AAII's Zweig Stock Screen Down 17.4% YTD

Occasionally I like to peruse my old haunting grounds to see how I would be doing if I still traded using stock screening techniques. As many of you know, the Zweig stock screen was my "bread and butter" for several years and it performed marvelously for several years averaging a 50% return for me each year. I was using a "tweaked" version of the screen that simply ranked the Zweig screen candidates by their 26 week relative strength (as compared to the S&P 500) using AAII's Stock Investor Pro.

I then chose the top 5 stocks listed in the screen (the screen averaged about 10) and bought them Monday morning. I held through the week without using any stop losses. I would re-evaluate the screen on Sunday and if any stocks dropped off the list, I would sell them Monday morning and replace them with new stocks that qualified for the top 5.

I sometimes held stocks for just a week, but in most cases, the stocks stayed on the screen for weeks and months at a time. It was a very simple way to trade using mechanical methods which allowed me to work full time during the day and still enjoy returns that handily beat the indexes. But things fell apart for the screen in 2008, and AAII's version of the screen lost 34% over the year. Before 2008, the screen's worst performance since 1998 had been a 17% gain in the awful market of 2002.

By mid-2008, I knew that I would have to change my trading strategy if I was going to be able to eventually trade for a living. A losing year just wouldn't cut it for paying the bills since I didn't have an abnormally large chunk of equity. So I made the switch to day trading which I felt gave me much more control over my trading and my equity curve.

I'm still learning, and the transition hasn't been easy by any means. The fast pace and emotional stress of trading intra-day takes its toll. It is much more complicated and requires a huge amount of effort, learning and dedication. I sometimes question the switch I made (as many of my readers have done). So once in a while, I'll "take a peak" at some of my former methods just to see how they're holding up.

I'll have to admit that I was completely surprised to see that the Zweig method has performed poorly this year--down 17.4% YTD. This is the type of environment where the stock screen usually thrives--an unrelenting bullish bias after the market bottoms out. In 2003 the unmodified screen returned 89% with monthly re-balancing.

That fact gives me pause that the rally we are seeing today doesn't necessarily indicate that happy days are here again. Something is not quite right fundamentally if the Zweig screen is down for the year after a 40% rally has taken place.

D.R. Barton Reviews Google's Stock Screener

Stock Screening - Google Finance Falters

by
D.R. Barton, Jr.

Last week we ended by talking about Google Finance's use of Web 2.0 tools to make an addictive little screener. And it is truly fun to play with. But alas, when the playing is done and it's time to get down to some real work, Google Finance's stock screener really has little to offer.

First the good stuff about the Google screener. Compared to almost every other screener, it's easy to find. A little thing, I know, but it's frustrating trying to go through the multiple layers of web pages to get to some of the better no-cost screeners. At the top of the Google Finance homepage, right next to the ubiquitous Google search box, is a single hyperlink, the stock screener (in typical Google minimalist style).

Once you get to the screener you'll find four default screening criteria with boxes for minimum and maximum values. The truly unique part is the slider that's between the min/max boxes. Between the min and max sliders is a little histogram that represents how many stocks are at each increment of the slider. Cool. For most criteria, this looks like a normal distribution, with some skew to one side or the other. What makes this really fun is that if you move one of the min or max sliders to reduce the universe of stocks, you get instantaneous feedback on how many stocks satisfy the scan, plus a sortable list of stocks that meet all of the criteria. And when I say instantaneous, I mean less than a second.

As Google has set this up, it's a very visual process, but I'll try to describe one example for you. With all of the criteria set as wide as possible, Google shows 2,950 stocks. Move the 'dividend yield' minimum value slider to the right from 0% to 5% and the universe is reduced to 512 instantly sortable stocks. You can do this with 61 different criteria that Google provides, if you so choose.

But the good news pretty much ends there. The minus side of the ledger is unfortunately well populated for the Google Finance screener. And there are some deal killers.

