5-11-15 Comments
Watch lists are updated.
IBD has the market in correction. One of the unique features of the MarketSchool model is the Power Trend. Once a rally has the NASDAQ lows above the 21-day for 10 consecutive days and the 21-day is above a rising 50-day for at least 5 consecutive days the Power Trend comes on which forces the buy switch to stay on even though subsequent events could move us to a cash position. The Friday market move put us back to 55% long invested situation from zero invested. Is the market churning here? Perhaps.
CANSLIM investing selects stocks with great fundamentals and recommends buying them when they break out from sound price consolidations. Breakout buying has shown poor odds this year and extending back around one year. This leads me to suspect that we are churning here. I also shy away from breakout buying and look to alternate buy points, usually as close to the 50-day as I can get using a sloping line pivot or volume trigger alert.
When I create a watch list I download all stocks into excel and rank order all stocks by a combination ranking that includes: Liquidity Rank (Average dollar volume), IBD Composite Ranking, Demand/Supply Ranking (Average volume compared to the float) and Margin Rankings (includes Pre-tax Margins and Return on Equity). The top 10% of the stocks are selected in this initial screen. Then I filter each stock for these parameters:
Average EPS % gain over the last two reporting quarters >= 25%, ideally EPS showing acceleration
5-Year annual EPS gain >=25% (for stocks trading that long)
Current price >= $15 and above the 200-day moving average
Liquidity >= $10 million/day
IBD composite rating >= 90
IBD SMR (Sales-Margins and Ratios) rating A or B
Accum/Distr rating C or better
ROE >= 17% and/or pretax margin >= 16%
Group RS >=80 or at least two stocks in the group shows RS>=80 AND EPS >=80
Up/Down volume ratio >=0.85 (a 50-day ratio dividing total volume on up days by total volume on down days)
Base stage less than 6
Company is not being acquired
Now less than 2% of all stocks have passed these filters.
Each chart pattern is now manually inspected in MarketSmith for being close to a recognizable buy point and contains constructive price and volume action. In particular if the stock is extended it is passed. The stock is owned by at least one of the mutual funds in the IBD mutual fund index (IPOs excepted). Management owns at least 1% of outstanding shares
Cash flow >= 20% above last annual EPS report. This takes us to around 0.25% of the stocks I started with to reach the final watch list.
This watch list is then uploaded to the High Growth stock section of the EV site. The same stocks are uploaded to the volume alert trigger list. This list also expands the technical requirements to not necessarily be close to a classical buy point but just not be too far extended from the 50-day moving average allowing for a possible safe entry based on the volume trigger alert.
Subscribing members to the list are (or soon will) be receiving real time volume alert triggers via email.
Mike Scott
Cloverdale, CA