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.

I hate downtrends

I started trading in March of 2003. I had absolutely no idea what I was doing. Some would argue that I still don't.

The market has been in an uptrend since then and my love for long position trades was rewarded by the trending market. Things have changed, and we are officially in a downtrending market. I've never traded in this kind of market, and my frustration and confusion has demonstrated that I haven't been around long enough to know quite what to do.

The Zweig screen did quite well in the last downtrend (2000-2003), and it will probably do well (eventually) in this one (chart is from AAII.com). I don't intend to abandon my bread and butter. I'll continue to keep an eye on different screening ideas.

I'm trying to develop some flexibility so that I can face new market situations without the frustration that I've experienced this year. I love to screen for stocks, and I love mechanical investing. It just isn't working for me in this environment, so I'm trying something different.

Week In Review 5-23-2008

Things didn't go any better for me today. One week ago, I was flying high. This week I got kicked in the shins. For the week, my portfolio lost 9%. The market has a way of teaching guys like me painful lessons. The key is to live to fight another day. I know that what I do works over the long run. One week is just a blip. This week was a nasty blip, but a blip nonetheless.

None of my screens suffered like I did. Zweig Relative Strength 5 (down 5.92%) was brought down by GHMs 15% drop--ouch. There is a lot of good discussion on StockPunk this week about using stops and about some of the struggles Zweig screen traders had this week. There are always going to be weeks where the screens blow up on you. Most people who trade don't make money because they quit after a week like this. If you just realize that you've got to experience the bumps and bruises and just stick with the program. Don't over-think things. Just trade your plan and hang in there.

The other screens did relatively well considering the trading environment this week. Zweig MACD lost 1.79%, To the Moon was up 1.45%, and Zweig and Zacks was down 2.01%.

It will be nice to have a break on Monday (its been a long time since I've looked forward to a holiday from the market). Take the long weekend to relax, rethink, and enjoy the freedom we all enjoy to trade our money in the freest market in the world.

Month in Review -- April 2008

I'm learning that every time I have a terrific day (or week) and I get a bit too cocky, the market ALWAYS kicks my buttocks and makes me re-think everything. Once again, the pattern continues. I was euphoric about my best day ever on April 16th, and then I managed to allow the market to siphon off 6% by the end of the month.

I still managed to meet my goal of making 4 times my risk this month. That is my new measure of progress since percentage gains really doesn't reflect the accomplishment of my trading system. I was up around 10 times my risk a few weeks ago, so once again, the market humbles me. Maybe one of these days I'll be able to keep my gains. Probably not.

For the month of April, the screens looked like this:

To the Moon: 5.39%
Zweig MACD: 10.79%
Zweig and Zacks #1: 10.63%
Zweig Relative Strength 5: 12.9%

My returns for the month were 9.68%.

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.

More on Expectancy

I asked my brilliant wife to help me work out some issues I was having with calculating information for the two screens I wrote about in the previous post. She insisted that I needed a measurement of risk for each trade. I insisted that I didn't. She was right.

So I went back and re-calculated the expectancy for each screen and edited the post with more accurate information. What I learned in trying to figure things out is that the expectancy of each screen will measure the average risk of a trading system. For example, the Zweig RS 5 screen's expectancy is .18. So, if you make 100 trades you should average about 18 times the risk that you took on each trade over those 100 trades. The system produced 244 trades over 2007, so if you risked 1% of your portfolio value on each trade you should expect about a 43.92% return over the year.

I went back and applied a 10% stop loss to all the losing trades to even out some of the larger losses that probably would have been avoided with a stop loss. I know that a few of the gainers would be stopped out as well, but I didn't take that into account. A 10% stop loss shoots the expectancy up to .79. Nice. That brings an expectation of a 193% yearly return risking 1% per trade on 244 trades.

Using expectancy and risk analysis allows you to make better decisions about your system and your stop losses, while allowing you a better way to compare systems. This is the first time since I started trading that I have analyzed things in this way and it has really helped me get a better handle on what I am doing. I think that I can get to the point where my emotions and feelings don't control my trading behavior. I no longer will need to labor over the placement of stops, or obsess over finding the "perfect" system.

Week In Review 2-22-08

Well, that week sucked. My screens all did better than I did. I completely over traded this week and my portfolio shows it. I've got stocks from four different "systems" in my portfolio now and I've got so many that it is getting difficult to remember why I bought each one. Stupid. I know better, but I get so desperate to make money sometimes that I grasp at anything that looks like it will work. Like always, I ended up hurting myself much more than helping.

The Zweig MACD portfolio continues to lead the pack this year with another good showing of 3.32% this week. The best stock in the portfolio was WFR at 7.37%. The worst was KEX with a loss of 2.11%. The screen picked 11 stocks.

The Zweig Relative Strength top 5 made 3.37% for the week.

Zacks & Zweig lost 1.36% and had 3 picks--ANDE, KEX, WW.

