The Active Trend Trading System: Pillar 1–What to Trade

When a person starts to get interested in trading stocks they are immediately faced with the daunting question, “What stocks should I trade?” There are multiple answers to this question depending on the objectives of each individual trader. For me I want stocks and ETF’s that have the potential of delivering 40%, 50%, 60% or even 100% return within a twelve month period. If this is my objective then where do I go to find stocks that have this potential?

The number of stocks and Exchange Traded Funds (ETF’s) available for trading provides a very, very target rich environment. With thousands of stocks and ETF’s listed on the various exchanges choice is ample but not simple. In fact having too many choices may make finding the right entity to trade an overwhelming challenge and a constant drain on time and emotions. The angst felt by so many traders and investors grows with the increasing choices as they try to answer, “How do I know which one is the best?”

So, where do the best stocks hang out? Is there one reliable source? The answer is yes!
Finding big potential stocks is much like going fishing for big fish. If a fisherman wants to go after big fish he has to do his research and find out where the big fish hang out. This includes finding the lake where other fishermen have historically landed big fish. Also finding where on the lake that the big fish hang out is equally important Which inlet or cove, what are the landmarks on the shore that the angler looks for to know he’s in the right spot. The fishermen must also take other variables into consideration also including time of year, time of day, weather and the type of bait to use to attract the big fish. Just because he knows where the big fish hang out doesn’t automatically mean he will successfully land that trophy! He must have a system after he’s done his research to find the big fish, to catch the big fish!

In the years that I’ve been trading I have found the most reliable lake to fish for big trophy stocks is the various lists provided by Investor’s Business Daily® at Investors.com. Year-after-year IBD® has provided proprietary fundamental analysis of over 6,000 stocks on a weekly basis and then published the top growth stocks each week in a list they call the IBD 50. Additionally they provide other proprietary lists throughout the week that have exceptional growth potential.

Over the past seven years I’ve paid particular attention to the stocks provided in the IBD 50 and studied how well this list did in comparison to the S&P. Because this list does change twice per week, in order to reduce complexity in the research, I only studied the first list from the first of each year going back to 2007. I measured various attributes such as gain from first of the year to the first high of the year, losses due to corrections and then rebound gains from the low of the year to the high of the year. In addition I measured the total gross return from the beginning of the year to the end of the year following a simple buy-and-hold strategy.

My research revealed that again and again, the returns many of the stocks on this elite list at the beginning of each year normally exceeded the return of the S&P. Individual stock within the list often had percentage returns if bought near the low of the year in the high double digits and some in the triple digits. My researched showed me not only where big trophy stocks hang out but how to know when the best time to fish is!

Here’s a summary of results for the first IBD 50 of each year from 2007 through 2013. (Prior to 2011 the IBD 50 was the IBD 100.)

2007: S&P Return = 3.53%
Of the 100 stocks on the list at the beginning of 2007
– 77% of the stocks had an average return of 78.95% from low to high of the year
– 42% of the stocks had an average return of 56.9% from the beginning of the year to end of year

2008: S&P Return = -38.51%
Of the 100 stocks on the list at the beginning of 2008
– 95% of the stocks had an average return of 78.77% from low to high of the year
– 22% of the stocks had an average return of -19.2% from the beginning of the year to end of year

2009: S&P Return = 23.45%
Of the 100 stocks on the list at the beginning of 2009
– 57% of the stocks had an average return of 121.6% from low to high of the year
– 32% of the stocks had an average return of 58.4% from the beginning of the year to end of year

2010: S&P Return = 12.78%
Of the 100 stocks on the list at the beginning of 2010
– 93% of the stocks had an average return of 78.77% from low to high of the year
– 44% of the stocks had an average return of 52.0% from the beginning of the year to end of year

2011: S&P Return = 0.0%
Of the 50 stocks on the list at the beginning of 2011
– 88% of the stocks had an average return of 43.10% from low to high of the year
– 34% of the stocks had an average return of 22.1% from the beginning of the year to end of year

2012: S&P Return = 13.41%
Of the 50 stocks on the list at the beginning of 2012
– 88% of the stocks had an average return of 45.93% from low to high of the year
– 44% of the stocks had an average return of 35.91% from the beginning of the year to end of year

2013: S&P Return = 29.6%
Of the 50 stocks on the list at the beginning of 2013
– 78% of the stocks had an average return of 68.39% from low to high of the year
– 52% of the stocks had an average return of 44.9% from the beginning of the year to end of year

Results like these say a lot about the quality of the stocks that make it to the elite IBD 50 list! The tools provided at IBD® equip me with a sound fundamental starting point to go fishing. I do make additional refinements to increase the likelihood of winding up with a winning stock. These refinements will be revealed as in the remaining Pillars.

As a reminder: These are backtesting results and not a claim that similar results be achieved by all traders. No backtesting can ever totally incorporate all the variables present in the Market and human factors in following trading rules. Backtesting is intended to test the viability of the system only.