Free Report for Opt-Ins · Nicolas Darvas famously built a $2million fortune in the 1940’s using...

HOT STOCKS: Why Some Stocks FLY and Others DIE

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HOT STOCKS:

WHY SOME STOCKS FLY AND OTHERS DIE

Dr.ThomasK.Carr(aka“Dr.Stoxx”)

©2017.BefriendtheTrendTrading,LLC.AllRightsReserved.


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AbouttheAuthorDr.ThomasK.Carr (aka"Dr.Stoxx")hasbeenactivelytradingthemarketssince

1996followingseveralyearsofstudyingtechnicalanalysis.Heholdsadoctorate

fromOxfordUniversity and for 16 yearswas a tenuredProfessor to liberal arts

students. Among other academic publications, Dr. Carr is the author of three

bestsellingbookson trading:TrendTrading fora Living (2007)– translated into

Chinese,KoreanandJapanese–Micro-TrendTradingforDailyIncome(2010),and

Market-Neutral Trading (2014). Hismarket insightshavebeenpublished in the

WallStreetJournal,InvestorsBusinessDaily,andUSNewsandWorldReport.

Dr.Stoxxhasdevelopedover30time-tested,proprietarytradingsystemsthathave

provedtobeprofitableinalltypesofmarketconditions.Thesesystemsarebased

on the essentials of technical analysis, but also incorporate Dr. Stoxx's unique

method of assessing the financial strength of companies, event-driven price

movements,andgeneralmarkettrenddynamics.Highlyskilledasachartreader,

Dr.Stoxxpossessesanuncannyabilitytotimehisentriesandexits,oftenjustprior

tomajormarketmoves.Heservesasaprivatetradingcoach,andhismarketletters

haveover 15,000 subscribers around theworld. Hepublishes 6 daily letters, 3

weeklyletters,and1monthlyletterthroughhis3websites:

• DrStoxx.com

• DrStoxxTrading.com

• IXTHYSLetter.com


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AboutDrStoxxTrading.com

DrStoxxTrading.com (an affiliate of DrStoxx.com) is a wholly owned subsidiary

service of Befriend the Trend Trading, LLC, founded by Dr. Thomas K Carr in

October, 2002. DrStoxxTrading.com serves the needs of online traders and

investorsthroughavarietyofadvisoryandtrader-trainingproducts.Thesiteoffers

twoweeklymarketletters(THEHOTSTOXXLETTERandTHEPENNYSTOXXLETTER),

premiumtradertrainingresources(manualsandwebinars),andaprivatecoaching

service.

OrderallofourTraderTrainingResources!

1. HowtoMake50%perMonthTradingStocks

2. TheAll-NewMeanReversionManual

3. HowtoReadPriceChartsLikeaPro–Level1(webinar)

4. HowtoReadPriceChartsLikeaPro–Level2(webinar)

5. TradeforaLiving:TheCompleteStocksandOptionsCourse

ImproveyourreturnswithoneofourStockPickLetters:

1. TheHOTSTOXXLetter:+159%annualreturn

2. ThePENNYSTOXXLetter:+183%annualreturn

Formoreinformationonanyofourstockpickadvisoryandtradertrainingservices,

includingtopicscoveredinthisTradingManual,emailus:[email protected].


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DISCLAIMER: This publication is for educational purposes only.

DrStoxxTrading.comiswhollyownedbyBefriendTheTrendTrading,LLC.,andis

not liable in any way for losses incurred through trading by readers of this

publication. Money can and will be lost when short-term trading. The kind of

tradingsuggested in thisTradingManual involves riskofcapital loss. Individuals

applying any of the trading strategiesmentioned in thisManual are solely and

completelyresponsibleforanyandeveryoutcome.

MOMENTUMTRADING:WhySomeStocksFlyandOthersDie©2017.Allrights

reserved. This manual, or parts thereof, may not be reproduced, transmitted,

shared, or distributed in any formwithout permission fromBefriend the Trend

Trading,LLC.Exceptionsaremadeforbriefexcerptsusedinpublishedreviews.


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WelcomefromDr.Stoxx!

Greetings, fellowtrader! Thankyou forbuying thisnewtradingmanual. Great

fortuneshavebeenmadeusingtheprinciplestaughtinthismanual.NicolasDarvas

famously built a $2million fortune in the 1940’s using a version of this system.

Investors Business Daily founder, William O’Neil, discovered that the best

performingstocksinanymarketwerethemomentumstocks.Imyselfusewhatis

taughtheretoregularlyfindgreatstocksfortrading.

Youwillgetthemostoutofthistradingmanualbyfollowingthefollowing4steps:

• readthemanualcarefully;

• takenotesinyourownwordstoconfirmthatyouunderstandthemanual;

• applywhatyouhavelearnedbyputtingon“virtual”or“paper”trades;

• then,andonlythen,tryputtingonafewreal-moneytrades.

ForthislaststepIstronglyrecommendyoustartsmallandgoslowly.Ifyouhave

anyquestionsaboutanythinginthismanual,oraboutanyoftheotherwaysweat

DrStoxxTrading.comhelpyoubecomeasuccessfultrader,pleasedonothesitate

toemailus:[email protected].


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INTRODUCTION

Momentumhasbeendefinedasaforcethatsustainsmovementandincreasesthe

strengthofthatmovement. Thistwo-foldnatureofmomentumisseeninwhat

tradersandinvestorscall“momentumstocks”.Amomentumstockisastockthat

istradinginasustainedtrend,eitherupordown,thestrengthofwhichisexpected

toincreaseoverthenearterm.

Momentumstocks(definedmorefullybelow)areamongthemostexcitingstocks

to trade. My own research, shared in this Manual, corroborates the general

observation among traders and investors that momentum stocks produce the

greatestamountofreturnoninvestmentintheleastamountoftime.

Justhowmuchreturnispossiblewiththerightmomentumsysteminhand?Let

meshowyou.Ihavebuiltanumberofdifferentmomentumscansovertheyears.

Somecarryhigherriskthanothers.Someworkbetterinbullmarkets,somebetter

inbearmarkets.ThestrongestperformeramongtheseisoneofthesystemsInow

useforoneofourweeklyadvisoryservices–“TheHOTSTOXXLetter”.Thissystem

istrulyamazing;itshowsextremeoutperformanceinallmarketconditions.Over

arecent5yearperiod(2009-2014),usingaweeklyrebalanceperiod(explained

below),andtradingonlythetop3stocksthatcomeuponthesystem’sscanning

tool,thissystemregisteredagainofover30,000%.Thatisenoughtoturnaninitial

stakeofonly$10,000intoover$3Million!


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5-yeargainsofCarr’sMomentumSystem(weeklyrebalance)

startingwithonly$10,000

Toputthatreturnindollarperspective,let’ssaythatatthebeginningofthis5-year

period (2009) you had $20,000 to invest in the market. You put half of that,

$10,000,intoarelativesafe,large-capindexfund,andtheotherhalfintothetop3

stocks of Dr. Stoxx’s Momentum Trading System, as listed in The HOT STOXX

LETTER.Fortunatelyforyou,afterthemarketsbottomedoutinMarch,2009,the

S&P500wentonastrongbullish run fromthatpoint. Over thenext5years it

gainedover170%.Thisputsyouroriginal$10,000atjustover$27,000today.That

prettygoodbyanyone’sstandards!Butwhatthenhappenedtotheother$10,000

invested with Dr. Stoxx? At the rate of return shown in our backtest, before

commissionsandtaxes,youroriginalinvestmentisnowworth,justfiveyearslater,


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$3,091,235!Whenyouaddthattowhatyouearnedinyourindexfund,youwould

nowhaveatotalinvestmentportfolioofover$3,118,000beforetaxesandfees.