First and foremost, there's no way to export the results of your scans to a spreadsheet or trading platform watch list. And if you devise a scan that you really like or need and want to run it later, there's no way to save a set of screening criteria. In addition, the universe of screening criteria is fairly limited.

Here's the bottom line. If you're just wondering how many stocks have a Market Cap over $1 billion and a dividend yield between 2% and 6%, and you want a lightening quick answer, Google can get you there with a sortable list. But you won't be able to save or export the scan, making the utility of this Google app marginal at best.

In the end, the Google Finance stock screener is a bit like a Slinky. It's fun to play with and can occupy you for minutes on end, but when all is said and done, you can't turn your time and effort spent into anything really useful.

Next week, we'll start to look at some screeners that scan for technical criteria. So please send any suggestions/thoughts/reviews of your own to drbarton "at" iitm.com. Until then...

Great Trading,

D. R.

About D.R. Barton, Jr.: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "iitm.com".

Using overall market health to time stock screens

Parker from Texas sent me his ideas on selectively going long with AAII stock screens:

AAII stock screens are long-only. Which is great in uptrends. And spotty in downtrends. So, I fooled around and came up with a screen which tells me when to use the AAII screens. Here it is - one simple question:

On the monthly chart, did the S&P close above its 12 month simple moving average? If yes, use the AAII screens for the next month. If no, sit out or short the market. Here’s a chart:

Using this method, you would have gotten the signal to go long on 11/1/98 and get out 10/31/00. Here's how selected AAII screens fared over that 24 month period:

Zweig = +103.8% (~43% per year)
CANSLIM = +117.1%
Est Rev Up 5% = +243.9%
Tiny Titans = +133.3%

Note - the S&P went from ~1100 to ~1425 in this period, a 29.5% gain (~14% a year).

The next buy signal was on May 1, 2003 and lasted until 12/31/07. Here's the cumulative performance over 4 years, 8 months, re-balancing and reinvesting every month:

Zweig = +362.2% (~39% a year)
CANSLIM = +199.0%
Est Rev Up 5% = +350.5%
Tiny Titans = +381.2%

Note, the S&P went from ~910 to ~1460 during this time, a gain of 60.4% (~11% a year).

Had you shorted the S&P on 11/1/00 at ~1425, you would have covered at ~910 on April 30, 2003, picking up a nice profit while you wait to implement the screens again.

Under the same principles, you would have shorted on ~1460 on Jan 1, 2008 and be sitting pretty with the S&P at 860 right now.

So there you have it - a simple 12 month moving average screen on the screens. Unfortunately, it may be awhile before the S&P closes above its 12 month average.

AAII Stock Screens

Most of you know that I cut my teeth on AAII's Stock Screens. I have been following them for several years and I love their simplicity. Moneysuckle (of the complicated poker post) has put together some information on why he has chosen just a few screens among the several that AAII shares each month. The results he discusses are assuming monthly re-balancing and holding all stocks that qualify in the screen.

Buffet averaged 25-30% a year compounded to amass his fortune. Of course, he dodged a lot of taxes with his buy and hold strategy. I cite this as a baseline to judge the AAII screens.

In order to get a total (pre-tax) return of 1000% over 10 years, you need to average 26% a year. A 1500% return over 10 years is 39% compounded per year. A 2000% 10-year return is 50% per year compounded.

So, when I look at the AAII screens, I am looking for anything with a total return of 1000% or more since 1998 - or returns Buffet would be happy with. I know, of course, that I'll likely be paying 28% cap gains tax on my profits, so I need as much cushion as possible.

The other things I am looking for in these screen results:

1. Consistency in returns. If a screen has a 1200% total return, but has 6 winning years and 4 losing years, that's not as attractive to me as a 1200% screen with 9 winning years and 1 losing year. When a screen has a big return but several losing years, it implies that it is not suitable for use in all market conditions.

2. No horrible years. I consider a horrible year a double digit loser.

3. Emphasis on recent performance. If a screen has a great total return, but 1998-1999 played a big role in it and recently it hasn't done as well, I will downgrade the screen.

