4/05/2007

Neglect is a good strategy

Expanding from the theme of 'Virgin' , I have over the years experimented with various ways of finding neglected stocks. The entire area of neglect is conceptually based on contrary thinking or long term mean reversion or value focus.

While the 'Virgin' strategy is focused on stocks which have not rallied in their entire lifespan, the focus behind my 'Neglect' strategy is on stocks which might have rallied previously some years ago and now are out of favor. In 'Neglect' I am primarily looking for seller washout.

Now the simplest way to find these kind of neglected stocks is to find the number of negative days to positive days ratio over a long period of time. After experimenting with various time frames, I look at 4 years negative to positive days ratio.

So the software basically finds out for all stocks number of positive days to negative days ratio for 4 years and ranks the stock. I look at the ratio of less than 25% positive days as the ideal 'Neglect' candidates. Some of these stocks just get delisted, but some survive, turn around and start rallying.

To time entries again I look for combination of factors like :
1 They should make 30% plus move from 260 days low (100 * ((C + .01) - ( MINC260 + .01)) / (MINC260 + .01))>=30
2 Should meet liquidity condition ( AVGC20 * AVGV20 >= 2500)
3 One day 4% plus breakout. ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1

Such stocks also have high success rate in their rallies as the sellers in them are washed out and the reason they start rallying in most cases is because of some improvement or turnaround in their business.

This strategy is again a variation of 'Virgins'. One of the things I have found after studying stocks which make 100% plus move in a year over years is that prior to their move they are essentially neglected. As I have said many times before previous neglect is very good for future returns. I have experimented with many other ways to quantify and find neglect and use 2-3 other ways to define neglect. All these strategies I club under Virgin/ Neglect label.

So if you want to find and trade stocks likely to make significant moves early in their price appreciation cycle you must find various ways of quantifying neglect.

Note: All such strategies require building your own databases or software or your trading software should have the capability to do such scans. I have got so many emails me asking how to do 'Virgin' scan in TC2000 or most commercially available software. Most of them are built for simple and popular things. You may not be able to do these things in them.
If you are convinced of the logic behind a idea, you can always build or find a software to do it. I first built my software using Excel.Where there is a will, there is a way.





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