This rally may have legs–IBD100 top ten out-shine again!

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When everyone is so bearish and expecting the worst, it is time to expect the opposite.   Last week, the Investor’s Intelligence Survey of letter writers and advisers actually showed more bears than bulls (38% vs. 29%, percents rounded). This is an exceedingly rare phenomenon and should have told us all that the market would rally.   The survey is known as a contrary indicator, when there are many bears, the market goes up, presumably because many persons have already sold or are afraid because stocks have declined. When there are more than 50% bulls, it is time to start looking for a market decline.   I am posting more explanations these days because I have a new class of undergraduate students who are new to these concepts.

Meanwhile, the GMI is 4 (one more flat or up day could turn it to 5) and the more sensitive GMI-R is at 8.   It is now time for me to close out my few short positions and start going long.   There are just too many stocks breaking out.   There were 226 new 52 week highs on Friday in my universe of 4,000 stocks.   This is the most new highs since August 9 (229). While the QQQQ short term trend is still down, by my count, it may end at Friday’s day 16 (D-16) if we have a flat or up day in the index on Tuesday. Both the SPY and DIA have closed above their critical 10 week averages, the level at which I can begin to trade profitably on the long side. 76% of the NASDAQ 100 stocks closed with their MACD above its signal line, a sign of near term strength.   And the Worden T2108 indicator is now at 76%, getting close to overbought territory, but this indicator can remain around 80% for   months.   The T2108 measures the percentage of all NYSE stocks that closed above their 40 day simple moving averages.   It behaves like a pendulum of the market, swinging from overbought to oversold…….

As you know, I think the IBD approach to trading stock is quite effective.   My strategy is to select stocks from the IBD 100 list,     the top 100 stocks that meet the IBD   CAN SLIM criteria.   I then time the entry according to my own trading rules.   The IBD100 list is published every Monday (this week on Tuesday) and is also available on their website for persons who subscribe to the newspaper.   I am always amused how some traders dismiss the IBD100 list as containing stocks that have already passed their time.   They say that when a stock appears on this list, it is too late to buy them.   I think the evidence does not support this assertion.   IBD100 stocks often outperform most other stocks, except during a market decline when these growth stocks can fall more.

From time-to-time, I record the first 10 IBD100 stocks on the list and compare their performance to other stocks.   I did this for the top ten stocks on the list published on Monday, July 12.   The top ten stocks are the first ten listed in the IBD100 table published each Monday, and presumably the most promising. I tracked the change in these ten stocks from the preceding Friday’s close (7/9) through last Friday.   This table (click on to enlarge) shows the extraordinary out-performance of the ten IBD100 stocks. 90% (9/10) of these stocks rose in this period, with 70% rising 20% or more.   In comparison, only 17% of the NASDAQ 100 stocks and 11% of the S&P 500 stocks rose at least 20%.   This performance of the top ten IBD 100 stocks occurred while the QQQQ (NAASDAQ 100 index ETF) advanced   8%. While I do not necessarily concentrate my purchases among the top ten stocks on the IBD100 list, I do tend to concentrate on stocks that have appeared on the list or in the IBD New America daily columns. Almost every Friday,   the New America page lists an archive of the companies written about during the past few months.   I use this archive to update a watch list of promising stocks to follow. The first ten stocks on today’s IBD 100 list (published on Tuesday this week) are, in order:   NFLX, ARUN, BIDU, PCLN, JKS, PPO, MELI, TSL, VIT, FFIV.   I already own some of these. It will be interesting to see how these stocks perform over the next month.

Going long—FFIV and other Darvas Scan stocks

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Now that the GMI is 6 and many stocks are hitting new 52 week highs again, I am looking for strong stocks to buy.   As you know, I prefer to buy stocks that have already doubled in the past year and that are trading at or near their all-time highs.   I also want the stock to have appeared on the IBD New America or IBD100 list.   FFIV meets all of these criteria.   It is also a concept stock selection of my talented stock buddy, Judy.   The weekly chart has the technical characteristics I look for, although the stock is extended on a daily basis. Finally, the stock appeared on my Darvas Scan that identifies stocks that have many of the attributes he liked. Below is the monthly chart of FFIV showing that the stock has recently burst through its all-time high reached in late 1999. (Click on chart to enlarge.) I purchased a little of FFIV and will add to it if it keeps rising.   Other stocks that appeared on Wednesday night’s Darvas scan include:   OPEN, APKT, VIT, BIDU, NTAP, ARMH, HWK, GSIT and IDSA.   I own some of these.   Please do not ask me to post my Darvas Scan.   In the future I will post promising stocks that come up in my scans.

