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Issue No. 55 – December 5, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
Resumption of the stock advisory went well. This week begins an analysis of the impact of various stop loss settings for growth stocks that have been screened using Dr. Stephen Cooper’s stock candidate filter. This study will be used to set a level of confidence in holding growth stocks for extended periods.
1.1 Growth Stocks
A group of 35 growth stocks was screened from December 2004 data using a modified form of the Stephen Cooper stock filter. The basic filter looks for optionable NASDAQ and NYSE stocks having an EPS growth of 80%, a 26 week % rank relative strength of 90% and within 5% of their 52 week highs. The minimum stock price for this study was $4.
The S&P 500 gained about 6.5% over the past year. Growth stocks that had actual gains (22 out of 35) comprised 62% of the group. The maximum gain was 226% and the maximum loss was -60%. Overall the group had an average gain of 16.71% using no stop loss. The optimum stop loss setting was -70%, where only 1 stock was stopped out in the 6th month, resulting in an average gain of 17.1%.
To understand this behavior one can look at the wavy shape of the S&P 500 over the past year. It had 4 successively higher highs with 2 intervening successively higher lows. Growth stocks that declined at the lows eventually recovered and surpassed their previous highs. For example, using a -25% stop loss, 26 of the 35 stocks would have been stopped out after 5.1 months but the average number of months it took stocks to reach their maximum values was 7.2 months. A -25% stop loss would have resulted in a gain of only 4.7%.
We have seen similar, but remarkably higher, gains for portfolios containing two groups of value stocks studied recently that were screened based on 5 valuation metrics. The absolute value filtered group had an average gain of 29.2% over the past year without a stop loss. A total
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.
of 12 out of 14 stocks (85%) had actual gains. Gains ranged from -42% to 137%. For this group a -35% stop loss was optimum resulting in a gain of 31.9%. A -25% stop loss setting would have reduced gains to 21%.
The industry relative filtered group had an average gain of 29.8% over the past year without using a stop loss. A total of 7 out of 9 stocks (78%) had actual gains. Gains ranged from -37% to 114%. No stop loss setting was found that would have improved results for the industry relative group. A stop loss setting of -25% would have reduced gains to 13.9% for this group of value stocks over the past year.
These results were surprising. Not only do they indicate that portfolios of the class of value stocks discussed have outperformed portfolios of the class of growth stocks discussed over the past year (29% gains versus 17% gains). It also implies that a wider stop loss setting is justified for portfolios containing these classes of stocks in a rising market. Of course, had the market been in an overall decline over the past year, the results would have been very different. Until the same study is repeated for a declining market, let’s agree not to hold long positions for extended periods in a declining market.
1.2 OptionsXpress Autotrading
A number of options traders have asked about autotrading WiserTrader.com Options Advisory alerts at OptionsXpress. The way this works is the OptionsXpress customer service takes weekly options alert recommendations and trades your account automatically according to your prescribed size limits and guidelines. It’s a hands free way to trade options and you don’t need to be an expert.
OptionsXpress provides autotrading using a number of advisory services already based on customer requests. If you wish to add the WiserTrader.com Options Advisory to the OptionsXpress advisory list, it will be necessary for a sizeable number of account holders to make such a request at the OptionsXpress web site from within their login accounts.
The trading record of the WiserTrader.com Options Advisory Service this year is summarized in Table 1 in terms of the current account balance for an account starting with $3,000 on January 1, 2005. Numbers in the table include brokerage fees of $9.99 per trade plus $1.25 per contract and a monthly advisory fee of $60/month. The fees you actually pay are probably lower. The average cost per options contract this year has been $617.23.
Table 1
Starting with $3,000 on 1/1/05 the Current Account Balance on 12/2/05 would be:
|
Contracts per Trade |
1 |
2 |
3 |
4 |
|
Current Account Balance |
$4,755 |
$8,409 |
$12,066 |
$15,720 |
|
% Profit |
58.5% |
180.3% |
302.2% |
424.0% |
If this fits in with your trading goals, ask your broker to add the WiserTrader.com Options Advisory Service to their autotrading advisors list.
2.0 Market Analysis
The markets entered a mild technical retracement this week and became a bit choppy after sizeable gains over the past 4 weeks. An upward revision in third quarter GDP, moderation in oil prices and a jump in consumer confidence left the market still in an upbeat mood.
Key industry ETF’s in Table 2A are Biotech and Semiconductors which confirm the NASDAQ. Transportation confirms the Dow Jones Industrial Average according to Dow Theory. Banking and Financials are confirming indicators for the S&P 500. Gold and Real Estate are respective indicators for the inverse health of the currency (inflation) and the capacity for consumer spending.
Table 2A
Indices, Key Industry ETF’s and Sector SPDR’s
|
|
1 month |
1 wk ago |
2 wks ago |
3 wks ago |
4 wks ago |
|
Dow Jones Industrials |
3.3% |
-0.5% |
1.5% |
0.8% |
1.5% |
|
NASDAQ |
4.8% |
0.5% |
1.6% |
1.1% |
1.5% |
|
S & P 500 |
3.7% |
-0.2% |
1.6% |
1.1% |
1.2% |
|
Russell 2000 |
4.9% |
1.0% |
1.7% |
0.8% |
1.3% |
|
GLD, GOLD |
10.6% |
1.8% |
2.0% |
3.5% |
2.8% |
|
RKH, Banking |
4.1% |
-1.4% |
2.4% |
-0.6% |
3.7% |
|
IYT, Transportation |
5.4% |
-1.1% |
0.8% |
1.7% |
3.8% |
|
SMH, Semiconductors |
10.3% |
4.2% |
2.7% |
1.4% |
2.0% |
|
BBH, Biotechnology |
3.6% |
-1.2% |
-0.3% |
2.0% |
2.3% |
|
IYR, Real Estate |
7.8% |
-0.9% |
2.5% |
1.2% |
4.4% |
|
OIH, Oil |
7.7% |
1.6% |
6.0% |
4.9% |
-4.7% |
|
XLE, Energy |
3.3% |
0.2% |
4.0% |
3.3% |
-4.1% |
|
XLU, Utilities |
2.2% |
-0.9% |
1.9% |
1.7% |
-0.8% |
|
XLB, Materials |
8.2% |
1.5% |
1.4% |
2.4% |
2.7% |
|
XLI, Industrial |
5.2% |
0.2% |
1.0% |
2.5% |
1.5% |
|
XLK, Technology |
5.4% |
0.9% |
1.4% |
1.9% |
1.2% |
|
XLV, Healthcare |
1.7% |
-0.4% |
0.0% |
0.6% |
1.4% |
|
XLF, Financials |
4.9% |
-1.3% |
2.4% |
0.3% |
3.2% |
|
XLP, Consumer Staples |
1.5% |
-0.9% |
1.3% |
-0.4% |
1.4% |
|
XLY, Consumer Discretionary |
3.2% |
-0.4% |
1.5% |
0.5% |
1.4% |
