Discover Stocks with Trend Potential
For most individuals, owning a stock that doubles – or more – in a year or two is about as rare – and might produce the same thrill – as a golfer getting a hole-in-one. The important difference, of course, is that while both are ego boosters only one increases one’s wealth.
Rare as they might seem to the average individual investor, almost every year there are numerous stocks that more than double – in bearish markets as well as bullish markets.
The challenge for all investors is to discover those stocks before they double or triple. Virtually all of those gains are the result of trends. Stocks seldom double or more within a day, a week or a month.
In November, 2005, Cole Wilcox and Eric Crittenden published a research whitepaper entitled “Does Trend Following Work for Stocks?” That report is available at the following web site:
http://trendfollowing.com/whitepaper/Does_trendfollowing_work_on_stocks.pdf
The conclusion reached by the authors was “Yes” . . . trend following does work with stocks.
The universe of stocks used for this study was the Russell 3000 Index, which comprises the largest 3,000 U.S. companies. That universe represents approximately 98 percent of the investible U.S. equity market. The study covered 25 years – from 1983 to 2008.
One of the most remarkable findings of this study was that all of the gains of the Russell 3000 index during this time period were generated by just 25 percent of all stocks. Said differently, 75 percent of all stocks had a collective gain of zero percent.
Therefore, the obvious challenge for all investors is to discover the 25 percent of all stocks that will account for 100 percent of future market gains. Most of those stocks will almost certainly generate upward market trends.
In order to reduce the universe of 3,000 stocks the Crittenden/Wilcox report used a screen that identified stocks that closed the previous day at an all-time high.
We use 2-proprietary screens to identify stocks with trend potential.
· Stocks making new 52-week highs
· Stocks receiving extraordinary dollar volume investments from a selected group of institutional investment firms and hedge funds
We track the daily closing prices of stocks that have passed through these two screens for a period of 8-trading days to identify stocks with trend potential. Stocks that successfully pass through these daily screens are then moved to a weekly screen.
The weekly screen measures the percentage increase of the current week-end closing price versus the entry price when stocks migrated to the weekly screen.
Stocks that display sequential increases in the weekly screens become Trend Candidates.
The logic supporting our systematic screens is simple. Before any stock can double, triple or more in market value it must first gain 10%, then 20%, then 30%, etc.
Any stock that successfully passes through these screens must be in an upward trend by any reasonable person's definition.
A spread sheet containing stocks that have gained 10% or more during the current week are e-mailed to Subscribers at the end of each week. This spread sheet contains percentage gains over a six-week period and readily identifies stocks that might be trending higher.
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