Some Stocks Near All-Time highs; Since June 4, IBD100 Stocks 3x more likely to rise 10%+

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I often search for new market leaders by scanning stocks that hit new 52 week highs.   This table   (click on to enlarge) shows stocks that hit a new high on Friday,   that are near their all-time highs, and had most recent quarterly earnings increases of   at least +50%.   The first EPS column is the most recent quarter’s earning’s change, followed by the prior quarter’s change, followed by the annual increase in earnings. Next comes P/E ratio, Friday’s close divided by the close one year ago, % change in revenue last quarter, and the P/S (price to sales) ratio.   Of note, all of these stocks had an increase in revenues (sales) last quarter.   As is typical, the majority of these 11 stocks (64%) also have shown up in my past IBD100 or New America stock lists, as shown by the flag (check)   to the left of the symbol.   If this up-trend is for real, some of these stocks may prove to be among the leaders of the new up-trend.   Of course, the next step is to research each stock’s fundamentals and business concept before considering a purchase.

From time to time, I analyze how a recently published IBD100 stock list has performed since its Monday publication.   I examined the list published on Monday,   June 7th and looked at the change in these stocks since their close the preceding Friday (6/4).   From that time through the close on 6/18, I found that 91% of the IBD100 stocks advanced.   The median change was +6.5%, and 21%of the stocks rose 10% or more.   In contrast, during the same period, 90% of the NASDAQ 100 stocks advanced, with a smaller median change of   +4.8%, and with only 8% of the stocks rising 10% or more.   Thus while almost all of the IBD100 and NASDAQ100 stocks rose during this period, the IBD100 stocks were three times more likely to advance 10% or more. In fact, the largest gainer in the NASDAQ100 stocks was WCRX (+13%), while six IBD100 stocks rose from   15% to 24%. These data do not support the often quoted assertion that when a stock appears on the IBD100 list, it is too late to buy. On the other hand, we have shown before that during a market decline, IBD100 type growth stocks tend to fall more quickly than other stocks.

I also looked at the top ten ranked stocks on the IBD100 list published on 6/7. Eight of the ten (80%) have advanced, with the biggest rises occurring in NFLX (+15%),   WPZ (+12%) and DECK (+12%).   The two declines were in DGIT (-<1%) and MED (-4%).   So, some of the top 10 stocks did quite well!

Sometimes it is difficult to grade the components of the GMI.   This week, two of the components received a “?” because they are too close to call.   I therefore kept the total readings the same as Thursday’s, with the GMI at 4 and the GMI-R at 7.   Those of you who prefer a rigid adherence to the criteria can go with readings of   3 and 6, respectively. A strong day on Monday would probably turn the GMI to 5, because we had 99 new highs in my universe of 4,000 stocks on Friday.   Friday was the third day (U-3) of the new QQQQ short term up-trend.   Of note, is that the Worden T2108 Indicator is now at 50%, and once the pendulum moves out of oversold territory, it typically goes back to around 80%.   Also, 95% of the NASDAQ 100 stocks have their MACD above its signal line (a positive histogram), a sign of short term strength.   I would feel more confident of this new up-trend if it can reach day 5 and if the QQQQ’ could rise above its 10 week average.   So, I am holding some long positions, and will add to them if the up-trend continues.   At the beginning of a new up-trend, we often are scared to go long because we are driving along, looking through the rear view mirror at the recently ended decline…..

How to use IBD 100 and New America stocks and TC2007 to find potential rocket stocks; Market rally begins

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I am writing this post primarily to teach my students how I search for potential rocket stocks–stocks that have been launched and appear headed towards new peaks.   As I said in class this week, it makes the most sense to buy stocks that have the best fundamentals and technicals.   This strategy has been advocated both by Nicolas Darvas and William O’Neil in their extraordinary books (listed at lower right of this blog).   Darvas,   made a fortune trading in growth stocks in the late 19050’s and said that he liked to buy stocks that were trading at all-time highs and that had already doubled in the past year.   So, I am going to show you how I use the great TC2007 stock charting and analysis program to find   potential rocket stocks that I research further before buying.

