StockTwits 50, June 11
- Posted by Ivanhoff
- on June 11th, 2011
The major indexes closed in negative territory for a sixth consecutive week, which sent the $SPY 7% below its 52-week high, reached on May 2nd this year. In the past decade, there were only three other occasions of 6 consecutive red weeks:
August – October 2002, 18.8% decline
May-June 2002, 13.9% decline
June-July of 2008, 14.7% decline
The good news is that in all occasions, there was a bounce after the 6-week decline. The bad news is that, there has always been another leg down after the bounce. The number of stocks above their 20-day MA is currently below 17%. We haven’t had such low close since the summer of last year (we had lower intraday measure in March this year). The market goes up and down, even during the steepest corrections. History rhymes and doesn’t repeat. Anything can happen and records can be broken, but there is a very high probability that we get a tradable bounce next week.
For the week, the equal weighted St50 momentum index declined by 3.63%. The S & P 500 lost 2.24%, the Nasdaq Composite fell 3.26%. Long-time members of the St50 – $RAX, $ATML, $PPO did not make the list this week. As I like to repeat on these pages, there is no place for sentiments. Discipline should always trump conviction. If they set up again, they will come back to the list. The correction will naturally leave the most resilient stocks on the list – the ones that will lead the next leg up, when it comes. It always does.
Stocks are moved by catalysts. Individual catalysts are constantly clashing with market catalysts. When they align, breakouts work and there is often continuation. During market corrections, the correlation between equities is very high and the general market weakness often overwhelms the individual catalysts. When institutions are searching for liquidity, everything goes. There is not a safe place.
No matter how high the correlation is, the concept of “market of stocks” always lives up to its name. There are always stocks that hold up better than the majority and they are the ones to pay attention to. The performance of recent and current St50 members was just another demonstration of the significance of relative strength as an equity selection approach. $ELN, $QCOR, $FOSL, $MCO were all moving sideways or making new 52-week highs as the general market deteriorated. They all finished the week well above the sea line.
The market constantly provides opportunities for the patient and for the people who have managed to overcome the strongest human bias after survivorship – the mean reversion bias. One of the biggest surprise of the week was $JVA, which went up 79%. Why it went up so much, so fast? Why it wasn’t in the St50? It had the minimum required liquidity in terms of dollar volume; it had the minimum price of $7. Why it didn’t appear in the top 50 last week?
Last week, $JVA was ranked 105th with a score of 8.1. It was in the 2nd decile in terms of relative strength; in the 2nd decile in terms of moving averages ratio; in the 5th in terms of earnings growth score, in the the 6th – in terms of sales growth score. It did not have any surprise score as it wasn’t covered by any analysts at the time. It was in the 9th decile – in terms of distance from its 52-week high – this is why it did not make the top 50 last week. By Wednesday, $JVA was trading at new all-time high, putting it in the 1st decile in terms of distance from 52-week high and raising its score to 9, which was enough to put it in top 20. On Thursday morning, the company reported tremendous acceleration in sales growth and given the tiny float of 2.78M shares and a market cap of about $40M, the stock went through the roof.
Contrary to the popular opinion, the St50 is derived from a mathematical formula. There is nothing fancy or sophisticated. It is a list of stocks with high relative momentum in terms of price, growth and expectations. It is just an equity selection tool, aiming to reduce the investment universe of stocks to research and improve the odds of success. Nothing more, nothing less.
There is nothing secret and special about the St50 or the IBD50. Everyone who understands market structure, has studied past winners and has the time, can create a similar list.
But if you don’t have the time or the knowledge or the tools, both St50 and IBD50 are a very good starting point for your preparation. Just remember. You can utilize someone else’s equity selection approach, but you can’t outsource risk management. And the latter is what makes all the difference.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus