Tuesday, August 23, 2011

Market Leaders; a Double Edge Sword - Part 2

Make no mistake; investing in leading stocks is indeed very risky if timed incorrectly. Market leaders and high flyers are great when they’re going up; however, the downside can be disastrous if you lack an exit plan. Without a sensible plan to minimize losses, your odds for a major setback at some point are almost certain.

Just as market leaders are out front on the upside, they also tend to lead on the downside. The smart money that bought these stocks will take their profits and move out much quicker than they came in.

My own scientific evidence and anecdotal review over 30 years of personal trading concludes that the chances of a market leader giving back most or all of its gains are high. This is why you must have a plan to sell and nail down profits when you have them.

History shows that one-quarter to one-third of past market leaders give back all or more of their entire huge advance. On average, their subsequent price declines are 50% to 70% depending on the period measured.

Click on image to enlarge

In a post- bubble-type market such as in 1929-1930s and in 2000-2003, many leading stocks declined as much as 80% to 90%. This is not the type of decline from which a stock investor can recover. Most don’t come back, ever! For those who do recover, it generally takes five years or even 10 years.

Big profits can be made during periods of optimism, even in stocks that virtually everyone is aware of. However, if you’re late to the party, look out below. The same stocks that had been going up for a period of one to three years or more could be due for a major correction.

For example, the Tech stocks that led the 1998-2000 bull market were the biggest losers during the 2000-2002 bear market, and recovered, at best, only about half of their losses during the entire 2003-2007 bull market. History is littered with examples that the leaders of one bull market are rarely leaders of the next.

Financials and housing stocks were market leaders during the 2003-2007 bull market and then took the biggest losses during the bear decline in 2008. Therefore, if history is any guide, the leaders of one cycle should generally be abandoned as buy candidates for both bear market recovery rallies as well as for the next bull market.

Though, there is a caveat to this rough rule of thumb: If the leadership stocks or sectors started to emerge late near the end of the bull market cycle that preceded the subsequent bear market, then in some cases, they can lead during the bull market.

Very often, leaders of the "next" bull market, emerge from the most unlikely areas, but quickly reveal themselves through the application of sound price and relative strength analysis techniques. Keep an eye out for those stocks that hold up the best during this bear market correction; they could be the next cycle’s bull market leaders.

Mark Minervini



CLICK HERE SIGN UP
Click on image to enlarge

Click on image to enlarge

go to www.minervinitube.com to sign up for Minervini on the Market $495 limited time offer for annual subscription
Posted by at 8/23/2011 10:47:00 AM

0 comments:

Post a Comment

Subscribe to: Post Comments (Atom)

Blog Archive - Read Mark's Past Posts

MARK MINERVINI'S STOCK SELECTION STRATEGY

Specific Entry Point Analysis® -SEPA®

Specific Entry Point Analysis® - SEPA® was developed by Mark Minervini. The methodology’s foundation is built upon historical precedent analysis of past stock market “SUPER PERFORMERS.” To determine what characteristics make a stock likely to advance significantly, historical models of top price performers and industry leaders are archived in the Minervini confidential database. These models are based upon sets of characteristics prevalent in exceptional winning stocks.

PATTERNS OF EXCELLENCE
On-going efforts are focused on identifying in detail the characteristics of the most successful performers of the past to determine what makes a stock likely to outperform its peers in the future. Based on these attributes, current investment candidates can be compared and scrutinized for criteria in-line with our proprietary Leadership Profile®. This success blueprint is the fundamental basis for our stock selection. The database and profile is continually updated to account for market dynamics and new available data. The SEPA® model takes into account thousands of historic company profiles going back over many market cycles spanning numerous decades. In order to find rapidly growing companies with the ability to sustain above average appreciation, a unique combination of quantitative screening, fundamental research and qualitative analysis serve as core selection criteria for the SEPA® investment process.