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My post from the bear market bottom; weak TJX; GMMA shows QQQQ in strong up-trend

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“Last week, a person who knows nothing about the market asked me how to short stocks.   This is reminiscent of the  stories of the shoeshine boys providing stock tips, near the roaring 20’s market’s top.   The sentiment is just too negative right now.   Does this mean the market has to turn up?   Not necessarily, but the market is always an assessment of competing probabilities.  â€œ (Post on 3/8/2009, GMI: 0, T2108: 7%)

I wrote the above words last March, which turned out to be just as the market successfully tested its bear market lows and   began the current rise.   The Worden T2108 indicator was   in single digits, a rare screaming oversold buy signal.   When people around me who never traded asked me how to short stocks it turned out to be a key contrary signal that the market decline was near an end.   Similarly, I remember when a friend who knows little about the market asked me if he should refinance his house to invest in the market–back in 2000 near that market’s top………

I have noticed that the pundits have been saying that TJX , the discount retailer chain, is a good buy. I therefore was struck by the GMMA daily chart below, which is flashing warning signals. With the short term averages (black lines) now below the longer term averages (red), this is not a stock I would want to own.   It may even be a good short play.   You do know that analysts sometimes tout a stock so that their big clients can unload their long positions to the unsuspecting public. (The “NA” on the chart shows when IBD wrote about TJX in its New America column.) Another stock with similarly weak technicals is PWRD.

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Meanwhile, the GMI and GMI-R

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Some new rocket stocks to watch

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I used TC2007 to scan the market for stocks that meet my most stringent fundamental and technical criteria for rockets.   These stocks have great fundamentals and technicals, have already doubled their price a year ago and are near 5 year or all-time highs.   I have listed in this table the 11 stocks out of 4,000 in my stock universe that met these criteria.  Rocketstocks1218 All of these stocks had last quarterly earnings up at least 100%.   Coincidentally, all but 4 of the 11 are in my records as having appeared on the IBD100 and/or IBD New America lists during the past year. I have also noted in this table where I might place long term or short term stop losses on each long position.   The most conservative stop loss is the short term support level.   With a growth stock I rarely retain   a long position if the stock closes below its short term support level.   However, if I bought near long term support I might use the LT support level as my exit strategy.   I will return to these 11 stocks in a future post to show you how they behaved.   These stocks have already proven themselves as being in strong up-trends, but one never knows when an up-trend will end.   That is why I immediately enter a sell stop or buy a put option for insurance, after buying one of these high momentum stocks. I currently own 3 of these stocks.

Below is a Guppy Multiple Moving Averages (GMMA) weekly chart (click on chart to enlarge) of one of these rocket stocks, RDY. Note how all of the shorter term averages (black lines) are well above the rising long term averages (red lines). This is the type of technical strength I seek in a potential rocket stock.

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Meanwhile, the GMI and GMI-R remain at their maximum levels.  

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New America stock ASIA breaks out and I automatically buy some

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On May 10, I wrote: “So, stocks on the New America list often take off sometime after their story is published in IBD.   One recent addition to the New America list that looks promising technically to me if it can break $18.60, is ASIA. ”

After I wrote that post, I placed a   GTC (good til cancelled) trigger order with my broker to buy ASIA if the stock traded above $18.60.   Sure enough, a week later, on Tuesday, ASIA broke out on huge volume.   I was at an all day meeting on Tuesday, when ASIA broke 18.60 and I bought my shares automatically at around $18.66.   One does not have to watch the market in order to buy break outs.   Just use trigger or buy stop orders. ASIA closed Tuesday at 19.44. I will now place a GTC trigger order to sell ASIA if the stock falls below $17.   These trigger orders take the emotion out of the trade. Note on the chart where “NA” indicates when ASIA appeared in the IBD New America column. It makes sense to monitor stocks that appear in the New America column.

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