The To The Moon screen lost 1.59%.

I'm adding the Zweig MACD screen to the side bar because I think it has potential. We'll see.

My portfolio is down nearly 14% which means I've lost nearly half of the 40% I made last year. I guess I shouldn't look at things that way, but I can't help it.

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.

Combining Zweig Screen with MACD Indicator

I really like the MACD indicator even though I usually don't use it in my trading. Since 2004 I've tracked the highest relative strength stock in the Zweig screen and also tracked the same stock and only buying if the MACD is bullish.

Since 2004 and rebalanced weekly that one stock has made 3723%. That's pretty good and worth a look, but the MACD indicator helped to produce a 7553% gain over the same period. That's even better.

I don't know why, but I have never tracked a modified Zweig screen buying only stocks with a bullish MACD. I started to track this this year and so far the results are promising. YTD that screen is down only .08% compared to heavier losses in my other screens (and in the indexes). I look forward to having a few years of data under my belt so I can see if the MACD "qualifier" has potential.

If you are interested in the MACD indicator, Zacks Research has a good article here.

Week in Review 2-1-2008

I got spanked.

This week was a mess for me and it is reflected in my account. I didn't lose anything (I gained a measly .5 percent), but when the averages looked like this (Dow +4.39%, the S&P 500 +4.87%, Nasdaq +3.75%, and the Russell 2000 +6.08%) I can't be too happy about my performance.

Here's where I went wrong (please learn from my stupidity):

• I lost focus and strayed from my plan
• I resorted to stops (and had no guidelines for how to place them)
• I paid too much attention to indicators, news, and other blogs which paralyzed my trading
• I worried too much about the broad market
• I waited for stocks to "prove" themselves and then got left behind as they rocketed upward
• I sold too soon

It has never paid off for me to market time, and yet I do it every time my account takes a hit. You'd think after years of doing this, I would learn my lesson. It just hurts so much to loose money even when you know it's all part of the game.

Now that January is over, I hope to get back to the plan and crawl out of this hole I've dug for myself.

All but one of the stock screens did very well this week. The ZZ#1 screen which filters AAII's Zweig screen with Zacks #1 ratings made 11.42% this week with it's one pick LXU. That is the first stock the screen has picked since the end of December which may be an indicator of its own (no #1 stocks--market sucks).

The Zweig Relative Strength screen made 4.05% this week but is still underwater for the year. The screen would have done much better if it wasn't for the blowup of GHM at the beginning of the week. I picked GHM up on Wednesday and have made a nice 13% on it so far which was my only good call this week. Without GHM the screen would have made over 10% this week thanks to a tidy 29% return for WSCI.

StockPunk's To The Moon screen is sucking wind and is down over 11% for the year so far.

Zweig & Zacks Screen

A few of you have commented on the 0% return that the Zweig & Zacks screen has shown so far this year. There haven't been any passing stocks on this screen for several weeks.

The screen looks for any stocks in AAII's Zweig screen that have a #1 ranking from Zack's Research.

I've been wondering recently if I could use the number of passing companies in the Zweig screen and/or the number of companies that have a number 1 ranking on Zack's to get a feel for the market. The Zweig screen averages about 15 stocks each month. Lately, only about 10 have shown up on the screen. And as I said before, none of those stocks have qualified for a number 1 ranking on Zacks. Interesting.

How soon I forget . . .

After another awful week for my portfolio and for the screens I follow, I assumed that this was probably the worst four weeks in trading for me and for the screens. So I went all the way back to August 2004 (when I first started tracking performance) and discovered that this downturn wasn't unique, and it wasn't the worst.

In fact the Zweig RS 5 screen had a MUCH worse four weeks back in AUGUST 2008--just 5 months ago. It lost a whopping 26% during that downturn--compared with 19% (so far--from the beginning of December until now) during this one. Things could still get worse, but it really puts in perspective what a short-term thinker I am.

I was writing this year off as the first losing year I've ever had (since 2003) and we aren't even four weeks into the year. Last year the Zweig RS 5 screen made 46% without any sort of stop management--even with a 26% downturn more than half way through the year.

I don't think it's quite time to jump back in, but I do think that once the dust settles we have an amazing opportunity to buy a lot of good stocks for some very good prices.

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.

More about August

I was quite surprised when I went over the Zweig screen for August. I base a lot of my trading on that screen and I figured it would have taken it on the chin during the month of August. On the contrary, it made 5.27%. Buying all the stocks you see in the chart on the first day of August and holding them through today would have beat me by 20% this month. That makes me question my tactics a little bit.

A couple of stocks caught me by surprise this month. I didn't have BW on my watch list this whole month and it was the best performer in the screen. I also ignored HRS and jumped out of VMI too soon.

I'm not sure if this month was an just a fluke, but I'm sure there is some further analysis that I can do to figure out what went wrong.