4. 15 or less qualifying stocks on average. I don't want to invest in more than 20 positions at a time, and I am really interested in 6-12 positions at a time. Therefore, a screen that gives me 45 qualifying stocks on average is of marginal use. Further, if I think I can screen the screen (like with Zacks rankings), then the more stocks I am screening out with Zacks, the more the AAII total return % becomes meaningless since I am doing something completely different than AAII did. Finally, if I invest the same in each stock, if I use a screen that produces 45 stocks and 1 that produces 15, I will end up weighting the 45 screen more. Which is probably bad since Zweig and CANSLIM have the best results, and they produce fewer stocks.

With that in mind, let's examine the candidates.

Currently, Graham Enterprising Investor is at 923%. It produces 4 qualifying stocks per month. It lost money in 1998 and 1999. While the losses were small (single digit), the market had great years in 1998 and 1999. Thus, this screen vastly underperformed the market in those years. It has vastly outperformed the market since. In fact, from 2000-2007, it's total return is 1109% (which is over 50% per year compounded for 8 years!!). This tells me that the screen works well in periods when fundamentals matter. Fundamentals didn't matter much in 1998-99 - it was mania. Finally, the screen is up this year! I will use this screen for current market conditions.

Foolish Small Cap 8 Revised - 623.1%. Through 2007, this screen was very impressive at nearly 1000% 10-year total return. Plus, it had 9 winning years in 10. It's only loss was small (3.9% in 2004). Otherwise, it made at least 12% every year. Very consistent. Plus, it produces only 7 passing stocks a month on average. However, this year, it is down 35%. Until I can figure out what's going on, I am not planning on using this screen. I am going to keep an eye on it, however.

O'Shaughnessy Growth - 652%. Another very consistent screen. 10 straight winning years of at least 10% gains. Until this year (down 13%). But it produces 50 stocks per month. Not suitable for my purposes, but I will watch it.

O'Shaughnessy Small Cap Growth & Value 985% - Another impressive screen. 9 excellent years and flat in 2002. But it's losing this year (down 13%). Plus it produces 25 stocks a month. Not suitable for my purposes, but I will watch it.

O'Shaughnessy Tiny Titans - 2262%. Awesome total return. But poor recent performance. $100 invested in Jan 2005 would be $114 today. Clearly, the weakening dollar has helped the larger companies recently (who have international operations) at the expense of small domestic companies. This may explain the drop off in performance. Plus, it produces 25 stocks a month - too many for my purposes.

Value on the Move - PEG with Est Growth - 833%. Another 1000% winner with 10 straight winning years until 2008 (down 15%). After a poor 1998-99, it made 970% from 2000-2007 or 49% compounded, which is incredible. But it produces an average of 47 stocks a month. Not suitable for my current purposes.

Zweig - 2107%. By far the best, most consistent screen on AAII from 1998-2007. Never returned less than 17% a year. 10 straight winning years in all sorts of market conditions. Until this year. I am willing to forgive it 2008 (down 12%). I am also willing to forgive the "slowdown" from 2005-07 when it "only" earned 18-27% a year. However, I am keeping my eye on Zweig to make sure it doesn't go south on me. Produces 15 stocks a month on average, in my sweet spot. I will use Zweig.

CANSLIM - 1471%. Excellent total return. Very consistent. 9 winning years of at least 20% a year vs. 1 modest losing year (3.8% in 2004). All on 9 stocks a month. Down only 3% this year, which beats the market. My second favorite screen behind Zweig. I will use CANSLIM

Est Rev Up 5% - 1302%. Excellent total return, but got a huge boost in 1998-99. This screen focuses on positive earning surprises, and everyone was buying/selling on news (instead of fundamentals) back in 98-99. Still, had excellent years in 2003-07. But it produces 43 stocks a month. Plus, when I cross-screen Zweig and CANSLIM through Zacks, I get stocks with good earnings surprises. As you might imagine, more of the Est Rev up 5% stocks get 1 ranks in Zacks than Zweig stocks do. So, if I used this screen, I'd be heavily diluting Zweig. I will watch it, but I don't plan to use it.

