Screening for the Best Stocks

It’s time again to take a look at stocks that are appearing most often in Investor Business Daily’s Screen of the Day. Stocks that appear most often are exhibiting superior fundamentals, technical strength and are often a part of a leading industry. To get the complete list you’ll need to be a subscriber of the newspaper and pick up an Excel add in over at www.excelsheets.com. The list below is for stocks appearing the most in the last 10 Screens of the Day. Next to each stock you’ll see the ranking from the Breakout Tracker which is part of the premium service at SelfInvestors.com. Stocks that are near a breakout get added to the watchlist and are ranked according to fundamental and technical analysis. A score of 20 is the best (however, no stock has ever received a score higher than 18 because no stock is perfect!). You may see a sample of this watchlist here. Appearing 8 times: Commercial Capital Bancorp (CCBI): Ranked 18, Broke out from base on 8/18/04 Notes: outstanding growth last couple years, accelerating recently – margins & ROE are excellent & rising – institutions rapidly initiating new positions – management owns large portion (35%) Appearing 7 times: Penn National Gaming (PENN): Ranked 16, trending up for several months, overextended Notes: very good earnings/sales growth for several years – margins & ROE good for its industry – very high debt (317%) Appearing 5 times: Aeropostale (ARO): Ranked 17, Broke out on May 24th and is up 25% since then Notes: outstanding sales/earnings growth (inconsistent in earnings) – excellent ROE, OK margins – institutions accumulating – top group Flir Systems (FLIR): Ranked 17, broke out April 12th and is up 47% since then Notes: sales/earnings growth accelerating rapidly last 4 quarters – very good margins & ROE – high debt (117%), but paying off quickly Headwaters Inc. (HDWR): Ranked 16, broke out today (August 23rd) Notes: growth has slowed a bit, but still strong – very good margins & ROE – paying off debt quickly Southwestern Energy (SWN): Ranked 16, Broke out on June 16th and is up 31% since Notes: very good earnings/sales last several quarters – very good margins & ROE – top group – institutions buying Wilshire State Bank (WSBK): Ranked 16, Broke out on August 16th and is up 10% since Notes: very good, consistent earnings/sales – margins & ROE are above industry averages – management owns large portion (51%) – # of institutions initiating a position is surging As always, do your own research before making any purchases. Most of the stocks listed above have risen past a proper buy point. Good Luck!

“Stock to Watch” (Taser Int’l)

It isn’t often that I post here about specific stocks, but I will try and do more of that since looking at the movements in specific stocks provides good lessons in buying and selling. Taser International (TASR), a former high flyer that has since come back to earth has carved out a very interesting chart in the last few months and provides a good look at the importance of buying VS. selling volume. The one thing that stands out to me about this chart is the dramatic difference in buying vs. selling volume. It is absolutely clear that the majority of those willing to sell have sold as the number of sellers continues to decline. Those holding the stock now are strong holders, most likely holding for the long term. Once the market turns, this is a stock that could take off once again. You can see what happened in June as sellers gave way to buyers. I realize the CANSLIM method doesn’t recommend buying a stock near the bottom, but there are times when it can be extremely profitable. What should you look for in these situations? 1. Most importantly you want to see a clear trend of decreasing selling volume. 2. You also want to see the stock hold up at a major support level (more than one is preferable – trend line + moving average). When you see a stock clearly being supported at a certain level, a drop below would indicate that the risk of further selling increases dramatically. It is your clue to get out with a very small loss. That being said, should you buy as the stock is settling in at support? If you can watch the market during the day, then no. Wait until you begin to see the shift to buying with volume. This can happen very quickly, so its best to create alerts at various price points and then check a 1 or 5 minute chart for a surge in buying. Of course many aren’t able to sit and watch a stock during the day. In that case, it may be best to buy as close to support as possible and add a stop loss a few percent below major support. (** In the case of TASR, you see the support of the 200DMA as well as previous support in the 24-26 range.) 3. Try and anticipate how much time the stock will continue basing. Do this by looking at the shape of the chart and assume it may form a near symmetrical base. ** TASR looks to be forming a double bottom base. If a well formed double bottom base is forming, it will need to spend more time basing and possibly undercut the low of the first bottom at 23.76. 4. All other CANSLIM criteria apply. – Must be a leading stock (strong earnings/sales, profit margins, ROE) – Stock a part of a leading industry – Need healthy market Taser International meets all the criteria, now we just need a health market! As always do your own research before making any buy and sell decisions.

Characteristics of a Well Formed Base

**A stock that sinks less severely during a market correction is outperforming its peers and is a sign of strength. It may be one of the first out of the gate as the market begins to rally.