Thatisthepoweroftradingmomentumstocks.Itcanturnevenasmallamountof

tradingcapitalintosomethingsubstantial,anamountofmoneythatcanmakea

realdifferencetoyourstandardofliving.WehavesubscriberstoTHEHOTSTOXX

LETTERwhobegantradingwithonly$3,000,puttingonlyabout$1,000intoeach

ofthe3positions,andwithcompoundedgainsovertimetheyarenowwellinto

the5-figuresinaccountsize.

Anotherofthegreatadvantagestotradingmomentumstocksisthataslongasyou

rebalanceyourportfolioregularly,andaslongasyourmomentumsystemgetsyou

intoonlythosestocksthatareshowingstrongupwardpricestrength,youstanda

good chance of profiting even when the market takes a downturn. Forbes

magazinestatesthat,“Momentumstrategiescanhelpinvestorsbeatthemarket

and avoid market crashes (Oct. 16, 2012).” This is to say that, when handled

properly,momentumstockscanhelpyougeneratemarket-beatingprofitsinrising

bullmarketsandprotectyourprofitsmoresecurelyinvolatilemarkets.

Momentum stocks are traditionally defined by their sustained and increasing

movementinprice,eitherupordown.Momentumstockstrategies,inturn,are

thosestocktradingstrategiesthatscantheuniverseofstocksforthosemakingthe

strongestgains(orlosses)intheleastamountoftime.Theyrecommendbuying

thestrongeststocksinanygivenmarketandrotatingyourpositionsonaregular

basis.


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Whiletradingmomentumstockscanbeoneofthemostrewardingapproachesto

the stockmarket, the waymost people do it is is a recipe for disaster! Most

momentumstrategiesfail!Yes,theycanhaveincrediblyprofitableseasons.There

arewindowsofopportunityfortheprice-chaserswheneveryoneisbuyingshares

inthenamesatthetopoftherelativestrengthlists.Butthoseare“specialcase”

markets;exceptionstotherule;outliers.

Here is the key to this problem: price momentum that is not sustained by

underlyingfinancialstrengthinthecompanyitselfisatargetforshortsellers.This

makesweakstocks thatareoverboughtonpricemomentumveryvulnerable to

collapse. To put this differently: any momentum strategy that relies on price

movementalone isdoomed toeventual failure. When it comes tomomentum

stocks,pricemomentumaloneisnotenough!You’llseewhatImeanshortly.

Idefinemomentumstocksdifferently.Amomentumstockinmybookisonewhich

notonlyshowsasustainedandincreasingtrendinprice,italsoshowsstrongtrends

incertainkeyfundamentalindicators.Forpricemomentumtocontinue,evenin

thenear-term,thereneedstobevalueintheunderlyingcompany,eitherrealor

perceived.Otherwisetheuptrendbecomesvulnerabletoshortsellersandprofit

takers. Thusanytradingsystemthataimstoprofitconsistentlyandsustainably

frommomentumstocksneedstogobeyondpricemovementalone.Itneedstobe

ascanbuiltonbothtechnicalandfundamentalparameters.

InthisTradingManual,Iamgoingtosharewithyoutheresultsofmy5-yearstudy

ofmomentumstocks.Iwilloutlinethekeyessentialsthatneedtogointoanyscan


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youbuildasyousearchforthebestmomentumtrades.Wewillseetogetherwhat

doesanddoesnotwork.Onthebasisofthisstudy,wewillthendetailseveralvery

specificrulesthatwillhelpyoubuildyourownmomentumstockscans.

PleasenotethatthisTradingManualservesasanintroductiontoournewweekly

stockadvisoryservice,“TheHOTSTOXXLETTER,”availablebysubscriptiononlyat

DrStoxxTrading.com.Atthesamesite,youwillalsofindourcompanionservice,

“ThePENNYSTOXXLETTER”whichhasanevenmorerobustperformancehistory,

though it is also more turbulent (as expected with penny stocks). We offer a

substantialdiscountifyoupurchasebothletterstogether.

TheHOTSTOXXLETTERrecommendsthe3bestmomentumstockpickseachweek.

TheserecommendationscomefromasetofscansthatIbuiltandtested,andwhich

Icurrentlyuseformyowntrading.BecauseTheHOTSTOXXLETTERisonlyavailable

bypaidsubscription,andbecauseIusethesestrategiestofindstocksforthefamily

fundImanage,IcannotfullydisclosetheexactparametersofthescansIuse.But

youwillbeabletotakewhat istaughthereandbuildforyourselfaveryrobust

systemscanthathighlightsthebestavailablemomentumsetups.


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PARTONE:RESOURCES

Thereareseveralresourcesyouwillneedtobuildthescansassuggestedinthis

TradingManual.Eachofthesetoolschargesafee.Ifyouapproachyourtradingas

a business, like I do, you can count these costs as part of your necessary

expenditures.Whenitcomestotrading,alittleinvestmentintherighttoolswill

goalongwaytowardbuildingyourprofitpotentialandearningpower.

ResearchTools

Beforewelookatscan-buildingtools,I’dlikefirsttogiveyousomerecommended

reading.WheneverIambuildinganewsystem,Iliketodobackgroundresearch

intotheindividualconceptsthatgointothesystem’sparameters.ThiswayIhave

greaterconfidencethatwhat Iamdoing isbuiltonmethodsandstrategiesthat

havebeentestedandprovedprofitablebymuchsmartermindsthanmine!

Tothisend,Icanrecommendtwogreatbookspublishedonsubjectsthatlieatthe

heartof themomentumsystem Iwill be teaching you in thisManual. It is not

necessary to have this background knowledge, but as someone who served in

highereducationforovertwentyyears,Ivaluethiskindofknowledge.Ialsoknow

asatradingcoachthatunderstandingwhyasystemworkscanreallyboostone’s

tradingconfidence.


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Ithusstronglyrecommendthefollowingtwobooks:

WilliamO’Neil,HowtoMakeMoneyinStocks (McGraw-Hill,various). This isa

classicandcomesinseveraleditionsandversions.TheoneIlikebestisthe2010

edition which is subtitled, “Complete Investing System”. While O’Neil’s famed

“CAN-SLIM” system is different fromwhat we teach here, his basic concept of

buyinggrowthstocksthatarealsooutperformingthegeneralmarketisrightatthe

heartofthemomentumconceptsIteachinthisManual.

MitchZacks,AheadoftheMarket(MartinoFineBooks,2011).MitchZacksisthe

son of Dr. Len Zacks, an MIT Ph.D. in mathematics whose doctoral research

uncoveredoneofthemostpowerfulfundamentaldriversofpricemomentum:the

changesintheconsensusofanalysts’expectationsregardingacompany’sfuture

earningsprospects.ZacksInvestmentResearch,anadvisoryfirmwhoseworkIrely

ondaily,isbuiltuponthiskeyinsight.AheadoftheMarketisanexcellentprimer

ontheconcept.Wewillbeincorporatingseveralvariantsofthisconceptintoour

momentumscans.

