Scantastic: Top Trenders in the S&P-500 Index
A detailed analysis of our scans for the strongest stocks
Overview
The economy created 943,00 jobs in July, and the June estimated gain was also revised upward.
The S&P-500 made a new high, but with only a relatively small gain.
Bonds retreated, with the 10-year rate increasing to 1.3% from an earlier low of 1.13%.
Small stocks rallied, but technology stocks stalled.
Momentum divergences have emerged as markets nudge to new highs, so we need more follow-through to mitigate pull-back risk.
Key Question
In my last post, I suggested that stock selection was a major challenge for the long-term investor. The biggest headache is that there are thousands of stocks to choose from. Is there an efficient way to pare down the list, a way to scan that will reject all but the ‘best’ stocks? We analyze our scanning technology using the stocks in the S&P-500 index and the NASDAQ exchange.
Performance Summary
After many weeks, we see a rebound in small-cap stocks (VTWO). The Dow 30 and the unweighted RSP are lagging the S&P-500. The large caps have made new highs, but the small caps are still below their all-time highs and are struggling around their 50-day simple moving average.
The unweighted S&P-500 index (RSP) equivalent is just breaking out over the top of its recent consolidation, but without much conviction, as you can see in the short-term oscillator in the lower panel, which is below 75 and its highs earlier in the consolidation. Hopefully, we can generate more momentum next week.
The sensitive bull/bear balance using leveraged and inverse ETFs is firmly bullish. However, you can see that trading has been quite choppy for the past several weeks, even as the market has drifted higher.
This week saw an important but subtle shift in the growth/value debate. The Vanguard capital-weighted ETFs for value, small and mid-cap stocks performed better than the large-cap ETFs (which have been on a strong surge for several weeks), possibly due to rising interest rates, which bounced this week after the strong employment data.
Taking their cue from rising rates, this week's strongest groups included financials and regional bank ETFs (KRE, KBE).
Key Question: Scantastic
I will begin with one of my tools which is part of a package for the MetaStock platform. Then, I will show two different scans below. Note that the data are from the market close on Thursday, Aug 05, 2021.
First, I will try to find stocks that had a big jump up in prices, perhaps in response to an earnings report. The system is called the Volatility Breakout System, and it is looking for a “large” jump in prices. For this scan using MetaStock, I used only the stocks on the NASDAQ exchange. Observe that of the 4320 stocks scanned, 99.5% of the stocks were rejected, thus saving you valuable research time and effort. The underlying idea for this model is that a stock jumps up in response to new information (such as an earnings report) and will continue to rally for several days as investors absorb the news. Naturally, this may not happen or could happen over many weeks. A good recent example is CROX (Crocs, Inc.), which is not in the list below but has been trending higher in a stair-step pattern after the previous quarterly report (~+40%) in late April.
Next, I focused on just the S&P-500 index and scanned for long-term uptrends. Notice that the scan rejected 96% of the 505 stocks in the index, saving you valuable research time. The concept underlying this system is like a freight train, it takes a lot of energy to get the train rolling at top speed, but it can keep going for quite some time once it gets going. In effect, the market has done the hard work of getting the trend going, and our job now is to hop on and hope the trend will continue.
The table above is measuring momentum in a particular way. However, there are many ways to measure momentum. Hence, I used my stock table from chandeindicators.com to measure the momentum of these stocks using completely different calculations. First, I compared these stocks to more than 1500 other stocks to gauge their composite 12-month returns. The table below shows the same stocks as above but sorted by the Relative Performance Meter. Notice that most of them had RPM values greater than 85, and many were well into the upper 90s, affirming that the market has done a lot of work for us in getting these trends rolling.
My table has four separate oscillators, two using relatively short-term data (< 2 weeks) and two using relatively long-term data (< 5 months). These time intervals are considerably shorter than those in table 1. Since the range is normalized from +100 (for the strongest) to -100 (for the weakest), I added the four different measurements of momentum into a single composite trend strength oscillator (varying from +400 to -400). In the table below, the strongest stocks had a composite trend strength greater than 350, and some had the maximum value of +400.
I chose to summarize my momentum statistics in a short table below. The stocks from the scan for MetaStock Long-term System scan all have very high RPM values and strong technical trend strength.
The main benefit of using technical analysis basis scans is that we have reduced the length of the focus list by approximately 95%, simplifying the process of researching stock selections. The other advantage is using hard, timely data (daily closing prices) versus accounting or industry aggregate data.
In summary, the MetaStock scan and the Stock Finder table agree on many momentum measures, and if nothing else, you can use the RPM data as a quick screen to find top trending stocks.
Wrap-up
If you like to do your own research, my posts should give you a good starting point, with context and suggestions. You can visit my website, chandeindicators.com, for more information and ideas. I hope you will stay tuned and help by subscribing and recommending it to your friends and colleagues.
Thank you for spending some time with me.
Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, information, and entertainment purposes only. It is not to be construed as investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.