Additionally, the SEPA® ranking process scores each company based on earnings surprises, estimate revisions and company issued guidance in order to determine the probability for future price performance catalysts. A unique component of the SEPA® process is a focus on “where” a stock is within its earnings maturation cycle. Each day, computers systematically analyze thousands of stocks for specific data items using a proprietary series of absolute, relative and time dimension calculations. The extensive fundamental research ranks each investment candidate for probable earnings surprise.

Specific Entry Point Analysis® focuses on identifying, company-by-company, the precursors of inefficient pricing in order to distinguish appropriate entry points. Utilizing SEPA® Technology, stocks displaying the potential for significant price appreciation are identified and pinpointed. While nothing is perfect, the proven SEPA® Technology consistently highlights many of the best investment ideas and stock market leaders before they’re widely recognized by Wall Street.
The SEPA® screening process can be summarized as follows:

1. Stocks are screened through a series of "filters" based on earnings, sales, profit margins, relative price performance and price trend characteristics. Approximately 95% of all stocks in the market are eliminated in this first screen leaving roughly 1,000 initial contenders.

2. These remaining stocks are scrutinized and ranked for similarity to a proprietary Leadership Profile® in-line with specific fundamental and technical factors exhibited by historic models. This second stage of qualifiers removes most of the remaining companies, leaving a narrowed list of investment ideas for further review and evaluation.

3. The final stage is a comprehensive manual review. The narrowed list of candidates are examined individually and scored according to a “relative prioritizing” ranking process which considers the following characteristics:

- Reported earnings and sales
- Earnings surprise history
- EPS and sales acceleration
- Company issued guidance
- Earnings estimate revisions
- Profit margins (historic & projected)
- Industry and market position
- Potential "catalysts" (new products, services or industry changes)
- Performance compared to other stocks in same sector
- Price momentum, price trend and trading volume analysis
- Liquidity

The SEPA® ranking process is focused on identifying three key elements:

1. The potential for future earnings and sales surprises
2. The potential for institutional volume support
3. The potential for rapid price appreciation based on a supply/demand imbalance

Profiting from the Earnings Cycle

Individual stocks can go through extended periods of underperformance, in some instances for decades – Eastman Kodak’s stock price took twenty-four years (1973-1997) to just break even while the S&P 500 Index advanced 500%. While some stocks languish, companies with superior improving fundamentals can perform exceptionally well.

Large institutional buyers (mutual funds, pension plans, hedge funds, etc.) have the greatest buying power to influence a stock’s share price. So, what do they look for? Earnings and sales surprise and estimate revisions contribute to valuation model changes and thus impact buying and selling pressure. The subsequent buying pressure that comes from an earnings surprise or a company materially raising guidance generally leads to a higher stock price, which in turn attracts momentum buyers.

An understanding of how Wall Street works and identifying what specific characteristic will attract institutional buyers into a stock is our daily focus. The graph below illustrates a typical earnings maturation cycle and where we focus our efforts on buying and selling within the cycle
Summary of the SEPA® Process

HISTORICAL PRECEDENT ANALYSIS
-Study of the best performing stocks over each market cycle
-Characteristics defined and archived in our database
-Blueprint is constructed based on attributes of winners

COMPUTER SURVEILLANCE
-Computers screen 8,000+ stocks daily
-Narrows down the top 1%
-Companies displaying specific characteristics are identified

LEADERSHIP PROFILING
-Data is compared to all stocks
-Results are compared to a Leadership Profile®
-Profile is continually updated to reflect new information

RANKING AND SELECTION
-Candidates are monitored for specific criteria convergence
-Catalyst such as earnings surprise, company issued guidance
-Entry point defined based on risk/reward

GET MARKET UPDATES HERE

Jack Schwager - Winning Methods of the Market Wizards

INSIGHT FROM AMERICA'S TOP TRADER

Mark Minervini's financial advice and SEPA® stock selections sold exclusively to institutional investors for $120,000 annually. Get insight, stories and stock picks from the Stock Market Wizard here FREE!