So, there's my analysis of the screens. I will focus on Zweig, CANSLIM and Graham Enterprising, which should produce a combined ~30 stocks a month. Edited for Zacks 1-2 ranks, that will bring it down to a manageable 6-12 stocks a month.

I plan to fully invest my portfolio each week, and invest in each stock equally. So, at 1% risk, 12 stocks means I need to put a 12% stop loss on, and 6 stocks means I need to put a 6% stop loss on. I saw your 2007 stats. For Zacks 1 + Zweig, your average loss as -3.2% on your losing trades. Therefore, I'd think a 6% stop loss is way sufficient. Unless you had a lot of experience with stocks losing more than 6% off the bat and coming back to be winners. Which I doubt.

Theses are the types of stats that I love to gather for myself. I think that thinking through issues like these often make you a much better trader. I know it has helped me put together my own ideas, and has helped me tremendously during periods of drawdowns.

Interesting Screening Site

I saw a mention of Keelix.com on a mechanical investing website and found the information there very helpful. The stock screening tool isn't real easy to use at first, but it somehow utilizes the Stock Investor Pro database and allows backtesting! So far I've been able to put together some of the Zweig screens and back test them over years that I don't have data for. The data that shows up is exactly the same as my actual results.

I'm excited about the potential of the back tester. I've spent hours and hours backtesting ideas by hand, and frankly I've skipped a lot of ideas because I wanted to avoid the tediousness of the paperwork. When I get some time, I'll head over there again and see what I can discover. Cool stuff.

AAII Stock Screens

Most of you know that I love AAII's stock screening ideas and that I have focused on the Zweig screen since 2005. The site hasn't reported year-end numbers for the screens yet, but there are some interesting things to note for 2007.

November 2007 was one of the worst months for the AAII stock screens since they started tracking the returns in 1998. It's comforting to know that some of the difficulties we faced as traders in 2007 were felt far and wide.

Many of the screens that consistently out-perform the market struggled this year. Others that haven't really kept up over the years had banner years.

AAII provides an excellent spreadsheet that details every screen with monthly returns, turnover, average number of stock picks, and cumulative return. It is worth spending several hours on their site and soaking in some of the knowledge and experience that they offer.

Changes to StockPunk for 2008

In the next couple of weeks, I'll be detailing changes that I'll be making to the site over the next year.

Here are a couple--

Weekly Stock Screens--
During 2007 I posted stocks that passed my screens on a weekly basis. I did this to allow folks to follow the screens and to show that the screens can produce real returns.

This year I will only post stocks that I come up with on my own. I will still post the returns of some of my favorite screens, but I will not post the actual stocks that show up each week. If you are interested in finding out which stocks qualify, you'll need to use AAII's Stock Investor Pro and/or Zack's Rankings.

StockPunk's Market Meter--
During 2007, I learned a lot about determining the overall direction of the market as a whole. I plan to use StockPunk's Market Meter to allow StockPunk readers to see my opinion on market direction on a daily basis.

After a three years of hemming and hawing (is that how you write that?), I purchased a subscription to Zack's Research Wizard today. I've been testing it for the past couple of weeks, and I've really discovered some time-saving ways to evaluate my screens and ideas. I used to go through reams of information (I have a stack of paper two feet tall) to get certain types of historical data. I found ways to get that same information in a few seconds.

The subscription price is $1,600 and that provides 6 years of historical data. I've talked with a lot of folks that nearly drop dead when they hear a price like that but I spent nearly that amount on my dumb '99 Plymouth Voyager yesterday and there is no way that thing is going to make me any money.

I've met a few traders out there who hurt their returns because they are too wrapped up in nickels and dimes. They are afraid to exit a $20,000 losing position because of a $7 commission. They spend all their time looking for free information when they could be making a lot more paying somebody else to do the leg-work for them.