ScanningTools

ThemomentumscanswewillbebuildinginthisTradingManualincorporateboth

fundamental and technical parameters. There are very few scanning services

availabletodaythatareabletoincorporatebothtypesofparameters.Moststock

scanning tools offer either fundamental filters alone, or technical filters alone.

Whatweneedisonethatoffersboth.Therearesomework-aroundsthatcanbe


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usedtocompensate,butthemostrobustscanscanonlybebuiltwithsoftwarethat

offersbothfundamentalandtechnicalparameters.

ThethreescanningservicesIcanrecommendarethese:

www.finviz.com

Finviz.com–Thisisanexcellentservicethateverytradershouldbefamiliarwith.

It is free if you don’tmind delayed data. Otherwise, you can pay theminimal

monthlycharge,likeIdo,forreal-timedataandscanning,andadvancedtechnical

charting.

TheadvantagesofFinvizovertheothertwoservicesareitslowcost,anditsvery

user-friendlyscanningtool.Youcanalsobuildwatchlistsofstocksdirectlyfrom

yourscanswithjustacoupleclicksofthemouse.Butthesitehastwonearlyfatal

flaws: it lacks one of the fundamental filters we use to build our most robust

momentum scans, and it has no backtesting feature. Without the backtesting

feature,youwillneverreallybesurethatwhatyouarebuildingisprofitable.But

ifyouarenewtosystems-building,oraretradingonalimitedbudget,itisagreat

tooltouse.


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http://woas.zacks.com/zcom/researchwizard/

ResearchWizard–ResearchWizardisadownloadedsoftwarethatissoldthrough

ZacksInvestmentResearch.Itaccessesnightly“endofday”datatogiveyoufresh

listsofstocksforthenexttradingday.Thisuser-friendlytoolhasalltheparameters

weneedtobuildrobust,profitablemomentumscans.Forthosewholiketotinker

with parameters, the ResearchWizard offers the ability to custom create scan

filters.Moreover,ithasanexcellentbacktestingtoolthatcantestyoursystemon

over17yearsofdata,includingtheabilitytotesthardstops,trailingstops,short-

onlystrategies,andmultiplestrategycomparisons.ThisisthetoolthatIusedto

buildmymostprofitablemomentumsystems.Alltheperformancedatalistedin

thisManualwerecreatedusingResearchWizard.ResearchWizardisthetoolIuse

tofindtradesforournewservice,“TheHOTSTOXXLETTER”.

Thereisacatch,however.WhiletheRWisthebesttoolIamawareofforwhatwe

aredoinghere,itisalsothemostexpensive.Thenormalcostforayear’suseof

theResearchWizardis$1800,andthatiswithlimitedbacktestingdata.Ifyouwant

thefullpackage,youwillbepaying$3,000peryear.Forsome,$150to$250per

monthisadeal-breaker.Icertainlyunderstandthat.Forthefirstfewyearsofmy

tradingcareer,Itradedonatightbudget.Itriedtokeepmyoverheadcostslowso

thatIcouldpumpasmuchasIcouldofmyprofitsbackintomyaccount.Buthere

issomegoodnews:youcangetasubstantialdiscountifyoufollowthesesteps:call


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customer service at Zacks and ask for David Bright (orwhoever is in charge of

productsales),andlethimknowthatI(Dr.TomCarr,aka“DrStoxx”)recommended

theResearchWizardtoyou.Thenaskfor“thelowestpriceyouarewillingtooffer”.

Ifyouareassertiveandcounter-offer,youshouldbeabletoworkoutapricethat

bothyouandZackscanlivewith.Alternatively,Zacksdoesoffer“lifetime”access

ataone-timepayment–currentlyitis$5000--whichwouldsavesubstantiallyin

thelong-run.I’vebeenusingResearchWizardfor10yearsnowandconsideritan

indispensabletool.

http://www.aaii.com/stock-investor-pro

StockInvestorPro–Iconsiderthisproductaviablemiddlewaybetweenthecheap

but inadequate Finviz and theexpensivebut fully equippedResearchWizard. I

myselfuseitasaback-uptooltoResearchWizard.Ialsorelyonitexclusivelyfora

numberofthetradingsystemsIdescribeinmythirdbook,Market-NeutralTrading

(McGraw-Hill,2014).

Stock InvestorPro is adownloaded software that runsondataprovidedby the

AmericanAssociationof Individual Investors (www.aaii.com)whichsupports the

softwareandprovidescustomerservice.StockInvestorProhasalltheparameters

weneed,bothfundamentalandtechnical,tobuildrobustmomentumscans.While


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lessuser-friendly than theprevious twoproducts, there is a setofonline video

tutorials you can view to get acquainted with its functions. And the price is

certainly on themark. An annual subscription only costs $298, but it is nearly

alwaysonsalefor$198.Atwo-yearsubscriptionlistsat$598,butthattooisusually

onsaleatonly$299.Attheseprices,StockInvestorProiscertainlyagreatvalue.

TherearetwodrawbackstoStockInvestorPro.First,itonlyworksonweeklydata,

uploadedtothesiteeachweekend.Youareautomaticallypromptedtodownload

thedataateachuseifyouarenotusingthemostcurrentupload.Thesedownloads

cantakeseveralminutes,dependingonthespeedofyourinternetconnection.The

seconddrawbacktotheproductisthatithasnobacktestingfunctionality.

WiththatImind,Istronglysuggestdoingthefollowing,especiallyifyouwantto

buildyourownmomentumscans:first,hagglewithZacksforthecheapestannual

feeyoucangetfortheResearchWizard.UsetheWizardforayear,buildingand

testingyoursystemspertheguidelinesIsetoutbelowuntilyougetasupersetof

veryrobustmomentumscans.ThencanceltheWizard,subscribetoStockInvestor

Pro,and inthatsoftwarebuildyoursupersetofscans. Thewholeprocess,not

allowingfortaxdeductions,mightputyoubackabout$2000fortheyear,butthat

isasmallpricetopayforbeingabletofindandtradesomeofthemostopportune

setupsinthemarketonaweektoweekbasis.

On the other hand, let’s hope that you make so much money trading your

momentum stocks that you are able to afford both ResearchWizard and Stock

InvestorPro!


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PARTTWO:DEFINITIONS

Allstocksaretypicallydividedintotypes,dependingonthefundamentalsofthe

underlyingcompanyandhowtheirsharepricesareexpectedtobehaveincertain

typesofmarkets.Whilethefollowinglistisnotexhaustive,someofthemore

commonstocktypesarethese:

1. GROWTHSTOCKS.Agrowthstockisonethatrepresentsacompanyknown

foritsrapidgrowthofearningspershare(EPS),revenueandsalesper

share,fromquartertoquarterandyeartoyear.Growthstocksnormally

carryhigherP/Evalues,ornoP/Evalueatalliftheirearningsareinthered,

becausetheirpresentvalueliesnotinwhattheyareearningnow,butwhat

theyareexpectedtoearninthefuture.Growthstockstendtooutperform

themarketswhentheyarerising,andtendtounderperformwhenthe

marketsarefalling.