**An upward price reversal at the bottom of the base with heavy volume indicating major support by institutions (this process may happen over the course of a few days and can be seen in a weekly chart).

**A long base, giving it a greater chance of a sustained breakout

**Volume dry up (decreasing selling volume) at the bottom of the base and in the handle

**Low volatility in the base and handle. An occasional shakeout is fine, but you want to see at least a few weeks of tight, quiet price action indicating a lack of speculators and a load of steady long term shareholders. A stock with a wide and loose base indicates that is in the public eye too much and calls attention to itself. Remember that stocks tend to shoot up to new highs when most people aren’t paying attention.

**A high volume gap up on the right side

**A handle that slopes downward (5-15%) with declining volume and tight price ranges. This handle should form in the upper half of the base (applicable to cup and double bottom bases).

**Volume on the breakout day at least 50% (I like a volume surge of at least 100%) higher than the average and trading volume for that week higher than the previous week. (NOTE: Average volume on the breakout may be OK as long as the volume on days following the breakout begins to increase as institutions begin to build their positions in the stock.

Calculating % Change in Volume at the Breakout
There are 6.5 hours in a trading day. If a stock trades an average of 650,000 shares per day, divide this number by 6.5 to get the hourly average of shares traded. This particular stock trades on average, 100,000 shares an hour. The next day you notice it passes its pivot point at 8:30am and the volume is 350,000. Do you buy? Yes. At 8:30am, you are two hours into the trading day and the average at this time is 200,000 shares. If the volume at the breakout is 350,000 shares, that’s 75% greater than the average. It’s a sign that institutions are starting to accumulate the stock.

**Relative strength is at a 52 week high at the breakout

**Confirmation after the breakout. You should see a few high volume advances within a week or two of the breakout to confirm that institutions are building positions in the stock.

Gauging the Herd Mentality

Gauging the feelings of investors about the market is also important in determining the health of the market. The reason for this is fairly simple. If the majority of investors are bullish, there are few buyers left to power the market higher. There is only one place for the market to go… down, as the sellers return. If the majority is bearish, there are few sellers left to send the market down further. Bargain hunters begin to smell an opportunity. As more and more money builds on the sidelines, a positive shift in perceptions will usher in a flood of cash and lead to a new bull market.

In any sustained bull market, it’s necessary to have people concerned about the economy, interest rates or stock valuations. These people sitting on the sidelines and/or shorting stocks provide a lot of capital down the road when they are finally convinced that the bull market is for real. When they do, it’s at this time that you may have the makings of a climax top, tempting the pros to sell. You should be selling too.

The following indicators help to gauge the feelings of investors about the market (however, keep in mind that these indicators are of secondary importance). The price/volume action of the market, the action of leading stocks and interest rates are of primary importance.

Put/Call Ratio
When investors buy calls they are betting that the market will move higher. If they buy puts, they are betting that the market will move lower. If the Put-to-Call Ratio is greater than 1, more investors are betting the market will head lower. Since the majority is usually wrong, a spike up in the ratio may signal a market bottom.

Advisory Newsletters
The newsletters are generally bearish at the bottom and bullish at the top… the majority is usually wrong!

Short-Interest Ratio
Measures the total number of shares being shorted vs. the NYSE’s average daily volume. A value of 3 indicates 3 days of short interest… the larger the number, the more shares are being shorted as investors become bearish. A few spikes in the short interest during a bear market could indicate a bull is just around the corner. The crowd is usually wrong!

Public/NYSE Specialist Short Sales
Another short indicator measuring the ratio of public selling short to NYSE Specialists selling short. A spike in this ratio may indicate the bottom of the market… once again, the crowd is usually wrong!

Where Do We Go From Here?

Obviously, July has been ugly for the market, especially for the Nasdaq. Fear is building as negative events/outlooks continue to get priced in. But I don’t think we’ve seen the end of the selling just yet. Bottoms usually occur at major reversals (or capitulation) where panic selling becomes overdone and buyers step in. This should occur with high volume. Let’s take a step back and look at the long term chart of the Nasdaq to get an idea of where this capitulation may occur. First of all where would panic selling most likely take place? The obvious choice is when/if the Nasdaq takes out the low of this most recent correction at 1865. Where might buyers step in to put in a bottom? Again, the obvious choice would be major support of the long term trend line in green at around 1850. This long term trend line is a very important support level that will be crucial in maintaining the long term uptrend experienced over the last year and a half. In my humble opinion, I believe this scenario plays out to some degree and the uptrend continues.

Filtering to Find the Best Stocks

Once again I list here a few stocks that have come up often in Investor Business Daily’s Screen of the Day. 

