Weekly Newsletter 10/14/12
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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 NASDAQ Composite continued to fall this week, as did the other major indexes. The index did not receive support at the 50 day moving average level as might have been expected and the next support level looks to be around 3000. Investors and traders are disappointed with the initial earnings season reports with only 50% of companies beating expectations compared to the usual 67% and continue to be cautious. Our trend indicators for the NASDAQ and S&P 500 remain negative and we recommend caution until the outlook improves.

NASDAQ Composite


 New Features this Week Additional Value that we added this week

When setting filters on each watchlist, you have the ability to backtest the filters over a recent time period. This feature had recently become inoperative due to a bug but is now functional again.

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

More Tips on Using the CwH Backtest Function.

Last week I reported that our MTC (Meets Target Criteria) flag had not worked well over the last year compared to when we initially introduced it. We recommended that of the criteria, only an RS Rank equal to or greater than 92 was valid. I've done some more research using the backtest function and have some interesting results to report.

Firstly, I found that using a stop loss from BoP of 6% and trailing stop of 6% gave the best results regardless of RS Rank level or other factors. These settings were used for all the results discussed here together with a target gain of 100%.

Secondly, if we run the backtest over the last 12 months with an RS Rank requirement of >= 92 comparing holding only one position to holding four positions, we see a distinct difference (minimum breakout volume requirement 1.5 times average):

RS Rank >= 92, 1 simultaneous position, Min ADV 1.5
12 month gain: 64%
Days fully invested: 38%
RS Rank >= 92,  4 simultaneous positions, Min ADV 1.5.
12 month gain: 56%% Days fully invested: 19%

Why is the gain so much lower with 4 positions? Remember that with 4 positions, we only assign 25% of our available capital to our first trade and then to each subsequent trade. Because there are fewer breakouts with an RS rank of 92 or higher, we end up putting all our available trading capital to work only half the time of when we allocate all our capital to one position.

Now compare these results with using an RS Rank of 80 or more.

RS Rank >= 80, 1 simultaneous position, Min ADV 1.5 12 month gain: 28%
Days fully invested: 40%
RS Rank >= 80,  4 simultaneous positions, Min ADV 1.5 12 month gain: 54%Days fully invested: 33%

In this case, using 4 positions gives us a better result because we have many more stocks to choose from so have a higher probability of including higher returning stocks, even tough the number days we are fully invested is still fewer. But both results are inferior to using an RS Rank of 92 or more!

Now lets see what happens if we require a higher breakout day volume of 2.25 times adv which was our previous recommendation.

RS Rank >= 92, 1 simultaneous position, Min ADV 2.25
12 month gain: 33%
Days fully invested: 39%
RS Rank >= 92,  4 simultaneous positions, Min ADV 2.25
12 month gain: 30%% Days fully invested: 11%

We see that the return is only about half of what we would achieve with the lower minimum volume requirement.

To summarize, our new recommendations are:

  • Minimum RS Rank: 92
  • Minimum breakout volume: 1.5 times ADV
  • Stop loss from BoP: 6%
  • Trailing stop loss: 6%
NB: The results above were obtained using a backtest start date of 10/15/2011 and end date of 10/12/2012.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 13328.8 -2.07% 9.1% Up
NASDAQ 3044.11 -2.94% 16.85% Down
S&P 500 1428.59 -2.21% 13.6% Down
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
-2.07 %
S&P 500
5.29 %
S&P 500
4.26 %
NASDAQ Composite
16.85 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Lumber - Wood Production Lumber - Wood Production Lumber - Wood Production Building Materials Wholesale
 Most Improved Industry (by change in technical rank2)
Auto Parts Wholesale
+ 84
Auto Parts Wholesale
+ 83
Silver
+ 159
Confectioners
+ 168
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 6 19.54 2.88% 1.99%
Last Week 24 20.38 2.45% -1.68%
13 Weeks 283 20.85 10.76%
4.07%
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
Category
Symbol
Company Name
Expected Gain1
Best Overall ADY Feihe International Inc 115
Top Technical ADY Feihe International Inc 115
Top Fundamental LULU Lululemon Athletica inc. 35
Top Tech. & Fund. LULU Lululemon Athletica inc. 35
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
Category
Symbol
Company Name
Expected Gain1
Best Overall POWR PowerSecure International, Inc. 103
Top Technical OSK Oshkosh Corporation 51
Top Fundamental RRC Range Resources Corp. 43
Top Tech. & Fund. RRC Range Resources Corp. 43
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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