VectorVest Views 4/5/07
CHERRY PICKING FOR BIG WINNERS.
Take a look at a 1-Year, Daily graph of M&F Worldwide, MFW. As I write this essay, it's up about $7.00 and I own it. How did I find this guy?
It all goes back to an essay I wrote last December, December 22nd to be exact. In that essay I wrote about my ambition to find "a way to find really big winners when they are still in the early stages of development." I discussed some of the ideas I was testing and admitted that I wasn't satisfied with what I had done. So, with tongue in cheek, I asked Santa to help me out. Sure enough, he came to the rescue. Let's take a look at what he taught me. (I suggest you print this essay so that you can see better what I'm going to illustrate.)
Let's take a closer look at the 1-Year Daily graph of MFW. What are the clues that would tell us that MFW could be a really big winner? Note that the Price of MFW was flat-lining until it spiked higher on 05/08/06. Did it hit a new 52-weeek high? The 2-Year Daily graph shows that it did not. In fact it would not hit a new 52-week high until 12/13/06. But it wasn't an explosive new high. We got an explosive new high a week later, on 12/20/06. How do I know it was an explosive new high? The answer should be obvious. Price soared and RT exploded. Even more importantly, however, Volume soared to 408,200 shares traded, more than five times the average AvgVol of 69,500. So there you have the major clues: A 52-week high, high volume and a break-out from a channel.
So I wrote a search called "High CI Prospects." It looks for stocks hitting a new 52-week high in the weekly mode, Stock Percent Volume Change >= 200, and Stock Price - (Split Adjusted), Channel, 26 week 50% Channel, no break-out starting 1-week ago, sorted by VST Desc. After a little testing, I added Stock AvgVol > 20,000. Let's see if it finds MFW on 12/20/06. To do this, click on UniSearch, Strategies - Price-Volume and High CI Prospects. Set the search date to 12/20/06 and click on Run Search. Bingo. It's right there at the top of the list. That's great, but it doesn't always happen that way. So this is where the cherry picking comes into play.
I do my cherry picking by looking at the graphs of all the stocks the search finds. As you know, I like stocks with smooth chart patterns. MFW is a good example of what I like. I quickly reject stocks with helter-skelter, volatile chart patterns. To see what I mean, run the High CI Prospects search as of 05/25/06. It finds seven stocks. Look at the 2-Year Daily graph of each stock. The ones to reject should be easy to spot and the big winner will jump out at you. To learn more about picking the best candidate stocks, visit the VectorVest University to see this week's "Strategy of the Week." Mr. Gordon White will explain in detail exactly how to identify the stocks with the best chance of becoming really big winners.
Ideally, one should run the search every day, but even I don't do that. I run the search just once a week, but I run it for every day for that week and put the stocks for each day in a WatchList. Then I look at the graphs of the top 50 or so stocks in the WatchList ranked by VST Desc. I create a new WatchList every month. Actually, I went back and created WatchLists for several past months. In this process, another big winner this search found was Jones Soda, JSDA, at $12.11 on 12/22/06. Run the search on 12/22/06 and see for yourself.
One last point I want to make is that you don't need to wait for a strong market to find big winners. It can be done anytime, whether the market is going up or down. In other words, it's always open season for Cherry Picking for Big Winners.
CHERRY PICKING POINTERS.
VectorVest Views 4/13/07
Last week we introduced the "High CI Prospects" search to you. This search is aimed to find big winners while they are still in the early stages of development. It looks for stocks hitting 52-week Price highs on high volume after breaking out of a 26-week Price channel. Stocks with the smoothest chart patterns tend to be the best performers. Mr. Gordon White did an excellent job at the VectorVest University last week of illustrating how to cherry pick for the big winners. In this week's essay, I will go into more detail on the features and application of this promising strategy.
SEARCH CRITERIA: The whole idea here is to identify a significant event as compared to a Price movement due to random noise. Therefore, I used a 52-week Price high rather than a 26-week or 13-week high because it gives a more meaningful and reliable signal. It is also more compatible with the requirement of having the stocks trade in a long-term channel prior to breaking-out. I prefer to use the 52-week high search run in the weekly mode rather than the daily mode because it is less discriminating and returns more stocks for consideration. The Percent Volume Change of >= 200 is high enough to reflect a statistically significant event, but low enough to capture as many prospects as possible. Channel height is, by far, the most sensitive criteria to set. While a narrow channel would, of course, be more consistent with seeing a smooth, flat chart pattern, I went with a 50% channel height because I wanted the search to return more stocks. The low AvgVol criteria of > 20,000 and absence of any Price criteria were aimed to allow small stocks, flying below the radar to qualify for examination. You should feel free to change any of these criteria to suit your particular needs.
