VectorVest Views 5/13/05
The more this market flounders around, the more I like the idea of bottom fishing. Two weeks ago, I said a good search for Prudent Investors to use involved finding high VST-Vector stocks that have hit 26-week Price lows and buying the top ranked ones when the market begins to rise. Having said that, I thought it would be worth illustrating how this technique works.
Here's what I did:
1. I went back to May 7, 2004 and ran a search to find stocks hitting 26-week lows in the Weekly mode, sorted by RV+RS Desc. This sort ensures that I'm working with undervalued stocks with good financials. They will become high VST-Vector stocks when they begin to rise in Price.
2. I then created a new WatchList Group which I called 00-Bottom Fishing. I put the top 25 stocks sorted by RV+RS into a WatchList called 05/2004 Flounders. Later I'll explain why it's important to identify when the WatchList was created.
3. I created a new Portfolio Group and called it 00-Bottom Fishing and created a new Portfolio called 05/2004 Flounders. I used no margin, managed Daily, bought the top VST-Vector "B" rated stocks and sold on an "S" Rec.
4. I would add new Flounders to the WatchList each week and update the Portfolio Friday to Friday. A step-by-step description of this process is given as this week's Strategy of the Week.
This portfolio gained over 20% from May 7, 2004 through May 12, 2005. It had only 19 trades, and gave 63.16% winners. The portfolio peaked at a gain of 39.62% on March 7, 2005 and lost nearly half of its gain since then. We ran exactly the same strategy with VectorVest Canada and got a gain of over 30% with 31 trades and 45% winners. The VectorVest Composite is up 11.01% over the same time period.
This bottom fishing technique clearly finds good stocks at bargain prices. Some of them even became top stocks ranked by VST-Vector. Two examples are HUM which received a "B" rating at $17.31 per share and closed yesterday at $35.89, and SNHY, which got a "B" at $13.00 and hit $34.05 at its peak. Even so, I don't recommend running the strategy as described above...it's too much work and you'd miss too many good trades. If I were to start using this strategy right now, I would use a cherry picking technique as follows:
1. Use the UniSearch tool to find all the stocks hitting 26-week lows as of April 1, 2005 and put the top 25 stocks ranked by RV+RS Desc into a WatchList.
2. If any stocks in the WatchList got a "B" rating as of April 4, 5, 6, 7, or 8, consider buying it.
3. If no stock got a "B" rating, look at the graphs of the top 20 stocks ranked by VST-Vector each day to spot any up and comers.
4. On Friday, April 8th, run the search again to add new candidates to the WatchList.
5. Repeat the above steps until Thursday, April 21, when Motorola got a "B" recommendation. Look at the graph. If you like the stock's price action and the market is going up, buy the stock. Continue to consider additional stocks for purchase as they arise.
6. Since I don't like to use a WatchList that's too old, start a new WatchList on Friday, May 6th. Now you must look at both the April and May WatchLists for new "B" rated stocks. This is worth doing because you won't fool yourself with old "B" rated stocks. Keep at least three monthly WatchLists active at all times. It is also worth saving the older WatchLists for back-testing purposes.
7. Continue the above process as long as you wish.
So far we've only scratched the surface on ways to go bottom fishing. But look at what you're getting. Great Stocks at Bargain Prices.