Weekly Newsletter 11/19/10
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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 trend for all the major indexes remains upward as the markets climbed a 'wall of worry' beginning Wednesday in the face of considerable nervousness surrounding:
  • a bailout for the bankrupt Irish banks
  • international and domestic criticism of the Fed's quantitative easing policy
  • Steps by China to constrain inflation
  • falling housing starts
  • continued weakness in housing as new starts fall, long term interest rates rise and sales and refi's head south
Despite these headwinds, the markets managed three straight days of gains which left the indexes virtually unchanged for the week. By Friday there were reasons for cautious optimism as:
  • a 50 Billion Euro aid package for Irish banks appeared near
  • the Philadelphia Fed reported expanding industrial activity in its region
  • new jobless claims continued to improve
  • retail sales showed surprising gains.
The NASDAQ Composite closed the week just below its April high. It will likely test that level again next week although low volumes during Thanksgiving week could put a brake on any significant move to the upside.
NASDAQ Composite

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If you are sceptical about Quantitative Easing, you will find this very, very funny: Quantitative Easing Explained
 New Features this Week Additional Value that we added this week
To make the Cup-with-Handle backtest tool even more realistic, I added a "transaction cost" option. If you set this to your brokerage fee and an estimated slippage amount then this will be applied to each buy and sell transaction in the simulation.

A change was also made to the implementation of the trailing stop. I found that it was being applied if the close was below the trailing stop rather than if the low was below the trailing stop.
This Week's Top Tip Tips for getting the most out of our site
Following last weeks progress report on how MTC stocks have fared since the introduction of the MTC criteria, someone noticed that if the trailing stop is reduced to 1% then the gains improve considerably and they questioned the accuracy of the backtest.

I replied that this result was to be expected as the effect is to take small gains often which then accumulate through compounding to give a better return. I suspected that if a transaction cost was applied, then this "churning" would reduce the gains significantly. I was wrong. Although the transaction cost does reduce the gains, the benefits of taking small quick profits are still substantial.

If you run the backtest now with the corrected trailing stop and with a transaction applied ($7.50 is the default) you will see that taking smaller profits often has significant benefits.

For example, using the default settings (8% trailing stop) for the MTC strategy over 12 months gives a return of 76.6% with eleven transactions completed. If the trailing stop is reduced to 1%, the number of transactions goes up to 29 and the profit goes up to 241%!

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 11203.5 0.1% 7.44% Up
NASDAQ 2518.12 -0% 10.97% Up
S&P 500 1199.73 0.04% 7.59% Up
Russell 2000 724.36 0.71% 14.24% Up
Wilshire 5000 12621.5 0.2% 9.78% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
0.71 %
Russell 2000
15.52 %
NASDAQ Composite
12.97 %
Russell 2000
14.24 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Silver Silver Beverages - Brewers Specialty Eateries
 Most Improved Industry (by change in technical rank2)
Drugs - Generic
+ 58
Wholesale - Other
+ 120
Air Services - Other
+ 131
Long Distance Carriers
+ 196
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 15 28.15 6.29% 4.48%
Last Week 27 28.31 0.32% -5.15%
13 Weeks 394 29.15 16.99%
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 PSUN Pacific Sunwear of California, Inc. 112
Top Technical SSCC Smurfit-Stone Container Corporation 55
Top Fundamental TPX Tempur-Pedic International Inc. 53
Top Tech. & Fund. TPX Tempur-Pedic International Inc. 53
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 GSIT GSI Technology, Inc. 111
Top Technical N NetSuite Inc. 67
Top Fundamental GSIT GSI Technology, Inc. 111
Top Tech. & Fund. GSIT GSI Technology, Inc. 111
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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