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Issue No. 56 – December 12, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
This week continues an analysis of the impact of various stop loss settings for growth stocks that have been screened using variations on Dr. Stephen Cooper’s stock candidate filter. The same group of growth stocks discussed last week was broken out into 3 price ranges with widely varying results.
1.1 Growth Stock Price Ranges
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 growth stock price for this study was $4.
Value stocks outperformed this group of growth stocks over the past year (29% gains versus 17% gains) while the S&P 500 had gained about 6.5% over the same period. Results also implied that a wider trailing stop loss setting was justified for portfolios containing both classes of stocks in a rising market.
While this was true for value stocks and the group of growth stocks taken as a whole, the picture changes when growth stocks are broken out into price ranges of $4 to $15, $15 to $40 and above $40, as seen in Table 1. For the lowest price range of $4 to $15, a trailing stop loss of $25% would have saved the investor money, stopping out 80% of the stocks in that group in the 3rd and 4th month with a net loss of -4.87%. Clearly the use of a trailing stop would have been beneficial for growth stocks in the lowest price range.
For the mid range of $15 to $40 growth stocks in Table 1, using a trailing stop loss would have been a hindrance that reduced profits. A 25% stop loss would have stopped out 71% of the mid range price group in the 5th month with a net loss of -1.85%. Without a trailing stop, the mid price range group gained 19.65% for the year.
© 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.
Similarly, for the high range of greater than $40 growth stocks, using a stop loss would have been a hindrance that reduced profits. A 25% stop loss would have stopped out 77% of the highest price range stocks in the 6th month with a net gain of 16.87%. Without a trailing stop, the highest price range group gained 28.69% for the year, nearly the same gain as for the two groups of value stocks. Details for the value stock filters are given in Table 2 for reference.
Table 1
Average Percentage Gains Using A Stop Loss
|
Trailing Stop Setting (%) |
Absolute Value Filter |
Industry Relative Value Filter |
Growth Filter
All Prices |
Growth Filter
$4 - $15 |
Growth Filter
$15 -$40 |
Growth Filter
>$40 |
|
10 |
8.17 |
9.56 |
0.66 |
-4.71 |
-3.70 |
8.43 |
|
15 |
9.96 |
14.76 |
6.85 |
-2.73 |
-1.51 |
21.48 |
|
20 |
13.65 |
13.37 |
4.80 |
-2.73 |
-3.04 |
17.96 |
|
25 |
21.04 |
13.85 |
4.67 |
-4.87 |
-1.85 |
16.87 |
|
30 |
25.46 |
12.99 |
7.37 |
-8.06 |
5.45 |
15.82 |
|
35 |
31.93 |
23.08 |
8.26 |
-15.76 |
3.13 |
24.22 |
|
40 |
29.86 |
29.44 |
9.54 |
-16.67 |
7.26 |
22.59 |
|
50 |
29.86 |
29.78 |
11.34 |
-23.52 |
10.04 |
26.45 |
|
60 |
29.86 |
29.78 |
14.38 |
-28.21 |
15.97 |
28.69 |
|
70 |
29.12 |
29.78 |
17.10 |
-21.73 |
19.65 |
28.69 |
|
80 |
29.23 |
29.78 |
16.81 |
-23.73 |
19.65 |
28.69 |
|
90 |
29.23 |
29.78 |
16.53 |
-25.67 |
19.65 |
28.69 |
|
100 |
29.23 |
29.78 |
16.71 |
-24.4 |
19.65 |
28.69 |
Table 2
Value Filters
|
Valuation Metric |
Stock Value That Reduced Risk of Loss * |
Corresponding Ratio of Stock Value to Industry Value * |
|
Price to Earnings (PE) |
(7) 10 to 15 |
0.5 to 0.75 (1) |
|
Price to Book (PB) |
< 1 |
0.5 to 0.75 (1) |
|
Price to Sales (PS) |
< 0.5 (1) |
0.5 to 0.75 (1) |
|
Return on Equity (ROE) |
10 to 20 |
2 to 3 |
|
Price to Free Cash Flow (P-FCF) |
< 5 (10) |
(0.5) 0.75 to 1 |
|
* Numbers in parenthesis are to extend the range. |
||
In conclusion, not all growth stocks are equal. Over the past year, low priced growth stocks under $15 did not sustain their price gains as well as higher priced growth stocks. Higher priced growth stocks above $15 showed a higher level of quality as to their ability to sustain their price gains. Growth stocks priced above $40 gained as much as value stocks without the use of a trailing stop. This confirms Dr. Cooper’s use of growth stocks priced greater than $50 in his stock candidate filter used for trading options.
2.0 Market Analysis
The markets continued their sideways movement this week, losing a little ground. Sentiment seems to be focused on anticipation of the FOMC policy statement this coming week concerning whether the end of the tightening period is near. Notably, the VIX and VXN have moved above their 20 day simple moving averages, not an encouraging sign.
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 |
0.9% |
-0.9% |
-0.5% |
1.5% |
0.8% |
|
NASDAQ |
2.5% |
-0.7% |
0.5% |
1.6% |
1.1% |
|
S & P 500 |
2.0% |
-0.5% |
-0.2% |
1.6% |
1.1% |
|
Russell 2000 |
3.3% |
-0.3% |
1.0% |
1.7% |
0.8% |
|
GLD, GOLD |
12.0% |
4.1% |
1.8% |
2.0% |
3.5% |
|
RKH, Banking |
0.0% |
-0.5% |
-1.2% |
2.4% |
-0.6% |
|
IYT, Transportation |
0.7% |
-0.9% |
-0.9% |
0.8% |
1.7% |
|
SMH, Semiconductors |
5.4% |
-2.5% |
3.9% |
2.7% |
1.4% |
|
BBH, Biotechnology |
-1.1% |
-2.3% |
-0.4% |
-0.3% |
2.0% |
|
IYR, Real Estate |
2.5% |
-0.7% |
-0.5% |
2.5% |
1.2% |
|
OIH, Oil |
16.6% |
3.3% |
1.6% |
6.0% |
4.9% |
|
XLE, Energy |
9.2% |
1.3% |
0.3% |
4.0% |
3.3% |
|
XLU, Utilities |
4.4% |
1.4% |
-0.6% |
1.9% |
1.7% |
|
XLB, Materials |
5.6% |
0.3% |
1.4% |
1.4% |
2.4% |
|
XLI, Industrial |
3.0% |
-0.8% |
0.3% |
1.0% |
2.5% |
|
XLK, Technology |
3.2% |
-0.9% |
0.7% |
1.4% |
1.9% |
|
XLV, Healthcare |
0.4% |
0.1% |
-0.3% |
0.0% |
0.6% |
|
XLF, Financials |
0.9% |
-0.7% |
-1.0% |
2.4% |
0.3% |
|
XLP, Consumer Staples |
-0.6% |
-0.7% |
-0.7% |
1.3% |
-0.4% |
|
XLY, Consumer Discretionary |
1.1% |
-0.7% |
-0.3% |
1.5% |
0.5% |
