The Stock Exchange is all about trading. Each week we do the following:
- Discuss an important issue for traders;
- Highlight several technical trading methods, including current ideas;
- Feature advice from top traders and writers; and,
- Provide a few (minority) reactions from fundamental analysts.
We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!
Our previous Stock Exchange compared the difference between patience and complacency. They can appear the same, but the results can be very different. If you missed it, a glance at your news will show that the key points remain relevant.
This Week: Thousands of US Stocks, How Do You Pick Yours?
There are 3,811 stocks included in the S&P Total Market Index (including large-, mid-, small-, and micro-cap stocks). If you’re going to pick your favorites via detailed fundamental analysis, you’re going to need a lot of time.
Alternatively, you may choose to follow Eugene Fama’s efficient market hypothesis thereby owning the entire market (or perhaps some well-diversified, low-cost, passive ETFs like those offered by Jack Bogle’s Vanguard).
However, most active investors and traders have some disciplined process in place to help systematically sift through the universe thereby focusing their efforts on a much smaller subset. For example, the good folks over at Bespoke have a knack for sifting through the universe and presenting subsets of data in very interesting ways such as this table showing the most volatile stocks on earnings announcements (apparently, Netflix (NFLX) has been the most volatile large cap stock—they announce on October 16th).
Or another interesting table from Quantifiableedges shows what has happened historically when the S&P 500 (SPY) closes the month at its highest closing price of the month.
Further still, Charlie Bilello from Pension Partners offers an interesting Twitter feed chock-full of interesting data points and metrics, such as the recent highly unusual statistic that micro-cap stocks have only been down 3 times in the last 33 trading days, which he calls a “ramp for the ages.”
But as an investor and/or trader, how do you use this data to pick stocks? Our strategies use a variety of models that we have developed over the years to sift through the data and select highly attractive trading opportunities. We’ve named our models to help differentiate their styles as described in the following table.
Expert Picks from the Models
This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger. Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.
Holmes: This week I bought Molson Coors Brewing Co (TAP). Are you familiar with this company?
Blue Harbinger: Yes. They brew beer, Holmes. Why did you purchase the stock?
Holmes: Well the stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see it is below its 50-day and 200-day moving averages. And it has attractive upside over the next six weeks.
BH: I appreciate that you’re able to sift through an entire universe of stocks to quickly identify the ones that are most attractive to you. However, I would never buy a stock simply based on its recent price performance alone without first understanding the fundamental situation of the company. For example, here is a look at Chuck Carnevale’s FastGraphs data for TAP. You might want to consider it—it’s very highly regarded.
Holmes: Thanks for the information, but as you know, my style is based on dip buying and mean reversion. I’m also really into protecting assets, as well. My process drastically reduces vulnerability to drawdowns while attempting to stay invested for the longest possible period of time. I use a mix of advanced trading techniques (including profit taking, stops, and trailing stops) and technical analysis to help protect if the stock price starts to fall.
BH: That’s interesting, Holmes. However, I am a long-term investor. How long do you usually hold your positions?
Holmes: I usually hold my picks for about six weeks at a time. And I have a growing track record of very profitable success.
BH: I really do appreciate your track record of success, but our investment time frames are very different. Nonetheless, I can relate to your mean reversion and dip buying style. In fact, as you can see in the following table from my recent article titled “Tectonic Market Shift Coming” the entire Consumer Staples sector to which TAP belongs has performed relatively poorly over the last 1- and 3-months. Like you, I pay attention to mean reversion and dip-buying opportunities.
Holmes: Thanks for the data, but I’ll stick to my process. It’s been working quite well. Anyway, how about you, RoadRunner, what have you got this week?
RoadRunner: This week I like ABIOMED, Inc (ABMD). It’s a $7.7 billion market cap medical device company. It provides mechanical circulatory support devices to aid heart recovery for heart failure patients.
BH: You literally picked that stock two weeks ago, RoadRunner. Granted, you’ve had a lot of success with it considering the price has gone from $157.34 to $172.37, for a 9.6% gain in two weeks. However, you always say you like to pick stocks that are at the lower end of a rising channel. How can it be in the lower end of a rising channel after a nearly 10% gain?
RR: Have a look at the following chart. It’s at the lower end of a rising channel.
BH: You just redrew the lines to fit your narrative. Do you really expect me to believe you?
RR: I’m a computer model, not a human. My picks are based on objective data. After sifting through my entire universe of stocks, ABMD ranks highly again this week.
BH: Well, as we discussed two weeks ago, the CFO recently resigned, and the FDA approved their Impella heart pump after five years of research. Plus, analysts at SunTrust initiated coverage of ABMD last week with a BUY rating and a price target of $195. Also, here is a look at Chuck Carnevale’s FastGraphs data—again, you might want to consider it.
RR: Thanks for the info, but as you mentioned, I have my own data-driven process to sift through the universe in order to identify the opportunities that are most attractive to me. How about you Athena, what have you got this week?
Athena: I don’t have any trades this week, and I’m not going to force anything.
Felix: Same here. No trades stood out for me this week, and I’m not going to force anything either.
BH: Thanks Athena and Felix. How about you, Oscar, what have you got?
Oscar: I like the China Consumer ETF (CHIQ). Emerging markets have been performing very well this year, China in particular. Plus, the consumer segment of China is increasingly strong.
BH: You’ve also picked this ETF a couple times recently (once on September 1st and again on September 22nd), and you’ve been doing well. I know you are a momentum trader, so it makes sense you’d like this ETF.
Oscar: That is correct, despite the strong gains so far this year, and the increasing volume of fearful investors, I’ve been happy to hold shares as this ETF climbs higher.
BH: This particular ETF includes some individual stocks with amazing momentum. For example, it holds some JD.com (JD) (the online direct sales company) and Alibaba (BABA) (the online mobile commerce company). If you think US names like Amazon (AMZN) have been hot this year (+30.8%), it is boring compared to JD.com (+53.9%) and Alibaba (+103.6%).
Oscar: I invest in momentum, my holding period is only six weeks on average, I rotate to something better when I’m ready to exit, and I use stops to control risks. And CHIQ is attractive right now.
BH: I respect your approach and your track record of success, but have you considered the potential volatility? When these types of stocks fall, they can fall hard.
Oscar: That’s why I’m invested in a basket of stocks through this ETF instead of individual names. CHIQ holds 39 stocks. Plus, as I mentioned, I use stops to manage risk, and I’ll rotate to something else when it’s time to exit.
BH: Well – I like the idea of having some exposure to emerging markets, and this is certainly one way to do that.
There are literally thousands of stocks to choose from. And unless you have an army of researchers, it’s not realistic to do a deep dive analysis of every single one. Further, mistakes are often made depending on the varying levels of objectivity versus subjectivity of the individual researchers within your army. That’s why many traders use computer programs and screening models to objectively sift the universe and narrow their focus. We’ve developed our models to focus on the opportunities that are most attractive to us, and we’ve been having a lot of success with them. Nonetheless, we acknowledge there are a wide variety of attractive methodologies to sift the universe depending on your individual style and preference.
Background on the Stock Exchange
Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out http://dashofinsight.com/background-stock-exchange/ for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.
We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!