I think there is a lot of fear out there because of shysters who have taken people for all they are worth. I'm sure that hurts the businesses of reputable companies that want to help people make money. My experience with Zacks over the years has been very positive.

I figure this is money well-spent. I'll let you know how things go throughout this next year. I hope to develop some new screens and after the summer, I'll be sharing those screens (and some of my older ones) with StockPunk readers.

I Screen, You Screen, Kirk Screens

Charles Kirk has just released his "Stock Screening Machine" for members. Yet another reason to divvy up some cash and get over to his members only website. I've had a look, and the whole concept looks very promising.

As a trader, I really think screening stocks is the only way to stay ahead of the game. There is no possible way to go through 8,000 stocks, look over the numbers, do the calculations, and come up with a watch list. I wouldn't know how to do that without a computer anyway.

What is cool is that the folks who screen stocks are really on the cutting edge of a new way to look at the market. Just a few years ago, stock screening was virtually impossible. The amount of data alone was too much for a computer to handle. It would have taken hours if not days to download the data (which wasn't available anyway). It would have taken hours to crunch the numbers (my laptop does it in less than 15 seconds). And it would have cost way too much to trade on an ongoing basis (thank you discount brokers).

Computers and the internet give guys like me a tremendous advantage over folks who traded even just a few years ago. Take advantage of the tools that are out there. You'll be glad you did.

Screening for Seasonality

A lot of folks see a long term trend toward the summer being a generally awful time to have money in the stock market. In his book Winning on Wall Street, Martin Zweig discusses the power of trading during certain times of the year. Charles Kirk posted an interesting link that discusses the seasonal trends here and here.

Since the Zweig screen is my favorite, I went back to 1998 to see how the screen did during the four summer months and compared it to how it did the final four months of each year. The results weren't as dramatic as I expected but they were interesting. The average return each year during the summer was 3.83%. The average return each year during the fall and winter months was 17.51%.

That's quite a wide margin, but the maxim "Sell in May and Go Away" doesn't seem to apply when you are making nearly 4% each summer. That summer average of 4% includes a nearly 30% loss the summer of 1998, which really skewed the numbers.

So, I haven't been convinced to walk away from the market from now until September. But it is never a bad idea to be more defensive during times of the year when the market is on the weak side.

Using Risk Grades with my Screens

I was introduced to the RiskGrades website when I was following the Stock Superstars newsletter that AAII offers. Riskgrades are proprietary calculations that analyze volatility. A grade is given for the general market and you can compare individual stocks or even a portfolio against the risk of the market. You can measure the "Risk Impact" of adding or deleting a particular stock to or from your portfolio.

Another interesting tool that I use is the Return Grade measure which looks at the risk of stock and compares it to the return of the stock over a given period of time. The stock is given a "grade" based on its risk vs its return. I like to plug in my list of stocks from a screen and see what stocks have the highest return grade because it sometimes gives me a different perspective on the screen list.

A couple of years ago (when I was even more dumb than I am now) I followed some portfolios that picked out the top 10 "Return Grade" stocks from the list in my screens. I saw some pretty amazing returns for about 5 months, but month 5 was awful so I assumed that the idea was worthless.

So now I am revisiting the idea because I think it has merit. I started paper trading (I don't take commissions or spreads into account) the concept again in October of 2006. I chose to pick the top 5 "Return Grade" stocks from the Zweig screen (as provided by AAII) and the return over the last 6 months has been 39%.

Rick writes:

I stumbled across your blog site about your investing experiences and was intrigued by your methods. I have been buying/selling stocks and funds for close to 10 years now. I never really spent much time researching or really trying to make any money. My first round was with DRIP's and although I only made about 5-6% it was fun. I then moved to funds and typically made about 10-12% a year and at the same time I dabbled with stocks. I almost always ended up losing money with stocks.