2. VALUESTOCKS.Avaluestockisonethatrepresentsacompanyknownfor

itsstrongnetincomepershare,strongsalespershare,lowpricetobook

value,andstrongfreecashflow.Valuestocksoftendispersedividendsand

carrylowP/Evalues,alongwithlowP/SalesandP/CashFlowvalues.

Generallyspeaking,valuestocksaredesirablenotsomuchfortheirfuture

earningspotentialasmuchasfortheirpastearningsrecordrelativetotheir

currentshareprice.Valuestockstendtofalloutoffavorduringstrongbull

markets,andcomebackintofavorduringweakandmorevolatilemarkets.


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3. MOMENTUMSTOCKS.Amomentumstockistraditionallydefinedonthe

solebasisofmovementinitsshareprice.Amomentumstockisonein

whichthepricepershareshowssuddenandthensustainedaccelerationin

theprevailingpricetrend,whetherupordown.Butthischangeinprice

movementisnormallyaproductofchangeineitherthecompany’s

underlyingfundamentals(e.g.,anexpectedriseorfallinearnings),orinthe

perceptionofthecompanyduetosomeextrinsicchange(e.g.,acultural

shiftwhichsuddenlymakesthecompany’sproduct“hot”).Momentum

stocksareeasilyrecognizedbytheirpricechartswhichtypicallydisplay

shorttermburstsofmovementoutofanareaofpriceconsolidation,along

withasustainedtrendinthatsamedirection.Momentumstocksare

expectedtocontinueinthesamedirectionoverthenear-term,regardless

ofmarketdirection.

Mosttradersandinvestorsfocusononeofthesethreecategories.Warren

Buffett,forexample,arguablythegreatestinvestorofalltime,isa“valuestock”

guru.Hismentor,BenjaminGraham,wasalsoa“valuestock”guru.Bothmen

builttremendousrecordsoflong-termsuccess.Othershaveturnedto“growth

stocks”tobuildtheirfortunes.MartinZweigandLouisNavellierareboth

examplesofsuccessfulfundmanagerswhofocusprimarilyonstronggrowth

stocks.Thosewhochase“momentumstocks”arealsorankedamongthewinners

ofWallStreet.Theyincludefundmanager,RichardDriehaus–the“founding

father”ofmomentuminvesting–whocurrentlyoverseesa$10Bfund;andthe

infamousJesseLivermore,consideredbyarecentbiographertobe“thegreatest


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traderwhoeverlived,”andwhosepersonalfortuneatonetimepeakedtonearly

$14Bintoday’smoney.Onhisowntradingstyle,Livermoresaidthisinhis

autobiography,ReminiscencesofaStockOperator:

“Whensomeofmystocktradingoperationsaregiven,youwillnoticeImademy

firsttrade…whentheforceofmovementwassostrongthatitsimplyhadtocarry

through.”

Livermore’sstatementcaptures,inessence,thegistofmomentumtrading:enter

onstrongpricemovementwiththeexpectationthatthatmovementwillcontinue

inthesamedirectionoverthenearterm.Soundsreasonabledoesn’tit?

Unfortunately,asastand-alonefilterforfindinggreattradingstocks,tradingon

strongpricemovementalonedoesNOTworkwell.Myresearchdemonstrates

thatsimplychasingpricemomentumisnotenoughtobuildawinningtrading

system.Myresearchalsoshowsthatbycombiningallthreeofourstocktypes

together,trulyamazingtradingsystemscanbecreated!

Itistothatresearchthatwenowturn.


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PARTTHREE:PRICEMOMENTUMALONEISNOTENOUGH

Ihavespentoverfiveyearsresearchingmomentumstocks.Idescribethis

processinchapter2ofMarket-NeutralTrading.Myquestinitiallywastofindthe

commontechnicalpre-settothe500mostexplosivepricemovementsseenin

individualstocksovertherecentpast.Myworkingassumptionwasthatthere

wasaquantifiablefootprintinthetechnicalchartsofstocksjustpriortotheir

priceexplosion.IfIcouldisolatethisfootprint,thencodeitintoatechnicalscan,I

figuredthatIwouldhavethebesttradingsystemontheplanet!

Infact,myworkdidindeeduncoveraverycommonpatterninnearlyhalfofthe

stocksthatrosesharplyinprice.Unfortunately,Ididnotlearnofthefatalflawin

mylogicuntilItradedthesystemwithrealmoney.Afteritfailedmiserably,it

becamepainfullyapparentthatjustbecausethereisacommonpatternthat

precedesmoststrongrisesinprice,itdoesnotfollowthateverystockdisplaying

thispatternwillriseinprice.Infact,mostdon’t.Theyeithergosideways,or

down,ordownsharply.

Thissamefatallogicisatworkinmostmomentumtradingsystems.The

reasonedassumptioninmostofthesesystemsisthatstocksshowingthe

strongestshort-termgainsareprecededbystrongaccelerationinshareprice.

Thisseemsreasonablebecausemoststocksthatgoupsharplyinpricebegan

theirascentwithmarkedaccelerationinprice.Unfortunately,thisreverse-


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engineeredthesisisinextricablypairedwithaforward-lookingtruth:moststocks

thatshowstrongpriceaccelerationshortlythereafterexperiencestrongpullbacks

inprice.Thusashort-termtradingsystembasedonnear-termaccelerationsin

pricemovementaloneisdoomedtodismalfailure.

Toprovethispoint,considerthefollowingdata.Imaginethatwebuiltasimple

momentumtradingsystembasedonpricemomentumalone.Thissimple

momentumsystemcouldbecodedintoascanthatisbasedpurelyonpercentage

pricechangeoverthreedifferenttimeframes.Itmightlooksomethinglikethis:

• Price>$10pershare

• AverageVolume>100,000

• 24-week%PriceIncrease=Top#30stocks



Thisscanteasesoutfromtheuniverseofover8000stocksthe3thatrisetothe

topofthelistbasedexclusivelyonupwardpricemomentum.Asmomentum

tradingsystemsgo,thisisexactlywhatyouwant:stocksthataremovingup

stronginpriceovermiddle-rangeandnear-termtimeframes.Now,let’sbacktest

thissystemoverthepast5years,usinga4-weekrebalancingperiodandseewhat

happens.Afterall,thisiswheretherubbermeetstheroad.Ifthesystemcannot

turnaprofitoverthepast,itverylikelywillnotdowellinthefuture.


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Togivemysystemeverypossibleadvantagetoshowitsstrength,Iselectedthe5

yearsthatbeganatthebottomoftherecentmarketcrash(March,2009)tothe

all-timemarkethighsthatwereprintedintheS&P500inMarch,2014.Thiswas

anespeciallybullishperiodforUSstocksastheyralliedoffthedeep-cutlows

causedby“TheGreatRecession”of2007–2008.TheS&P500rose165%during

thisperiodforacompoundedannualgrowthrateofover22%.Howdidour

“momentumstocksfare?Notverywell.Infact,theyactuallylostmoney!

Letmesaythatagain:duringwhatformanyyoungerinvestorsisthegreatestbull

markettheyhaveeverseen,oursimplemomentumstocksystemLOSTMONEY!

