Buy low, sell high. You’ve heard that before. It’s a great way to get rich in the stock market. Why isn’t everyone doing it?

Obviously, buying low and selling high is not as easy as it sounds. No one knows for sure which stocks are “low,” and which are “high”. A stock that seems “low” may go lower. One that seems “high” may go higher. How can we tell which is likely to do what?

Clearly, history can be our guide. A stock whose price has fallen from a peak is “low” relative to that peak. A peak may reflect the highest price a stock has ever attained, or it may reflect an intermediate high over the last 52 or 13 weeks. Whatever the case may be, investors tend to perceive that stocks are “low” when their prices are down from former levels.

The same is true in defining a high. Investors perceive that stocks are “high” when their prices have risen from lower levels. It doesn’t matter that some of these stocks may be terribly undervalued and are destined to go much higher. Sellers believe that stocks are too “high” and likely to go lower. Buyers believe the opposite.

Ideally, one would like to buy undervalued stocks that have gone down in price, and sell overvalued stocks that have gone up. This is what VectorVest is all about.

VectorVest gives Buy, Sell and Hold recommendations on over 8,000 stocks each day. Every recommendation is based upon an assessment of Value, Safety and Timing. Timing plays an especially important role in assigning VectorVest recommendations. Our system of using Relative Timing and Stop-Prices is designed to get you into stocks that are rising in price and to get you out when prices are falling. A stock is in an upward price trend when its Relative Timing is above 1.00 and its Price is above its Stop-Price.

Every stock in the VectorVest system whose price is above its Stop-Price receives an “H” or “B” Rec. All stocks with prices below their Stop-Prices receive “S” Recs. Stop-Prices are computed from 13 week price moving averages. A stock whose Price has fallen below its Stop-Price is in a downtrend and is expected to continue going lower.

When a stock’s price rises from below its Stop-Price to above its Stop-Price, its recommendation changes from an “S” to an “H” or “B.” Stocks with solid fundamentals, i.e., safe, undervalued stocks, receive “B” recommendations more readily than those with weak fundamentals. If a stock has a Relative Timing greater than 1.00 and its Price is above its Stop-Price and it has a “B” recommendation, it is in an uptrend and is expected to continue rising in price.

Stocks making a “turnaround” from an “S” to a “B” are, in all likelihood, still near recent lows. Catching these stocks on the way up is what “Bottom Fishing” is all about. In this study, a “Bottom” occurs whenever a stock goes from an “S” Rec to a “B” Rec. Since we advocate buying high VST–Vector stocks with “B” Recs, the results of our searches are based upon the performance of the top ranked VST–Vector stocks that have experienced “S” to “B” transitions.

The Trend section of UniSearch is ideally suited to finding stocks going from “S” to “B” Recs. Therefore, Bottom-Fishing searches may be created with UniSearch in just a few minutes. For example, let’s find all the stocks whose Recs have gone from “S” to “H” to “B” over the last three weeks. Here are the steps:

1. Click Research on the Main Toolbar.
2. Click UniSearch.
3. Click on the Trends-Bottom Fishing group.
4. Click New.
5. Click Search.
6. Click in the Parameter box.
7. Select Stocks/Capital Appreciation/Rec.
8. Click in the Operator box. Select Trending.
9. Click in the Value box.
10. Select Custom Trend.
11. Click on the arrow next to day and change the Trend to Week.
12. Click on the arrow next to week 3 box and select =S.
13. Click on the arrow next to week 2 box and select =H.
14. Click on the arrow next to week 1 box and select =B.
15. Click OK.
16. Click Run Search.

VectorVest ProGraphics will find all the stocks having an “S”, “H”, “B” Rec sequence. The fact that the Rec went from “S” to “H” to “B” in three weeks means that price and RT have moved up fairly substantially. Our experience has shown that this search produces some fantastic winners, but it also produces a lot of failures. The sequences S, H, B, B, and S, H, B, B, B offer more assurance of a solid turnaround. The trade-off, however, is that your entry price is likely to be higher.

As you can imagine, a virtually endless string of searches may be created by using various combinations of “S”, “H” and “B” Recs. This problem can be alleviated by leaving a non-discriminating input field blank in place of a specific Rec. Let’s see how this works.

