About StockTwits 50
StockTwits 50 is a weekly list representing the stocks with strong fundamental and technical characteristics. Each stock is ranked based on its ST score.
The methodology for the ST score is derived from historical study of the best performing stocks over three, six and twelve month horizons. We distinguish 4 major catalysts that have been in the foundation of most of the biggest price moves and incorporate them in a proprietary system:
• Earnings growth is the major fueling component behind price growth at the beginning of most big trends. Market history reveals that institutions tend to build positions in stocks with exceptional recent earnings acceleration. We are looking for catalysts that have the potential to start a process of major price appreciation. EPS growth is sustainable when it is derived from organic (sales) growth.
• Positive surprises attract attention and new capital. They have the potential to alter market participants’ perceptions of value and to start a major process of re-pricing. The best performing stocks in any given year are often the ones that surprise the most.
• Momentum. Numerous historical studies have revealed that stocks that outperformed during the past 6-12 months tend to continue to outperform over the next 6-12 months. RS is an important criteria because it directly reflects the market reaction to the catalysts that are supposed to move stock prices. It doesn’t matter how fast one company is growing or by what margin it is beating analysts’ consensus estimates if the market doesn’t react favorably to these announcements.
• Setup. The ST50 is a very dynamic list that is rebalanced weekly. The ST score takes into account not only strong fundamentals and relative strength, but also recent price action and the existence of high reward/low risk setups. Hence the motto of the ST50 – the best stocks with the best setups.
- Consecutive weeks on the list measures the number of weeks a stock has spent on the list after it was last added. When a stock comes back on the list for a second time, the count starts from 0 (marked with N for new);
- Performance since inception measures the return since a stock was last added to the list. If a stock is dropped and then comes back, its return starts from 0%. There are many stocks that are on the list for a second or a third time;
- Dropping a stock from the list is not necessarily a recommendation for a sell. It just signals that there are other stocks with higher scores, potentially representing better risk to reward for the time being.
HOW TO USE STOCKTWITS 50
First of all, StockTwits 50 is an algorithm, whose primary function is proper equity selection. Simply stated, its purpose is to save time by reducing the investment universe you have to deal with. It will help you to focus on the market leaders and with that – substantially improve the odds of success.
Keep in mind that equity selection is a necessary, but insufficient condition for consistent market success. Disciplined risk management is needed for the latter. Patiently wait for the highest probability setups in the strongest stocks to develop before you commit any capital. Do not hesitate to cut losses quickly and exit a position if it goes against you. There is no place for sentiment. Stocks don’t know that you own them and don’t care. If you don’t follow your own plan, you will become part of someone else’s plan and you don’t want that. Hope is not a strategy.
THE DIFFERENCE BETWEEN SWING AND POSITION SETUPS
In order to fully benefit from StockTwits 50, you need to clearly distinguish between swing and position setups.
A setup is a combination of factors that need to align in time and space in order to produce a buy or sell signal. Look at it as a checklist. I already stressed on numerous occasions that when it comes to swing setups, the two main equity selection factors are price and industry group momentum. Everything else is secondary. The purpose is to find quick 5 – 30% moves in 2 to 10 trading days.
To recap, when looking for swing setups, the two most important factors to consider are:
- recent price volume dynamics: most swing setups consist of an uptrend move, followed by consolidation in the upper range of that move. Traders have come up with different names for them: flags, wedges, triangles… Keep in mind that finding the so called flags and wedges is never a guarantee of success. It is not that easy. There is one more factor that needs to be taken into account: the industry group;
- which industry group is currently hot. Stocks tend to move in groups and being in the right technical setup in the right group could mean the difference between a 5% and a 20% move; the difference between a failed breakout and a breakout with continuation.
How are position setups different?
Their purpose is to enter and ride a trend for as long as possible and for the biggest gain possible. What are some of the most important factors that matter for the equity selection process of position trades? Price momentum, earnings and sales growth momentum, earnings surprise momentum and guidance are among the most important ones. All of them take a central place in the Stocktwits 50 algorithm.
The best way to show what a position setup is and how it could be managed is through example. Let’s take a look at $CMG
- Opening new position: One good entry point could be a 5%+ move to a new 6 month high on above the average 50-day volume. Better risk/reward entries typically take into account 3 month price growth. For example being under 30% signifies that the stock is not too extended.
In the case of $CMG, the stock made a 5.7% move to a new all-time high on September 1st 2010. The volume was more than 2 times the 50-day average. The 3-month return of $CMG before that move on September 1st, was 7%.
There are numerous other entry approaches: a 2% to 52-week high; a 2% move to new all-time high…
- When to add to a position: 3% bounces from the relevant moving average is a good risk/reward entry point. In the case of $CMG, the relevant MA since September 1st has been the 20sma.
- Partial Exit: Momentum stocks often go parabolic in the last 1/3 of their move; therefore it makes sense to take partial profits when they extend too far from their 50-day MA. For example $CMG was 25% above on Oct 22 and Nov 30th.
- Closing the whole position: when the stock closes below its relevant moving average or its50-day MA or if you are really long-term investor – the 100 day MA. Some people use a new 20-day low as an exit signal or some form of ATR (Average True Range).
Some Frequently Asked Questions:
What is the St50 selection criteria? Why $XYZ is not on the list?
There are various criteria that encapsulate the St50 score. RS, earnings and sales growth are only part of it.
There is a proprietary setup score, based on moving average ratio, distance from moving average, distance from 52-week high, etc.
Recent earnings surprise and market reaction to it also plays a big role.
Also, stocks that have been on the list for awhile, receive higher score than those that have not. One of the goals is to create a list of stocks that people could ride for as long as possible. This is why changes are rare. The algorithm is not perfect. It has missed some big winners and I am constantly refining it.
How can a stock gain a perfect score of 10?
For a stock to gain a perfect score of 10, it needs to be in the top 5% or 10% in each category: relative strength, distance from 52wk high, EPS growth, Sales growth, Moving average ratio, distance from major moving averages, earnings surprise score among others. A stock with a score of 9 might might offer much better risk/reward ratio than a stock with a score of 9.5.
Why there isn’t a short version of the St50?
Historically, some of the best short candidates have been momentum stocks when they break their uptrend. Many of the stocks that lose their place on the St50 list, become appetite short targets. This is not true for all stocks. Some manage to build a new base and come back strong. Keep in mind that equity selection is worthless without proper risk management and discipline to follow your own rules.
Where can I download the St50 list to an excel file?
Just click the link under the St50 table.
Where can I find older issues of the St50 list?
Go to the “Weekly Update” page and click older entries at the bottom until you find the weekly issue of interest