Thefollowinggraphicshowsthereturnsfortheabovescreenwhenusinga4-

weekrebalanceinterval:alossof-34%over5yearsvs.morethan+170%gainfor

theS&P500!Ooops!


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5yeartestofPrice-onlyMomentumScreen(Longs,4wkrebalance)

Thisclearlydemonstratesjusthow“weak”momentumstocks(representedbythe

greenline)canbe,eveninastronglybullishmarket,whenpricemomentumisthe

onlycriterionusedtofilterstocks

Normallyarobustscanwillimproveitsreturnsbyshiftingtoashorterrebalance

period. In thereturnsshownabove,wewereusinga4-weekrebalanceperiod.

Thismeansthatthescanwasrunevery4weeks,withanystocknotshowingupin

thescansoldandreplacedwithanewstockfromthescan.Perhapsbytightening

theperiodto2weeks,wecanimprovethereturns.Butwatchwhathappensnow

toourprice-onlymomentumscan:


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5yeartestofPrice-onlyMomentumScreen(Longs,2wkrebalance)

Insteadofimprovingourreturns,whichiswhatweexpectfromarobustscanwhen

wetightentherebalanceperiod,wemadethemworse!Wewentfromalossof

over -34% to a loss of -71.2%! Andwhatwasworse,we saw our systemmax

drawdown for theperiod rise to -91%,whichcomparesveryunfavorably to the

S&P500,whichhadamaxdrawdownoverthesamefiveyearsofonlyaround-15%.

Soclearly,scanningforpricemomentumaloneisNOTthewaytogo!

Andyet, it isanestablishedpieceoftradingwisdomthatbuyingstocksshowing

strongpricemomentum–whatsomecall“trendfollowing”or“trendtrading”–is

aprofitableendeavor.Whatarewemissing?Toanswerthat,weneedtodosome

moreresearch.


26

PARTFOUR:ADDINGFILTERS

Wecanconcludefromtheforegoingthatchasingafterpricemomentumaloneisa

recipefordisaster.Yes,the“turtletraders”andotherspeciesof“trendfollowers”

normally use systems based on price momentum alone. But the Turtles were

trading futures, not stocks. Stocks are a very different game; they abide by

differentrules.Ifanyonetellsyouheismakingmoneytradingmomentumstocks

basedonpricealone,he iseither lying,very lucky,orwillsoonsufferanervous

breakdownbecausehe’sgluedtothemonitorscalpingoutofeveryminorprice

twinge.

Yes,somecanmakeagoodlivingtradinginandoutofintradaymomentumswings.

But we are not talking about day-trading in this Manual. And you can have

incrediblyprofitablestreaksputtingonveryshort-termtradesinthebig“momo”

nameswhentheyareonthemove,andtheoverallmarketismovinginyourfavor.

Butthistradingmethodisnevermorethanaboutamonthawayfromgoingbust

onastringofbiglosses.

What we are after here is amomentum trading system supported by a set of

functionalscansthatcansustainsteady,long-termgainsoveraprofitable“trade

foraliving”kindofcareer.Wealsowanttoseethissystemminimizelossesand

evenpostdecentgainsduringweakmarketperiods.Togetthere,wewillneedto

learnhowto trademomentumstocksprofitably,because it is thebestgame in


27

town.Buttotrademomentumstocksprofitably,wewillneedtolearnthekeyto

turning a losing system (trading momentum stocks based on price movement

alone)intoawinningsystem.

Hereisthekey:ourscansneedtoaccountfortherealitythatpricemomentumwill

onlybesustainedbythetradingcommunity (bothprofessionalandretail),even

overthenear-term,whenthereisrealvalueintheunderlyingcompany.Realvalue

cancomeinvariousforms,butmyresearchhasnarrowedthatrangeconsiderably.

AswewillseeinthenextpartoftheManual,onceweaddfilterstoourscanthat

factorinfundamentalvalue–i.e.valueintermsofthecompany’ssales,earnings,

growthandvaluation--wewillseeourprofitsskyrocket.

AddingaValuationFilter

Ouraimnowistofindfiltersforourscanthathelpusidentifytherealqualitystocks

amongallthosestocksthatshowmomentuminprice,i.e.thestocksthatdespite

anupwardriseinpricestilltradeatreasonablevaluationsbasedonearningsand

sales.Sowhatthenhappensifweaddavaluationfiltertoourscan?Thereare

severaldifferenttypesofvaluationfilterswecoulduse,themostcommonofwhich

istheP/Eratio(PricetoEarnings).Butsincemanyofthebestmomentumstocks

donot(yet)showrealnetearnings,andthushavenoactualP/Eratio,thisisnota

goodchoice.


28

Another valuationmetric that is commonlyusedby value stock investors is the

PricetoBookValue(P/BV)ratio.IdiscussthisratioingreaterdetailinChapter7of

Market-NeutralTrading.ThereIdescribetheworkofthemainproponentofthis

ratio,Dr.JosephPiotroski,aneconomistattheUniversityofChicago.Piotroskihas

statistically demonstrated that low P/BV stocks tend to outperform high P/BV

stocks over time, and that they really outperform once other fundamental

parametersareconsidered.ButtheproblemwithusingP/BVasavaluationmetric

isthatthevastmajorityoflowP/BVstocksshowverylittlepricemomentum.This

iswhytheyhavesuchlowP/BVvalues:theirsharepricehasfallensignificantly.In

fact,mostcompaniesontheirwaytobankruptcywillspendsometimeinthelow

P/BVuniverseofstocks.

Ratherwhatweneedforourmomentumscanisavaluationratiothatincorporates

realgrowthinthecompany’sperceivedvalue.ThePEGratioworkswellforthis

(P/EdividedbyEPSGrowthRate)butsince,again,manystrongmomentumstocks

don’thaveaP/E,theydon’thaveaPEGeither.Soweneedtolookelsewhere.

Thevaluationmetric that suitsourpurposesperfectly is thePrice toSales ratio

(P/S).Thisratioislowwhenacompanyhasahighlevelofsalesrevenuenumber

ofoutstandingsharesrelativetoitspricepershare.Thissinglemetriccanbeused

tohighlightcompaniesthathaverealmomentumintheirearningspowerbecause

theyaregrowingtheirsalesrevenues(eveniftheyhavenonetincomeyet),and

are trading with relatively smaller share floats (hence are more responsive to

changesinsharedemand),andarenotyetoverlypricedrelativetothoserevenues


29

per share. It is this universe of stocks that tend to be the real winners in the

momentumgame.

Forourpurposeshere,alowP/Smetricisanythingunder1.0.Ifyouaretrading

largecapmomentumstocks,youcanlowerthisevenfurtherto,say,0.7. AP/S

ratioof1.0meansthat thecompany isselling$1of itsproductperoutstanding

shareforevery$1initsshareprice.AnotherwayofthinkingabouttheP/Sratiois

that,ifacompanyistradingatonly0.5xsalesrevenue,thenyouareonlypaying

$0.50forevery$1.00ofsales.That’sagreatvalue!That’sthekindofstockthat

tendstocarrymomentumhigherbecausethereissomuchperceivedvalueinthe

sharesatcurrentprices.