A wide selection of Bottom-Fishing searches may be created with UniSearch by simply looking for stocks which have experienced an “S” to “B” sequential changes over a two to six week period. These are as follows

Table I.  UniSearch Trend Bottom-Fishing Searches

Case 1 is the simplest search, and reflects the case of fishing in the shallowest water. This search would not be expected to find stocks coming off of very low bottoms. However, it may uncover very good stocks that have dipped in price and are making a quick recovery.

A back test of Case I searches from 10/28/94 to 10/27/95 showed that if one were to buy the Top Stock ranked by VST-Vector on the “B” signal and sold it at its Stop-Price, they would have achieved an annualized return of 42.9%.* This search found four stocks that gained more than 100%. However, it also gave 19 stocks which lost an average of 14%. All in all, it’s not a bad strategy, but could be better.

Case 2 represents an approach to fishing in “deeper” water. Notice that the blank week in Table I means that the stock may have had an “S”, “H” or a “B” Rec. This technique is illustrated in Table II.

If one wishes to explore each of these searches separately, they are free to do so. It should be remembered, however, that the number of combinations rises rapidly as one uses more and more weeks in their Trend Searches.

Table II. Variations of Case 2 Searches

Table III.  Variations of Case 3 Searches

So far, we have only scratched the surface regarding the number and variation of searches which may be conducted using VectorVest ProGraphics. A wide variety of interesting and profitable searches may also be devised using Week-to-Week Comparisons.

Let’s take a look at a search involving stocks hitting new weekly lows. These stocks reside in much deeper parts of the VectorVest ocean. They have been beaten down, and should offer some good values. Use the following procedure to catch some of these goodies:

1. Click UniSearch.
2. Click on the Hi-Lo Searches - Stocks group.
3. Select 52-Week Price Low.
4. Click the edit button next to Sorted by and enter Rec Asc in the Primary sort box and VST Desc in the Secondary sort box. Click Ok.
5. Select a week which is at least four weeks prior to the current date and run search as of that date on Stocks.
6. Run Search. Scroll down the results until you reach the first “S” rated stock and click on it.
7. Count down to the 10th stock rated an “S” and click on it while holding the Shift key down on your keyboard. This will mark ten stocks.
8. Add these stocks to a WatchList and name it High VST, Weekly Lows.
9. Open this WatchList and re-price it as of the current day.
10. If any of these stocks are rated a “B”, buy it in a portfolio named High VST, Weekly Lows and remove it from your WatchList.
11. Continue to repeat steps 3 and 5-10 for the subsequent weeks and continue to buy the top 3 stocks that are in the WatchList every week with a “B” rec.

A back test from 10/28/94 to 10/27/95 using this strategy gave a 39.7%* annualized rate of return when the Top three stocks ranked by VST-Vector were bought on the “B” signal and sold at their Stop-Prices. Only three stocks were found which gained more than 100%. Twenty stocks gave losses which averaged 9.4%.

We were somewhat surprised that this strategy did not give better results. However, upon reflection, it’s reasonable to expect that a stock that hits a 52 week low is not very likely to become a barn burner overnight. On the flip side, the downside risk of these stocks turned out to be quite low.

Another Week-to-Week search which can be used for Bottom-Fishing would be to examine the stocks receiving New Sell Recs. Rank them by VST-Vector, and put the top five stocks into a WatchList. As time goes by, look at this watchlist for the highest VST-Vector stocks with a “B” rating. You should find some real winners.

With a little imagination, you should be able to devise similar searches using Week-to-Week Comparisons of stocks and/or Industry Groups with falling and/or rising RT’s.

When the price of a stock hits a low, it usually reflects circumstances related solely to that stock. When an Industry Group hits a low, it reflects a problem related to a class of stocks. This creates the opportunity to Bottom-Fish using a bigger net. Consider the following strategy:

1. Open Industry Viewer
2. Select a week which is one week prior to the current date
3. Click the RT Column to change the sort to RT Asc
4. Print out one page of the lowest ranked Industry Groups. This list contains 48 Industry Groups. Call it "Last Week's List."
5. Repeat steps 2-4 for the current week and call the output "This Week's List"
6. Compare "Last Week's List" and "This Week's List." Focus on the 10 lowest ranked Industry Groups shown on "Last Week's List." Which one of these Industry Groups is ranked highest on "This Week's List?" Select it.
7. Add the stocks from this Industry Group to a WatchList called "Industry Temp"
8. Open "Industry Temp" and sort the stocks by VST-Vector Desc.
9. Buy the highest ranked stock that has a "B" rating and repeat this process each week.

