Weekly Newsletter 12/10/10
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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  

NASDAQ Composite

The major indexes continued to rally this week on the strength of the $850 billion stimulus contained in the agreement President Obama has reached with theRepublicans. While the Democrats threaten opposition and/or modifications to the deal, it seems that ultimately they will get on board. If not, or if the stimulus amount gets whittled back, then we can expect a sell-off.

Other factors helping move the markets higher were a lower than expected trade deficit, initial unemployment claims 4 week average fell to its lowest since Aug ’08 and University of Michigan consumer confidence rose the  best since June

The NASDAQ Composite chart shows the index at new post crash highs despite volume continuing to be below the 50 day average. We have added a relative strength line versus the S&P 500 which shows the extent to which the NASDAQ has outperformed the S&P 500 since September.

The low volume levels are suppressing the number of successful breakouts which were just half the thirteen week average this week. Average gains for breakouts were well above the weekly gains for the indexes, however.

 New Features this Week Additional Value that we added this week

Industry Rank Filter in CwH Backtest

A subscriber asked us to run a backtest on cup-with-handle breakouts that were ranked between 1 and 137 on our industry rankings.

While this is easy for us to do, we thought it better to give our subscribers the power to do this themselves.

We have now added a new filter to the backtest which allows you to limit the backtest to stocks that belong to industries that fell within the top x % of the industry rankings on the day of breakout.

For example, there are 215 industries that on any day are ranked from 1 (highest) to 215 (lowest). Selecting the top 25% of industries will limit the backtest to stocks ranked from 1 to 53. Selecting the top 60% will limit the backtest to stocks ranked from 1 to 129.

industry filter

This Week's Top Tip Tips for getting the most out of our site

Preliminary Industry Filter Results are Promising

We completed adding the industry filter to the backtest on Friday afternoon and were eager to to try it out. 

The results of using the industry filter in our CwH backtest surprised us. Previously, we have never found a relationship between industry rank and performance after breakout using standard statistical techniques. However, our backtest tool does allow us  examine a potential relationship more precisely and this time we found that breakouts in higher ranked industries at the time of breakout did perform better.

Our first trial run was made using our default CwH Backtest (no MTC criteria) with a filter on the top 25% industries. We found it improved the 1 year return from 26% to 87%. The results are shown in these charts.

industry filter 1 year

Our next trial was to run the test over all our backtest data. Our the industry ranking methodology dates back to October 2005 so we were able to run a backtest over 5 years. We did so once again using our default criteria but with industry filters on the top 5%, 10%, 15% and so on up to 100%.  We plotted the gain against the industry filter and obtained the following graph.

5yr back test

The red diamonds are the actual returns for each industry filter and the blue line is the best fit curve through the data points.

The conclusion from this limited set of tests is that stocks in the top 60% of the industry rankings will provide better returns.

We will do more work on this in the coming days to confirm these conclusions and possibly modify our MTC metric.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 11410.3 0.25% 9.42% Up
NASDAQ 2637.54 1.78% 16.23% Up
S&P 500 1240.4 1.28% 11.24% Up
Russell 2000 776.83 2.7% 22.51% Up
Wilshire 5000 13105.5 1.35% 13.99% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
2.7 %
Russell 2000
22.05 %
Russell 2000
19.7 %
Russell 2000
22.51 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Silver Silver Silver Beverages - Brewers
 Most Improved Industry (by change in technical rank2)
Long-Term Care Facilities
+ 52
Toy & Hobby Stores
+ 82
Air Services - Other
+ 187
+ 177
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 14 27.46 4.92% 3.16%
Last Week 22 27.38 9.39% 5.67%
13 Weeks 399 28.46 18.43%
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 CPE Callon Petroleum Company 114
Top Technical CBLI Cleveland BioLabs, Inc. 89
Top Fundamental CTSH Cognizant Technology Solutions Corp. 42
Top Tech. & Fund. MNRO Monro Muffler Brake, Inc. 33
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 CLFC Center Financial Corporation 100
Top Technical CLFC Center Financial Corporation 100
Top Fundamental SHOO Steven Madden, Ltd. 53
Top Tech. & Fund. SHOO Steven Madden, Ltd. 53
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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