Solet’sseewhathappenswhenweaddaP/Svaluationfiltertoourscan.Now,

with this valuation requirementadded,weendupwithamomentumscan that

lookslikethis:



• PricetoSalesRatio<1.0





30

Justwatchnowwhathappenswhenwerunthisscanoverthesame5-yearperiod

weusedabove,usingthesame4-weekrebalanceperiod:

5yeartestofPrice+P/SMomentumScreen(Longs,4wkrebalance)

Eureka!Wejustturnedourlosingscanintoamoney-maker!Okay,a3.7%gain

over5yearsofastrongbullmarketisnothingtogetexcitedabout.Butitshows

usthatweareontherighttrack.Byrequiringthatourpassingcompaniesshow

strongsalesgrowthrelativetotheirshareprice,wehavesuccessfullyweeded

out,onaverage,allthelosingmomentumstocks.


31

Now,ifourscanisarobustone,weshouldseeevenmoreimprovementwhenwe

movefroma4-weekrebalanceperiodtoa2-weekperiod.Andthisisexactlywhat

wesee:

5yeartestofPrice+P/SMomentumScreen(Longs,4wkrebalance)

Notonlyhaveourreturnsimprovedfroma-70%losstoa62.6%gain(bothwith

weeklyrebalancing),butwehavealsoreducedthemaxdrawdownforthescanto

amoremanageable-44%!ThisscanstillunderperformscomparedtotheS&P

500,sowehavesomeworktodoyet,butitisahugestepintherightdirection.


32

AddingaFundamentalGrowthMetric,PartI

Wecanimproveourscanevenfurtherbyaddingafundamentalfilterthataimsat

averyparticularformofmomentum:anticipatedearningsgrowthoverthenext

quarterthatisstrongerthanwhathadbeenexpectedfromthecompany.Wecan

thanktheaforementionedDr.LenZacksforthisgemofanaddition.Hewrotehis

PhD.ThesisonMITonthetopic.ItwasDr.Zacks’amazingdiscovery,toourgreat

gain,thatthemostpowerfulpredictoroffuturepricegainisthe“earnings

estimaterevision”.Specifically,wheneverananalystorthecompanyitselfcomes

outandsays,“hey,wegotitwrong.Lookslikeourearningsarebetterthanwe

thought…sowearegoingtoreviseourestimatesbyraisingthem.”

Sowhatweneedtodoinordertoaddthismostreliableoffundamentalgrowth

metricstoourmomentumscanistoscanforcompaniesthathave,inrecent

weeks,raisedtheirearningsguidanceforthenextquarter.Itturnsoutthatthisis

moreeasilysaidthandone.It’snotlikethereisasitewhereallearnings

estimatesrevisionsareputonpublicdisplay.Buttherearewaysofaddingthis

filtertoourmomentumscansothatthescanitselfweedsoutonlythosestocks

thathavemadesucharevisionintherecentpast.

Let’slookatthisingreaterdetail.Mostcompaniesissueforward-looking

guidanceforthenextquarterandfiscalyearwhentheymakepublictheresultsof

thepreviousquarter’searnings.Somelargercompanies,andcompaniesin

certainindustrieslikeretail,alsogivemid-quarterupdates.Whencompanies


33

maketheseforward-lookingprojections,theyusuallygivearangeofpossibleEPS

valuestheyanticipatefallingwithinbythetimethenextquarter’sannouncement

ismade.Bycomparisontowhatthecompanysaidatthepreviousupdate,this

rangecanbemeasuredaseitherabove,beloworin-linewithprevious

statements.Normally,projectionsmadeabovethepreviousrangearewell

receivedbythemarketoverthenear-term,hencetheirpredictivepower.

Whatwearelookingforinthisfilterisatleasta5%increase–theminimum

amountneededtomaketherevisionmateriallyrelevant–intheprojectedrange

ofQ/QEPS.AsDr.Zacksdemonstrated,thisrevisionisincrediblypredictiveof

near-termfuturepricemovement.I’vewrittenatlengthaboutthisparticular

metricinChapter8ofMarket-NeutralTrading.I’vebuiltseveraltradingsystems

aroundthisfilterandwhencoupledwithsoundtechnicalanalysis,itworks

incrediblywell.Withthisfilteradded,ourmomentumsystemscannowlookslike

this:




• Q(1)/Q(0)EPSEstimateRevisioninpast4wks>5%





34

Thefollowingchartshowswhathappenstoourreturnswiththisfundamental

filteradded:

5yeartestofPrice+P/S+EPS5%Revision(Longs,4wkrebalance)

Herewiththesimpleadditionofonelinetoourscan,we’veaddedalmost50%of

returnoninvestmentoverthe5yearlook-backperiod.Notonlythat,butwe’ve

alsocutourmaxdrawdownto-37.7%,asignificantimprovement.Still,our

momentumisnotwherewewouldwantittobe.It’simproving,butwearestill

laggingtheS&P500.Thereismoreworktobedone.


35

Butwait,itgetsevenbetter.Ifa5%EPSrevisioncouldmakesuchan

improvement,whatwoulda10%EPSrevisionfilterdotothereturns?Think

aboutthatforamoment.Toreviseacompany’squarterlyearningsup10%from

previousestimatesissayingalot.It’seithersayingthat“ourformeraccounting

figureswerewayoffbecausewearestupid!”…ormorelikelyit’ssayingthat,“we

arehavinganincrediblequarter,muchbetterthanexpected,withourproduct

flyingofftheshelves,andouroverheadcostslowerthanweprojected,andwith

allthosenewcontractswedidn’tseecomingourway.”

Inanycase,a10%jumpinabullishdirectionissignificant,butwillitchangeour

tradingoutcome?Let’sputthatintoourscanandsee:

5yeartestofPrice+P/S+EPS10%Revision(Longs,4wkrebalance)


36

Okay,nowwearetalking!Withourvaluationfilteronboard(P/S<1.0)marking

relativestrengthinsales,andwithourEPSgrowthmomentumfilterrequiringour

passingcompaniestobesurprisingthemarketstotheupsideatleast10%with

theirearningspotential,andallofthattakingplacebeforeweevenbegintolook

atpricemomentum,wenowhaveamomentumscanthatoutperformstheS&P

500.Yeah!That’sthegoalofanytradingsystem,toproduce“alpha.”The318%

5-yearreturnisnearlytwicethereturnoftheS&P.That’salotofalpharight

there.Anditgetsbetter,forwehavealsoreducedourmaxdrawdownto-33.8%.

Butwecanstilldobetter.Watchnowwhathappenswhenwerequirethatour

undervaluedcompaniesraisingearningsestimatesarealsoshowingsignificant

growthinearningsoverthepastquarter.Thisiswherethingsgetreallyexciting!

AddingaFundamentalGrowthMetric,PartII

Wehavemeasuredsalesstrengthrelativetoprice.Wehavemeasuredsignificant

improvementinforwardanticipatedearningsgrowth.Whatweneedtoaddnow

–andthisisourfinaladd–istherequirementthatcompaniesdemonstrateactual

EPSgrowthoverthepastquarter.Itisthemostrecentquarterthatwilldrive

sharepriceoverthenearterm.Wealreadyhaveinplacetherequirementthat

companiescreatetheanticipationofagreatquartergoingforward.Nowwe

needtobolsterthatanticipationwiththeprovenabilityofthecompanyto

producerealEPSgrowth.Remember,manyofthecompaniesthatmakeit

throughourscandonothaveactualearnings.Butgrowthdoesn’tneedactual


37

earningstobemeasured.Areductioninearningslossalsocountsasgrowth.So

thisiswhywecanmeasureEPS(earningspershare)growthincompanieswithno

netearnings.AreducedlosscanalsobeaformofEPSgrowth.

