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"An Approach to Successful Stock Trading Combining Company   Fundamentals with Chart Technicals"
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On these pages I'll share the results of  proprietary screens that I'm constantly developing.  The ideal screen would meet the following criteria:

• generate 20 percent plus annual compounded rate of return;
• experience a max drawdown of 20 percent over both bullish and bearish periods;
• require minimal time management, i.e., perhaps weekly, biweekly or monthly adjustment.

Fundamentals Plus Pullback (06/27/11)

I recently ran a screen covering 9.9 years between 2001 and 2011 over periods of both strong and weak markets (even the extremely weak 2008).  The universe of stocks tested met these constraints:

• Zacks ranking =1 (highest earnings quality)
• Price-to-Sales ratio between 0.01 (good value) and 1.0
• 2 year PEG ratios between 0.01 and 1.25 (good value left in price)
• Price > $10
• Average 20 day volume >100,000

Over 516 weeks (starting in 08/01/01), from those stocks meeting the above constraints, one screen bought the worst 4 stocks in terms of price growth over the preceding week, while another bought the best 4.  The following chart shows how each performed utilizing a one week holding period and contrasts each one's results against the S&P's return over the same period.  While the Zacks #1 stocks performed well, buying the pullback was a far better strategy--yielding 5 times the return.  Note, very little escaped the 2008 market.  A rule that allowed one to trade only bullish markets, like the S&P must be above its 200-day moving average, would have kept one out of the deep drawdowns.

Pullback Versus Breakout for Fundamentally Sound Stocks (03/02/09)

This first one demonstrates the power of buying fundamentally sound stocks in pullback rather than breakout and confirms that it's hard to beat a stock with good fundamentals that's in pullback mode.  That's why I prefer to trade TSM's daily picks in pullback, even looking to enter buying a position in further pullback rather than buying at breakout prices, though I usually offer both entries for each daily TSM pick.

The following chart shows the performance of two investment strategies over the a 479 week period (9.2 years from 12/17/99 to 2/13/09) through both bullish and bearish times.  Note, the S&P 500's performance is included as a benchmark (and the y-axis is a log scale).  Each strategy begins with $10,000 and has its holdings updated each week.  Over this period, the S&P's equity curve dropped to $5,587 while the first strategy's equity curve rose to $2,096,347 and the second one dropped to $2,127.  So what are these two strategies that differ so drastically in their performance?

Though I'll keep most of the requirements proprietary, both begin by requiring their stock membership have a Zacks ranking of 1 or 2 (the strong buys and buys); both require their respective picks to be in the top 50 percent in terms of price performance over the past 24 weeks and then that group the top 50 percent price performance over the past 12 weeks.  The two differ in their fourth requirement:  the strong performing strategy picks the worst 10 performers over the past week (those in pullback), and the weaker performing strategy picks the top 10 performers over the past week (breakout and strong momentum risers). 

Each week 10 stocks were picked to meet the above criteria.  I think you'll agree, the huge performance difference is both counterintuitive and its magnitude surprising. 

The lessons to be learned from this screen:

• Buying fundamentally sound stocks in pullback is much preferred to buying fundamentally sound stocks in breakout (both in good and bad times); (my other studies have shown this is well)
• Historic price change is a good strategic element (though not clear here, for short-term trades it's far better than fundamental criteria, like price-to-sales, P/E or PEG ratios);
• Even a great stock-picking strategy won't perform well in a bearish market, as evidenced in the last year's flattening performance of the top curve (all three strategies have 50 percent maximum drawdown over this period);
• Clearly, one needs to add market performance criteria that minimizes risk in poor market conditions.

My next effort will be aimed at improving the drawdown characteristics.  It doesn't matter how great an annual return one gets, if it's susceptible to a 50 percent drawdown, it's not very tradable, i.e., it's tough to sleep at night and trade the strategy.