Stocks that have appeared in 6 out of the past 10 screens:
Engineered Support Systems (EASI): broke out June 18th, has since returned to pivot
eResearch (ERES): broke out on June 22nd, but has returned to within 5% of the pivot

Stocks that have appeared in 5 out of the past 10 screens:
SCP Pool (SCP): broke out on April 2nd, has advanced 30% since
Winnebago (WGO): forming handle of sloppy base

.. but it all looked so rosy

Looking out over the horizon last Wednesday, it would have been impossible to see the cliff right in front of you. That’s because the sun was a shinin’ right in your eyes. It all looked rosy just days ago as ingredients for a nice little rally were thrown into the pot. But the recipe was ruined with the addition of earnings warnings, a surprisingly lackluster jobs report, terror warnings and the addition of corporate killer John Edwards to the Kerry ticket.

Nothing is ever certain in the market. Technical analysis using price and volume data of the major indices provides clues and a general probability as to future direction, but it is never absolute. Generally speaking, breaking through resistance and finding support are bullish signals. On the opposite side, retreating from resistance and plummeting below support are bearish signals. More often than not these signals work. When they don’t it’s critical that in order to protect your capital you act quickly and decisively.

Looking at the current state of the market, the Nasdaq is in trouble and will most likely test previous lows (setting the stage for the rare triple bottom?). Yesterday marked the 3rd day of distribution in just a weeks time. That is enough to derail any rally. The DOW and S&P still have the support of their 200 day moving averages, which is critical for the market. I’ll be watching these levels closely. CANSLIM leading stocks are not sustaining breakouts and in many cases completely breaking down (See ESCA, FILE, SNIC, BRCM, HIBB, HLEX.. and on and on). In fact leading stocks have lagged the general market for five days in a row. OUCH!!

Amidst all the doom and gloom, there are bright spots in the market. Opportunities can be found in Oil/Gas & the metal markets (Gold, Silver & Copper). However, you may want to be careful by purchasing half positions and setting tighter stops. Good luck.. it’s a jungle out there!

Volume Questions: How to Determine If Breakout Volume is Sufficient & Sell Volume

Question:

On a breakout during the day, how do you determine if the volume is sufficient? Do you just extrapolate the breakout volume from the time of the breakout and compare it to the 50 dma of the stock’s volume? WOM likes to see a 50% volume increase on breakout. Do you use a minimum percent volume over the average? 

Another volume question. On a pull-back from a breakout, I assume you want the volume to decrease. What is your take on a pullback with an increasing volume? Again, is there a rule-of-thumb for determining an optimal volume decrease for buying in at a pullback? 

My Response:

For real time volume levels, you can compare volume to the average for any time during the day.. i discuss this in the tutorial section on buying.  Take the 50 day average and divide by 6.5 (hrs in trading day).  That gives you the hourly average volume which is also listed in the breakouts watchlist.  If the stock breaks out at 8:30AM take the hourly average and Multiply by two to get the average at that point in the trading day.  Compare this number to the trading volume of the stock.  On a delayed basis the percentage change from the average volume is published every 15 min. for each stock in the Breakout Tracker.
 
Regarding selling volume on an intraday basis you can use the method above to see if volume is below average at that point in the trading day.  To see the trend over several days or weeks, just pull up a chart (stockcharts.com is great) and look at the red volume bars of the stock.  Are they getting shorter as the stock declines?  You won’t always see a good decrease in volume.. what’s important is that selling volume isn’t surging.  On pullbacks, watching to see if it finds support at key levels is often just as, if not more important than the volume level..  Of course nothing is 100% certain in the stock market.  You use this information to gauge probability of success.  The key to becoming a good chart reader is to just start looking at the charts.  After you’ve looked at thousands of charts, you will notice certain trends and patterns emerge. 

Overhead Supply

Question:

When you buy a breakout such as you did with EASI, what are your concerns about overhead supply? I noticed this stock will be hitting the December high of 61.93 fairly soon. How will you handle this?

My Response:

Overhead supply is of some concern, but not much in this case.  The December high is the all time high, which may offer some resistance in the form of another handle like formation (pull back on lighter volume).  Much more important of a resistance level is 60.  Multiples of 5 and 10 are often sources of resistance for higher priced stocks.  For example, investors rarely say sell my position when it hits 61.93.  They will set a sell or tell the broker to sell at 60.  This is exactly what we are seeing now.  Notice I chose a breakout point for this stock quite low in the right side?  Sometimes it’s a good idea to purchase lower in the right side, because your purchase point is much closer to major support which allows you to stay in the stock longer w/out getting stopped out of the position.  How do you know which stocks to purchase lower in the in the right side?  Depends on volume, price action and instinct (based on viewing many charts)… this is where experience comes into play

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