Whatwearelookingforherewiththisfilterisa%changeinactualEPS(actual

EPSmeaningEPSfromthepastratherthanafutureprojection)onaquarterto

quarterbasisgreaterthan5%.Wecanraisethatnumber,butdoingsotypically

reducesourpoolofpossiblecompaniestotoofew,sowewillkeepitat5%.With

thislastfilterinplace,ourmomentumsystemscannowlookslikethis:




• %ChangeQ/QEPSEstimate>10%

• %ChangeActualEPSQ/Q>5%





38

Usingthesame5-yearlook-backperiodanda4-weekrebalanceperiod,our

returnsnowlookverystrong:

5yeartestofPrice+P/S+EPSRevision+EPSActual(Longs,4wkrebalance)

Fromthischartweseethatourreturnsnowhavepropelledupto540%,afull

3.25timesthatoftheS&P500,anda+220%improvementoverourprevious

scan.Moreover,ourmaxdrawdownisnowdowntoamuchmorereasonable

risk-level(consideringthepotentialreward)of-29.6%.Andwewouldseethose

returnsincreaseagainbydrillingdowntoaweeklyrebalanceperiod.


39

Asgoodasthisreturnis,itisnowherenearthe+30,000%returnIwasableto

attainwithmymomentumscanoverthesame5-yearlook-backperiod.Thisis

the“secretsauce”thatliesbehindthesuccessofTHEHOTSTOXXLETTER

(www.drstoxxtrading.com)anditisaformulaIteachinmyworkwithprivate

coachingclients.Ican’tthereforegiveitawayhere.Butinthescanwehavebuilt

inthismanual,youhavealltheprinciplesyouneedtobeginbuildinghugely

profitablemomentumstockscansonyourown.

Rememberthetwocrucialkeystoprofitingfromtradingmomentumstocksareas

follows:

1. Tradingmomentumstocksbasedonpricemomentumalonelosesmoney!

2. Tradingmomentumstocksprofitablyoverthelong-termrequiresfinding

momentumstocksthatalsohavestrongunderlyingvalueinthesalesand

earningsofthecompany.

Clearlythereisagreatdealofroomforimprovementonthescanwehavebuilt

here.Butitisagreatbasetoworkfrom.Thatisthefunofsystemsbuilding:you

changethisalittlehere,movethataroundthere,andseewhathappenstothe

returns.It’skindoflikefishing:youthrowoutthebaityouthinkwillworkbest,in

thespotyouthinkthefishare,butyouneverreallyknowwhatyouaregoing

catch(ifanythingatall!).


40

AFewWordsaboutPositionManagement

BeforeweturntothelastpartoftheManual,Ishouldaddthatnosystemscanis

everasgoodasthepositionmanagementmethodsyouuseonceyouareinthe

trade.Thosewhotradeanymomentumsystemneedtobeawareoftherisks

involved.Thereisnohigh-rewardtradingsystemthatdoesnottakeonoutsized

risk.Itishowthegameisplayed.Sometraderswillwanttousestop-lossesto

managetheirrisk.Myresearchshowsthatstop-losseswillreduceyourmax

drawdown,buttheyalsoreduceyouroverallperformance.Ifyoucanstomach

therisk,thebestrewardwillcomewithholdingontoallpositionsuntilthenext

rebalanceperiod,nomatterwhathappens.

Forthisreason,itisbesttobegintradingyourmomentumscantradesusinga

verysmallamountofmoney.Youareonlybuying3stocksperweek,soitis

perfectlyreasonabletobeginwithaslittleas$3,000,with$1,000goingintoeach

ofyourinitialpositions.Thisway,evena50%drawdown(-$1,500)isnotlikelyto

bringyoutobankruptcy,andifitdidyoushouldnotbetrading.

Thebestwaytofigureouthowmuchyoushouldstartwithistoaskyourself,how

muchmoneycanIaffordtolosewithoutinanywayinterferingwithmyabilityto

paybills,paymydebts,givegenerously,supportmyfamily,etc.Thendoublethat

amountandthatisyourstartingpoint.Thisgivesyoua50%cutoffpoint.Ifat

anytimeyouaredown50%,youstoptradingandclosetheaccount,andyouwait

untilyouarebettersuitedfinancially.Withthistradingsystem,a50%drawdown


41

isnotlikely(its17-yearaveragemaximumdrawdownisonly-27%),butitcanhit

thatandmoreduringamarketcrash.Soitisprudenttokeepthat50%cutoff

numberinmindasyoubegintrading.Knowthepointatwhichyouwillcallit

quitsifthingsgosouth.

InnearlyeverybacktestIranintheResearchWizard,thebestreturnswere

gainedbysimplylettingthesystemitselftakeyououtofthetrade.Withthis

method,ateachrebalanceperiod–whether4weeks,2weeks,or1week–you

simplyholdthestocksthatcontinuetoshowupinthelistofpassingcandidates,

andyousellthosethatdon’t.Thosethataresoldarereplacedwithnewstocks

onthelist.This“rebalancing”canbedonepriortotheopenonMondaymorning

byusing“OPG”or“marketonopen”orderstobuyandsell.

Lettingthesystemitselfstopyououtofatrademakesallkindsofsense.These

days,highfrequencytradersandmarketmakerscanpushstockpricesaround

quiteeasilybysimplypumpingupthevolumeoveraperiodofmarket

inefficiency.Inthiswaytheycanrunthepricethroughyourstop-loss,then

havingtakenawayyoursharesatalowprice,ramthestockpricebackupagain

beforesellingyoursharestosomeoneelseatahigherprice.Thisiswhyweare

seeinganincreaseinintradaypricemovementsanddaytodayvolumelevels.

Toavoidthismischief,wecanletthesystemtelluswhentoexitourtrades

insteadofastoploss.Withourmomentumsystemasoutlinedabove,whena


42

stockfallsoffthelistittypicallymeansthateitherthestockhasralliedabove

reasonablevaluationlevels,orithasnotkeptupinpricemomentumandthushas

droppedoutofthetop3stocks.Ineithercase,itmakessensetosellthatstock

andreplaceitwithabetterone,namely,onefromthetop3listasdeterminedby

thesystemscan.Yes,tradingthiswaywillmeanthatyouwillneedtotakethe

inevitablelargeloss,whenastop-losswouldhavesavedyoufromthat.Butover

time,youwillseefarmoretradesturnouttobeprofitableattheexitwhenyour

stop-losswouldhavebumpedyououtofthesharesforaloss.

