.3 (or 5 on our normalized scale used in our watchlists). While the slope of the line shows there is a positive relationship between CEF and max. gain, a statistical analysis shows that the relationship is weak. While it may be tempting to assume that CEF scores greater than 8.3 would help us select breakouts that will meet our target, there are several points to make about this plot.
Rank in Industry
We rank stocks in their industry group according to their RS Rank on a scale of 0 to 1. Here is the scatter plot of max. gain vs. Rank in Industry.
We see that stocks with a higher Rank In Industry are better represented in our sample, which shows that higher rank in industry makes a stock more likely to breakout. However, the flat regression line shows that there is no relationship between Rank in Industry and performance after breakout. We therefore conclude that Rank in Industry is not useful for selecting stocks to meet our target after breakout.
We rank industries based on the mean technical score (CET) of stocks within the industry. There are 225 industry groups ranked from 1 (best) to 225 (worst). Here's the scatter plot for max. gain versus Industry Rank.
We see that all industry ranks are more or less equally represented in our sample so industry rank is not useful in predicting which stocks are more likely to breakout. Furthermore, we see that the regression line is again flat, so Industry Rank is also not useful in determining likely performance after breakout.
|Market Summary||Overview of market direction and industry rotation|
|Weekly Breakout Report||How confirmed breakouts performed this week|
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|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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