SEARCH EFFICACY: In developing the "High CI Prospects" search, I used Quick Test an awful lot. I also ran a number of back-tests with Portfolio Manager and the Auto-Tester. While I found that sorting by VST gave the best Quick Test results, and they were quite good, it did not produce outstanding results in back-testing with Portfolio Manager. That's why I deferred to Cherry Picking. To verify the efficacy of the search, Mr. Steve Chappell, our Manager of Educational Services, ran hundreds of Quick-Sims on the Simulator. Generally speaking, the results were excellent. He will describe this work as part of this week's "Strategy of the Week" presentation at the VectorVest University. Thank you Steve, it's nice to receive confirmation that the search is robust.
PROSPECTS WATCHLISTS: I hope you have already begun building your WatchList of High CI Prospects for April. If not, Steve will show you how to create this WatchList and add the stocks found by the "High CI Prospects" search. He will also show you some things to do to improve your cherry picking skills. Since last week, I've been updating my WatchList every night. As of last night, I had 106 stocks in the WatchList. Incidentally, I named the WatchList Group "High CI Prospects" and I labeled each monthly WatchList I've made so far by year and month, i.e., "2007 - 04 (Apr)." Now this is where the cherry picking starts.
I could do my cherry picking only by looking at the chart pattern of each stock. So last night I opened the "2007 - 04 (Apr)" WatchList and began looking at 1-Year Daily Graphs of the stocks presented on the screen. Since I was looking for stocks that were trading in a relatively tight channel; then hit a 52-week high on well above average volume, I adjusted the graph setting to show volume at the bottom of the screen. The first graph I looked at was that of Chordiant, CHRD, the top ranked stock by VST. It looked pretty good to me, so I put it into another WatchList called "HCIP Favorites." (Steve will show you how to do this.)
The next stock was Medimmune, MEDI. Its chart pattern also looked pretty good, but I did not add it to my "HCIP Favorites" WatchList. The pop in price was due to news that MEDI was considering putting itself up for sale. The moral here is to not buy any of these stocks until you have checked to see what caused the pop in price. (Steve also will show you how to do this.) And so I continued looking at graphs until I encountered U S Home Sys, (USHS); Eagle Hosplty, (EHP) and MDU Resrces, (MDU). Try looking at the graphs and see whether you would agree with my cherry picking choices. You won't have to build the "2007 - 04 (Apr)" from scratch because we have sent it to you in a new WatchList Group called "High CI Prospects."
INCUBATION: A stock's price behavior shortly after it pops is often a very good indicator of whether it is going to have legs or not. For example, High CI Prospects found Sparton Mtrs, SPAR, on April 27, 2006. Shortly thereafter, the market suffered a severe correction, but SPAR's price held up very nicely. This was a good sign of the support underlying the stock and the possibility of a good run. So it's not a bad idea to see how these stocks hold up after they spike higher. I call this the "incubation" period. In order to help you see how these stocks have been doing, we have actually sent six "High CI Prospects" WatchLists to you. They could be very useful to you. For example, Cramer raved last night about Annaly Mortgage, NLY. I remember seeing it in my "2007 - 03 (Mar)" WatchList. The pattern looks good.
Speaking of Cramer, Spartan Mtrs, SPAR, a classic HCIP stock, was his headline stock about a week ago. On Monday, he headlined Rose Rescs, ROSE, and the stock popped on Tuesday. Our "High CI Prospects" search caught it and its chart pattern also looks good.
OPEN SEASON: As a final word, I want to repeat that it's always open season for cherry picking. I have found some terrifically big winners in the worst possible markets. For example, Teeny Boppers found SOHU at $1.70/share in June 2002 and it ultimately went to $42.68/share. Teeny Boppers also found SINA at $2.33/share in August 2002. It soared to $48.25/share. I'm happy to say "High CI Prospects" also would have found both of these stocks had it existed then. So don't stop prospecting when the market turns sour. You can find big winners anytime by applying "High CI Prospects" and these Cherry Picking Pointers.