By creating a close watch list and tracking the right stocks while the market is in a tailspin, future leaders can be found that will return significant profits when the market ends its funk spell. The trick is in knowing how to find them.
Whether it be a healthy/natural market pull backs of 5 - 10%, a severe retracement of 10 - 20%, or bear market declines of 20%+, future leaders are lurking in the shadows waiting for the market to turn to shine. These future winners are rule breakers. Why? The majority of them do not follow the 75% rule which says 3 out of 4 stocks follow the overall market trend.
In a 5 - 10% market pull back, the best stocks may only shed 2-3% with some staying flat or even posting fractional gains. More importantly though, these stocks are the best amongst their peer industry groups stocks both fundamentally and technically.
So, how do you find this elite group of stocks and track them moving forward?
1. Narrow an Established Watch List
If you are like me, you have a standard watchlist of a few hundred high quality stocks you watch. These stocks are all in solid industry groups and the majority are leaders. The goal here is to create a new sub-watchlist by narrowing your current stocks.
Open Microsoft notepad or pull out a pen and paper to write down your new narrowed watch list. Slowly go through your watch list and look for stocks that are holding up technically. These stocks don't have to be up 10% or something crazy, just holding up. Remember, in a normal "healthy" correction the market will have already shed 5-10% when doing this step, so we can't expect to find big winners.
Tip: An easy to way to see how stocks are technically holding up is to use your favorite charting program. Even a free site like stockcharts.com can get the job done. Pull up a standard chart, remove all the default technical jargon, then add in an S&P 500 underlay. I've included an example below of Chipotle (CMG). Below that is a screenshot of the settings to replicate.
2a. Scan for Further Results (Free Tools)
Free scanners are available all over the web, and while some are better than others, most should serve their purpose (one good one I would recommend is the WSJ stock screener). The goal is to hone in on finding quality stocks fundamentally that are going against the trend and holding up in a tough market. Here are some criteria most free scanners have that I would recommend using:
- Price = I like to trade stocks that are atleast $20 per share. At a minimum though avoid penny stocks (stocks under $1).
- Average Daily Volume = Look for stocks trading atleast several hundred thousand shares per day.
- Market Cap = $500 million+. Adjustable but the primary goal is to weed out small cap stocks.
- Trading above the 50 day moving average = Yes.
- Price performance versus the S&P 500 = 5%+. Make sure to adjust this to get enough results to sift through. Also be aware of the time horizon offered.
- Price % off 52 week high = 2 - 15%. Again adjust accordingly to obtain desired results.
- Revenue Growth last x years = 5 - 10%+. Adjust accordingly
- Earnings Growth last x years = 5 - 10%+. Adjust accordingly.
This will give a list of stock results that can be further narrowed via step 1 above and then added to the new watch list. Also note that this is just some basic criteria I look at, and there are many others that could be used to obtain similar results.
2b. Scan for Further Results (Premium Services)
For those investors who trade CANSLIM, using IBD tools investors.com and MarketSmith makes finding the stocks we desire pretty easy. While there are some other premium services out there that also do a great job, I am going to use MarketSmith for this example below because it is one of my preferred tools of the trade.
Using MarketSmith, I plugged in the following criteria:
- EPS Rating = >90
- SMR Rating = A
- RS Rating = >90
- Accumulation/Distribution Rating = A B
- Industry Group = A, B
- RS 3-Month Rating = > 90.
- Current Price = >$20.
- Trailing 26 Week performance vs S&P 500 = 5%+
This narrowed my search from 6,743 possible stocks to a whopping 17 results. Now, if the market was up 10% in the last month and not down 10%, then the results would have been easily 80 - 100+ stocks. Again, we are looking to strong stocks fundamentally and technically that are holding up in price as they have the best shot at becoming leaders once the market turns the corner.
Some of the names that came up were big names like Netflix (NFLX), Chipotle (CMG) *chart featured above*, Fossil (FOSL), and Opentable (OPEN). One of the common occurrences is that there will always be a handful of big name stocks (leaders) in the results. This more or less affirms you did the search correctly and have a strong list of stocks to choose from.
3. Monitor, Update, and Wait
Now that we have our new watch list, the goal is to keep a close watch on the overall market and plot entry points on the best individual stocks amongst our new list. If our 5 - 10% pullback turns into a bear market then we may be waiting several months or longer to take positions, but that is ok as discipline always pays off.
Hopefully we are sitting in 100% cash or a large cash position while we are conducting this research. This allows us to avoid the whole sell off by sitting on the sidelines, and furthermore gaurantees we will have cash ready to buy when the time is right.
The last piece is to constantly refine and refresh our watch list. For part time/hobby investors, the weekend is a great time to spend an hour or two and update the list by removing under performers and adding new strong candidates. For full time traders, updates can be made nightly if desired.