7-17-16 Morning Comments

[Mike]

I find Pascal's comments about the Central Bank NIRP policy outweighing the drop in US earnings and reduction of margin debt particularly compelling. The question for investors is how long this effect will last? We truly are the market of last resort. Also, historical methods of estimating market tops are broken.

What would change the current market situation?

• US NIRP
• US recession
• Major war

None of this will likely happen immediately. As we move into earnings season, the market might begin to sense recessionary pressure. So, it is entirely possible that the rally will have legs.

Watchlists in the High Growth Stock area are updated. I don't recommend taking the short positions. I always produce long and short watchlists; this helps me understand which side of the market is predominant.

I am in the process of changing stock selection methods after Harry Friebel on this forum produced a study that looked at the correlation of subsequent stock price escalation vs. fundamentals before the price move. These studies are difficult to perform because one has to have Fundamental historical data. Harry leveraged IBD data that I have been saving since 2011. The surprise for me was that Industry Group Relative Strength had little correlation with a subsequent price increase. What does work is counting the number of stocks making a new 52-week high in each industry group. Also, ROE and pre-tax margin seem not to correlate with a subsequent price increase, at least over the last five years.

So, what Industry Groups have a significant number of stocks making a 52-week high?
Here is my list (with the number of stocks in each group at a 52-week high).

Finance-ETF/ETN (131)
Finance-Property REIT (15)
Banks-Northeast (9)
Mining-Gold/Silver Gems (8)
Banks-Southeast (6)
Finance-Investment Management (6)
Banks-Foreign (4)
Chemicals-Specialty (4)
Medical-Products (4)

When I inspect the ETF/ETN group I find precious metal ETFs dominate. You have to go to the bottom of this list to find an industry group that might contain a traditional growth stock. This list of leading industry groups supports Pascal's observation that money is chasing Yield.

[Pascal]

Hi Mike,

This is an interesting story, but Id like some details regarding this sentence: "What does work is counting the number of stocks making a new 52-week high in each industry group."

Do you really count the number of stocks or some sort of normalized number such as the ratio of the number of stocks making a new 52-week high in each industry group. Gold miners for example include a limited number of stocks compared to the financial sector. So I guess, a straight number of stocks at a 52 Weeks high cannot directly compare to another sector if you do not normalize.


Pascal

[Mike]

Hi Mike,

This is an interesting story, but Id like some details regarding this sentence: "What does work is counting the number of stocks making a new 52-week high in each industry group."

Do you really count the number of stocks or some sort of normalized number such as the ratio of the number of stocks making a new 52-week high in each industry group. Gold miners for example include a limited number of stocks compared to the financial sector. So I guess, a straight number of stocks at a 52 Weeks high cannot directly compare to another sector if you do not normalize.


Pascal

Pascal,

We found that the larger the group the better the subsequent performance. Perhaps institutions prefer the larger groups. The data shows both effects, the larger the percentage of companies in each group and the larger the group both led to greater performance. The ETF/ETN group is strange because it contains ETFs from all industries. We decided to let the data tell us what works.

[Pascal]

Thank you Mike.

I look forward to studying your new lists.


Pascal