While this search may sound like a lot of work, it’s one of the most interesting and revealing that we have done. It’s simply marvelous to watch the rise and fall of Industry Groups ranked by Relative Timing. It’s also a good way to find future winners.

For the period 01/06/95 to 12/30/95, the search described above gave an annualized rate of return of 68.9%.* While only three stocks had gains greater than 100%, only 12 stocks gave losses which averaged 7.3%.

Variations of this approach can be done by using Week-to-Week comparisons and searching the Industry Groups with the largest increases in Relative Timing. While this search does not guarantee that you’ll find stocks coming off bottoms, it’s likely that they’ll be going up in Price.

If you take the Industry Groups with the largest percentage increase in “delta RT,” you’ll usually be looking at Industry Groups coming off lower bottoms.

For example: If the “delta RT” of Industry Group 1 is 0.36 and its RT is 0.60, and the “delta RT” of Industry Group 2 is 0.50 and its RT is 1.25, the percent “delta RT” for group 1 is 60, and that of Group 2 is 40. Thus, Industry Group 1 is likely to be a better Bottom-Fishing prospect than Industry Group 2 even though its “delta RT” is not as large as that of Industry Group 2.

Chapter IV - BOTTOM FISHING USING VECTORVEST STRATEGIES

The examples described above show that VectorVest ProGraphics is ideally suited to conduct a wide variety of successful Bottom-Fishing strategies. This is not surprising given that VectorVest is specifically designed to predict the direction a stock’s price is likely to go. Statistically, VectorVest knows when a stock is “high” or “low”. The ability, however, to create and conduct these strategies with such ease and simplicity is truly remarkable.

Trending conducts the simplest and, perhaps, the most powerful searches. We were pleased by the excellent results produced with UniSearch. Its unique capabilities, which are unmatched in the field of stock analysis, allowed us to fish just deep enough to catch good stocks which had slipped a bit, but not so deep that we were dealing with Carp and other scavengers.

It was our feeling that strategies utilizing stocks hitting new weekly lows should have given better results. The explanation for this finding could be connected to two factors:

• First, stocks hitting 52 week lows are in serious trouble. Even though we were able to find the best ones, most of them do not have outstanding fundamentals. Therefore, it’s unlikely that they are going to outperform the market.
• Secondly, it probably takes a lot longer for these stocks to blossom than our study allowed. Profiting from stocks coming off of 52 week lows takes a lot of patience.

The best Bottom-Fishing strategy for achieving consistent, above average results over the long-term may be that of using Industry Groups. 1995 was an exceptional year for the market, however, and just about everything went up. It could turn out that in a tougher market stocks won’t bounce back from lows as readily as they did in 1995. Moreover, Industry Groups hitting Relative Timing lows probably will remain in downtrends much longer. When an Industry Group starts moving up, however, it could lead to good results even in a tough market.

Our work showed that it’s not a good idea to buy stocks in Industry Groups just because they’ve hit the bottom of our RT ranking. Some Industries will stay there a long, long time. It’s better to buy into an Industry Group when it starts to move up. It’s even better to buy into Industries with good fundamentals. Your chances of hitting some home runs improve dramatically.

You are probably aware that Semiconductor (Mfg) and Semiconductor (Equip) hit bottoms recently. These Industries had the highest RT ranks only a few months ago. They are too good to stay at the bottom very long. Jump into them when they leave the bottom 10 Industry Groups ranked by RT.

Whatever you do, it pays to remember that Bottom-Fishing takes tools, skills, courage and patience. VectorVest ProGraphics can provide the tools and skills. You’ve got to provide the courage and patience.

Buy low, sell high? Yes, you can!

*Past performance is not a guarantee of future results.