Newsletter

June 16, 2007

When The Coach Goes Home - So Does The Motivation

Market & Sector Review
Can It Be This Easy? - A Backtest

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Member Notes: Over the weekend (hopefully) we will be updating our stock watch lists in the growth, growth plus value, and value sections. If time permits I may get into other scan area's beyond these three categories. I might suggest you download the current list to your computer just in case one of the stocks that may interest you happens to disapear from the listings.
When The Coach Goes Home - So Does The Motivation

All external motivation is temporary. External motivation is the kind that may wake you up, but it will not keep you awake for long. External motivation is motivation that comes to you from the outside. It may, and it often does, influence you to make a change, it cannot however make the change for you. And it cannot keep you from drifting off course, when the motivator is gone.

Many of you in your school years played sports. If you played and were fortunate enough to have an exceptional coach, you knew that he expected a lot from you but he also gave you lots of encouragement. He picked you up when you were down, he made you believe that you could win, and he let you know when you did a good job. He was a great motivator and he took your team all the way to the top. He was your friend, your ally, and your strongest supporter. You relied on him for your motivation and you got it.

The school year is over and you graduate moving on to college or the work force and the coach goes home. What does he take home with him? Your motivation, that's what! He was your motivation. Now you must receive your motivation from somewhere else, because the motivation was external and now it is gone. All external motivation works the same way. Keep giving us motivation and we will do better, take it away and we will gradually move back to where we were before the motivation began.

That is why so many of the hopeful at so many motivational talks get so excited, full of energy, and then slow down or stop dead in their tracks within a few days or a few weeks. The inspiration is no longer there, because the speaker has left town. It takes more than a great speech to erase and replace those internal programs, which tell us we should know better than to believe that we are powerful champions of success.

An hour or two of someone else telling us the "we can do it!" simply does not have a chance. The intentions were great, the talk inspiring the ideas incredible. But when the coach goes home - so does the motivation.

I am not saying, or even implying that one should not to attend those seminars, or buy the books, or listen to cassettes. They all help, they all generate ideas, and this one may begin to move you in the right direction. Just do not overestimate the outcome unless you have truly unclogged your mind of most all of your previous negative thinking.
Market & Sector Review
Can It Be This Easy? - A Backtest

This week we digress a bit from our series on fundamental data screens for our watch list stocks to do a little back test work. A number of years ago I read on an internet site about a system they were selling for something like $49. It was cheap enough and the marketing material aroused my curiosity. Basically the system was as simple as could be; if a stock makes a 3 year high buy it. The philosophy is simple enough; if a stock is making new highs it has nothing but happy shareholders. There is no overhead resistance by sellers looking to get even. Sounds not only interesting but probable, can making money in the market be that easy? This week we take a look.

I did a very quick back test on all New York Stock Exchange Issues from the beginning of 2000 through June 1, 2007. The software used for the back test has a limitation that, without my programmer to help, I have to live with; simply a limited number of open positions at any one time. Even with that limitation the sample size I believe is large enough to draw some conclusions. I chose the time period mentioned in order to cover both bull and bear markets and see if that makes a difference. The test is also simple enough; if the stock makes a new high (differing time periods covered) we buy it. The sell for the tests is the price three months later and then six months later (21 trading days are used to approximate a month). No other conditions! The test was for new 52 week or 1 year highs, new three year highs, and new five year highs. Before reading on pause for a moment; does this whole idea make empirical sense to you, that once a stock clears certain levels it should be free to move higher?

First the overall results across the seven and a half year period for all conditions tested.

The first thing I noticed is something similar in nature to back testing a good deal of technical indicators; the odds of picking a winner by a new high alone, is no better than a coin toss. What I did find interesting in this study is if you had enough money to buy every issue your three month return increased with the time frame of the new high. A one year high returned on average 8.76% while the three year high 8.76% and the five year high 14.44% annualized in the three month time frame. Six months after the buy all time frames were about equal.

This study is across both a bull and a bear market. Next thought was to separate the trades into bull and bear market phases. Perhaps if we applied the new high theory into these phases we can improve upon the results. For purposes of this letter we will use the rate of change of the 55 week moving average as our definition of bull and bear phases. If the rate of change is positive it's a bull market, if it's negative it's a bear market. This particular indicator is always late in turning but over time is not a bad little definition. Those conditions defined the bear market from December of 2000 through July of 2003. What if we divvy up the trades under those conditions, what happens?

If you think like I do this is a no-brainer; we have to do better in a bull market. Let's take a look at the bull market figures:

Your odds of having a winner are a little better but still not much better than a coin toss. Your three month return is substantially higher than the overall picture on the one and three year new highs but less on the five year highs. Very interestingly though your six month returns is less than the overall with the exception of the five year high, this floats higher than any other so far.

Now on to the bear market from December 2000 through July of 2003 by our very conservative definition:

This picture is a real total surprise, at least to me! As one would expect there are a fewer number of new highs during bear market phases and your odds of picking a winner from the list is less than during bull market phases. However if you did have enough money to buy each issue as it registered its new high the returns are excellent and better than any other single period. I think the conclusion is obvious; a new high made during a down trend or bear market means a good deal more than one made in a bull market where the rising tide carries many more issues over the threshold, whether they are worthy or not.

While this particular study shows that picking a stock because it is making a new high alone without any other consideration is no better than a coin toss. That does not mean that you should ignore this data. It means that this is one place to do your shopping homework. Some of the gains subsequent to the original new high were spectacular. There were in all probability many good reasons for purchasing those issues at that time, not just blindly off a list.

One of the benefits of membership to this site is that I publish a list of five year new highs for you to begin your shopping. It's not a bad place to start; see if the same issue appears on any of our watch lists that give you cause, or begin doing some research on that stock and see if it passes your investing/trading criteria.

If you wish to view the entire list and do some research here is a link to the Microsoft Excel Spreadsheet: Click Here! Do a look back at the time and the issues could you have found a good reason to buy some of those winners?
Largest Changes In Raw Numbers (21 Days)

[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports

Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.