After a couple years away from stocks, I decided to get back at it. This time around I am taking it serious and I am going to learn what I am doing before buying anything and try to make very educated decisions. I am a member of Zack's Premium, as well as a couple other sites, and I am starting to get more comfortable with the screens and started to build some of my own custom screens. I haven't paid much attention to AAII's site until I came across your blog.

I am interested in why you like the AAII site so much, what do you gain from it that is better/different than what I can get either free from other sites or from Zack's? Any advice you could offer?

Also, thank you for recommending Kirk's report, it is a Gem that I never came across before.

My Reply:

Thanks for sharing some of your experience, Rick. I am always fascinated to see what other people are doing because there are a million ways out there to work the market!

Here's why I like AAII.

1. It's cheap compared to most sites. I was a member of just the site for a few years. At $40 a year, that was a bargain. I learned a bunch each month and I really cut my teeth on AAII's risk management and stock screening.
2. They're honest. Most sites "cook the books" a bit to make themselves look better than they really are. Just look at Hulbert's Financial Digest (I recommend subscribing) and you can see how inflated nearly every newsletter or service makes their returns. I subscribed to AAII's Stock Superstars Report for a couple of years, and I was extremely impressed with how accurately information was reported. The same goes for their stock screens. I've tracked them myself to confirm the numbers (because some of them are hard to believe) and have always found them to be accurate. I haven't found many other stock sites that are like that.
3. The screens have nearly 10 years of data. AAII's stock screening started in 1998 which is years before I got into the game. In their screening area they track performance on a monthly basis. I've been hard pressed to find any other site that provides that type of information.
4. I like other members of AAII. I went to a local meeting of AAII members and I was the youngest guy there (I'm 40). It looked like a room of Warren Buffets. And they asked questions like Warren Buffet. There weren't any "hot shots" that tried to dazzle with their revolutionary techniques.

I've found that Zacks shares many of those attributes. The site has shared an enormous amount of information for free over the years (they just started charging for Premium) and for the most part, they avoid sensationalism.

I'm always looking for alternatives. I have an irrational fear that AAII will close shop and my sources for information will dry up. So I would like to have a couple of backup sources for data eventually.

Screening for Relative Strength

I've been following the relative strength of the stocks that filter into my screens since January of 2003. I've been especially interested in the stocks that shake out as the highest relative strength in my screens on a weekly basis. For the Zweig screen, investing in the highest relative strength stock each week since January 2003 would have resulted in a 5656% compounded return so far. Holy freakin' cow.

It gets better. I hypothesized that if I mechanically invested in the #1 Relative Strength stock only when a MACD chart indicated that the stock was trending upward I could avoid some of the bigger losses. I started tracking what would happen in August of 2004. Less than 3 years later the returns are 4258% so far. Not too shabby.

Last year, I foolishly tried to invest a large part of my portfolio this way (in just one stock) and soon realized that I couldn't take the heat of the daily swings. My worst day zapped me with a 9% loss on my total portfolio. Despite the enormous past returns, I couldn't justify the worry and pain of large losses.

I've got a much more balanced portfolio now and I have taken the advice of traders who are smarter than I am. I no longer risk more than 2% of my portfolio on any one trade (a common rule of thumb with successful traders). The growth has been less exponential, but my sanity is what's important.

Using Zacks Rating with my screens

One of my top ten books for trading is Ahead of the Market by Mitch Zacks. Despite its shameless promotion of the Zacks website and ratings (who could blame him), the book is very helpful in showing some market moving concepts. The Zacks rank is a great tool. It rates stocks based on earnings surprise (which is explained very plainly and thoroughly in the book) which over time seems to be a good indicator of short term movement. The earnings surprise screen on AAII has produced gains of 1165.2% since 1998 which isn't too shabby.

I've been combining the Zacks indicator with some of my screens for nearly two years and the results have been pretty impressive. For example, since September of 2005 the combination of Zacks ranking and AAII's Zweig screen has made over 100% in gains while the Zweig screen alone has made about 23% during the same period. So far, picking just the stocks that rate a "1" on Zacks and rebalancing weekly seems to really boost the performance of a very profitable screen.