Theotherthingtomentionregardingpositionmanagementisthesystematic

compoundingofyourgainsovertime.Isuggestthatateachnewrebalance,

wheneverthereisanewtradetoputon,youcalculatewhatyourcurrent

portfolioamountis,includingbothprofitsandlossesfromclosedtradesandfrom

openpositions.Thisiscalledyour“mark-to-mark”amount,anditshouldbeused

todetermineyourpositionsizeateachnewrebalanceperiod.Simplytakethat

amount,divideby3,andinvestexactlythatamountintoanynewtrade(s).Inthis

wayyouwillbeincreasingyoursizeduringbullishrunsinthesystem,and

decreasingyoursizeduringdrawdowns.


43

PARTFIVE:RULESFORSCANBUILDING

Okay,I’vegivenyoujustabouteverythingyouneedtoknowtobeginbuildingaset

ofrobustmomentumscans.Isuggestthatyoustartwiththefinalversionofthe

scanwebuiltabove.Ihavenoproblemwithyourpiggy-backingonmywork;but

youarebestservedinthelong-runbybuildingandtradingyourownsystemscans.

Someofyoumaybeabletoworkwithsoftwarethatcanautomatethetweaking

process. I’m not that fortunate (nor that technically astute). I do it the old-

fashionedway:linebyline,tweakbytweak,testbytest.Forthatreasonittook

me5yearstobuildthescanwhose+30,000%returnsover5yearsyousawearlier

inthisManual.Hopefully,withthisguideinhand,itwon’ttakeyouquiteaslong!

ThefirstthingIneedtomentionhere isthatthetestingandscan-buildingwork

represented in thisManualwas all done in theResearchWizard available from

ZacksResearch. Youcanreplicatethesesameparameters inStockInvestorPro,

butasIsaidbefore,youwon’tbeabletobacktestyourscans.Thebestyoucando

isrunthescanonhistoricaldataandseehowthosestocksfaredovertime(atrue

laboroflove).Youwillalsoneedtofudgeabitwiththethree“Top#X”functions

inourscan.StockInvestorProonlyallowsyoutoscreenforstocksinthe“TopX

%”ofallstocks.

IfyouuseFinviz,youwillneedtoimprovise.ThereisnofunctionforEPSestimate

revisionsinFinviz,andasforrankingstocksbasedon4week,12weekand24week

performance,youwillhavetodothatmanuallyfromthelistsofstocksthatshow


44

upafterfilteringforthefundamentalparameters.Therearetwoperformancetabs

inFinviz, andyoucan screen for the strong stocksusing those (alongwithyour

valuationandgrowthfilters).Onceyouhaveyourlistofstocks,youcanrankthe

stockson thebasisofperformanceoverhalf year,quarterly,monthlyandeven

weeklytimeperiods.Inthiswayyoucangetprettyclosetothesamelistofstocks

thateitherResearchWizardorStockInvestorProturnout.Butthemaindrawback

toFinvizistheinabilitytoscanforearningsestimaterevisions.Youcan,however,

checkthenewsheadlinesunderneaththestocksthatturnuponyourscansand

lookforanyreportofsuchrevisions.Itistedious,butcertainlydoable.

Withthatsaid,inthisfinalsectionletmelayoutsomebasicrulesforbuildingyour

ownmomentumscans.Someofthishasalreadybeentouchedon,butitallbears

repeatinghere.

1. Always startyour scanswithaprice filter (I suggestkeep to stocksabove

$10/share).

2. When building your scan(s), set the fundamental filters before the price

momentumfilters.

3. Trybothloweringandraisingtheaveragevolumefigureifyougettoofewor

toomanystockspassingthroughthescan.

4. ThePrice/Salesvaluationfiltershouldneverbegreaterthan1.0asamax.

Tryexperimentingwithlowervaluestoseeifyoucanimprovereturns.All

studiespointtothatnumberasastrongdividing linebetweenstrongand

weakperformanceovertime.


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5. TheEPSQ/QEstimateRevisions filter canbeplayedwith. Try raising the

valueabove10%.TryaddingFY/FYalongwithQ/Q,oreveninsteadofQ/Q.

6. The%changeinActualEPSQ/Qcanalsobeplayedwith.Tryraisingthevalue

above5%.TryaddingFY/FYalongwithQ/Q,oreveninsteadofQ/Q.

7. Forthe3linesofrelativepricestrength–short-term,mid-term,long-term–

try changing the “Top #” values. Lower numbers will generally improve

returnsbutalsoincreaserisk.

8. Firstmakesureyourscanissignificantlyprofitableusinga4-weekrebalance

period.Thenloweritto2-week,then1-week.Themostrobustscansshould

improveateachchange.

9. Besuretorunyourbacktestsoverdifferentmarketperiods.You’llwantto

makesureyourscanoutperformsinabearmarket(e.g.,2000–2002and

2007–2009)andinarelativelyweakbullmarket(e.g.,2003–2006).

10. Be aware that the Research Wizard backtesting feature counts Friday’s

closingpriceastheofficialentry/exitprice,butnewdataisnotavailableuntil

Mondaymorning.Thustheretendstobealagbetweenbacktestedresults

andreal-timetrading.Sometimesthisworksinourfavor(ifstocksgapdown

Mondaymorninggivingusabetterentrythanthebacktestedresults),but

sometimesitdoesnot.

11. Ifyoupreferamoremarket-neutralapproach,youcanbuildashorts-only

scanasacompanionsystemtoourlongs-onlymomentumsystem.Myown

testingovertheyearsshowsthatashorts-onlymomentumsystemcanbe

profitablebutalsoveryvolatile,sobeawareofthatandpositionyourself

accordingly. To build a shorts system, try reversing the fundamental


46

parametersbutkeepingthepricemomentumfiltersinbullishmode.So,for

example,youcanstartwiththefollowingscan:



• PricetoSalesRatio>1.0

• %ChangeQ/QEPSEstimate<0%

• %ChangeActualEPSQ/Q<0%




Thethesishereistoshort“junk”stocksthatareinrallymodeinthe

anticipationthatrealitywillkickinandtheywillfallbacktoamore

appropriatevaluation.Remember,justusingtheveryfirstscanwebuilt

aboveisalreadyaprettygoodscanforfindingshortsetups.Ifyouadd

filtersthatscanforlousyfundamentalstoo,you’vegot,intheory,an

awesomeshortingsystem.Youwillneedtoplayaroundwiththeprice

performancenumbersabittogetarobustscanoverdifferentlook-back

periods.Butitispossibletogetashorts-onlymomentumscantestedover

thelast5yearbullmarketthatshowsstrongtriple-digitgains,anddouble-

digitannualreturns.Andoverbearmarketperiods,thereisnothingmore

profitablethanshorting“junk-momo”stocks.Keepinmind,however,that

inmyexperience,shortingmomentumstockscanbeaveryrockyridesoit

isalwaysbesttogoinwithverysmallpositionsizes.


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So…that’[email protected]

haveanyquestions.

If“TheHOTSTOXXLETTER”isopentonewsubscribers(wecapitat200

subscribers),considergivingitatry.Ifnot,pleaseconsiderourevenmore

profitablePENNYSTOCKLETTER,oroneofourwebinarsormanualstohelpyou

tradeforyourself.Idonottakeonmanycoachingclients(maybe20peryear),

butifyouareinterestedinthatletmeknowandI’llsendyoudetails.Thisway

you’llbeabletoseewhetherthestocksyoucomeupwithmatchwhatmyscans

comeupwith.

Andasalways,GodBlessandHappyTrading!

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