Editor's Note: We're pleased to announce that three investing columns from MSN MoneyCentral will appear regularly on
. On Wednesdays, Jon Markman's "SuperModels" will alternate with Mary Rowland's "Start Investing." Jim Jubak's "Jubak's Journal" will appear each Friday. All three columnists appreciate your feedback at firstname.lastname@example.org.
If you didn't care much for the fate of your equity investments in January, take heart: A review of recent market history suggests that February may bring some temporary relief.
In a moment, I'll suggest some specific stocks that could -- no lie -- rally nicely by Washington's birthday. But first, a brief history lesson to illustrate why it doesn't really matter what the broad market does, so long as you've got a solid strategy. (If you can't wait for the February picks, see below.)
The last two times the S&P 500 Index finished the first month of the year in the red were 1992 and 1990; the losses were -2% and -7%, respectively. In both cases, the following month showed gains of 1%. The rebounds were short-lived however, as both years were among the worst of the past 20: In 1990, the broad market benchmark fell 6.5% for the year, and in 1992 it rose a very modest 4.5%. The only worse year in the past 10 was 1994, when the S&P 500 dropped 2%.
Of course, not all equities were losers in those years. In 1990, the country already was suffering through a mild recession when the market was jolted by the Iraqi invasion of Kuwait in August. If you held an S&P 500 Index fund, you lost ground. But that same year, three relatively obscure companies got big boosts in the market:
, finished the year up 231% -- its first of five 100%+ years in the 1990s. Other notable growth stocks that year were
, up 143%, and
, up 122%. The three-stock Flare-Out Growth year-trading momentum strategy that I follow in this column advanced 21.4% in 1990, or 30.2 percentage points more than the S&P 500. It was led by a 40.2% gain in
. (None of the year's top gainers was a Flare that year because they all failed to meet our screen's minimum $1 billion market capitalization or profitability criteria. Dell and EMC had market caps of less than $500 million at the time.)
In 1992, the market suffered through a nerve-wracking battle for the presidency between incumbent George Bush and challenger Bill Clinton. Yet even as the broad averages faltered amid fears over new taxes, there were again some impressive moves among individual stocks: vitamin maker
, up 1,360%; network equipment maker
, up 432%; and disk-drive maker
, up 214%. The Flare-Out Growth strategy advanced 27.1%, or more than 20 percentage points better than the S&P 500, led by a 134% gain in
International Game Technology
In 1994, the last year that a string of Federal Reserve interest-rate hikes resulted in a negative return for the market, good stock picking was well rewarded. Top gainers included communications component maker
, up 437%; and network equipment maker StrataCom (later purchased by Cisco Systems), which climbed 317%. The Flare-Out Growth strategy returned 45.8%, or 47.8 percentage points better than the S&P 500, led by a 142% gain in
The points are that the returns of broad averages never tell the whole story, and that both strong mechanical strategies and smart fundamental stock picking are rewarded in any environment. The Flare-Out Growth stocks that our model picked to start 2000 look pretty sick right now, down a hellacious 32% through Tuesday's close if you bought at what turned out to be their peaks at the Jan. 3 open. But we've seen our momentum portfolios down just as much or worse. Our April 1999 10-stock Flare portfolio got whacked for a giant loss about two weeks after it started trading. Anyone who stuck with the year-trading discipline was well rewarded by the time seven months had passed, and through Tuesday, the portfolio is up five times the S&P 500: 48% vs. 9%. Likewise, the July 10-stock portfolio also got hammered over the summer, but year-traders again were well rewarded; it's well off its highs, but it has still performed six times better than the market, 24% to 4%. (New readers should note that Qualcomm made its first appearance in our models in that portfolio, and is now still up 302%, despite the latest static on its line.)
I don't want to sound like Pollyanna, because for all I know, a great bear move may well have begun and the recent mauling of Qualcomm,
may be just the start of a massive decline. But history suggests that successful money managers spent much of January stepping away from the plate and reassessing their next moves after the unusual run-up of late 1999. These kinds of buyers' strikes are hard to witness first-hand, but from the perspective of two years from now, the past month will probably look like a funny little zag in price charts that are mostly a handsome set of zigs.
If you follow the SuperModels concept with an aggressive-growth fraction of your investable funds, but would still like to practice conservative money management and set stop limits, I suggest you look back at my Nov. 10
column titled, "A new technique for selling stocks near their peak." The column describes a system for setting limit orders to sell stocks when their prices break the upward trend of their "average true range" (ATR). There's even a link in it to an Excel macro created by a SuperModels Community member that can help you set the ATR stops on your stocks. (The ATR of a stock each day is the greatest of the difference between a stock's previous day's close and the current day's high, low or close. In this system, a trader determines a 14-day moving average of that range, and sets a stop at some multiple of that number, ranging from 0.5 to 2.0; we use 1.38, the first Fibonacci sequence number.)
Using this system aggressively by never moving a stop down from peaks, a trader would have sold Qualcomm on Jan. 4 at $155.25, BroadVision on Jan. 5 at $154 and Emulex at $107 on Jan. 28. My research has shown that this stop system can be counter-productive in surging market environments such as the one we experienced last fall, but helpful in flat or declining markets.
For another perspective on cutting losses, read two books by
Investors Business Daily
founder and veteran money manager William O'Neil: the classic
How to Make Money in Stocks
and its update,
24 Essential Lessons for Investment Success
. In the latter book, O'Neil insists that Rule No. 1 is a loss limit of 8% for every purchase. He writes: "You must always protect your investment account. Particularly if you invest on margin, cutting losses is absolutely essential."
Which tactic is right for you? The "magic" in the SuperModels year-trading and month-trading concepts (if there is any) is in the regular rebalancing that occurs. These rebalancings are themselves a crude stop system, since you are trading out of stocks that no longer meet the models' investment criteria. So take a few moments to consider the level of aggressiveness that makes you comfortable: If you're not much of an activist, go yearly and don't worry about stops. If you want to be more aggressive, then try the ATR stops. And if you want to go all the way, follow O'Neil's methods. Whichever you choose, though, try to stick with it long enough to determine whether it suits your temperament rather than just bailing at the first (or second or third) sign of failure.
Thank Goodness It's February
As for determining the stocks that could simply enjoy a solid February, I'll turn to our new HiMARQ analysis. This is my theory that many stocks and sectors exhibit a remarkable amount of monthly and quarterly seasonality. The strategy -- whose name is an acronym for Historical Monthly Average Return Quotient -- suggests that investors can add a time dimension profitably to their set of fundamental and technical methods for purchasing stocks. Very often, my research shows stocks and whole sectors will make as much as 25% of their entire annual return in the same one or two individual months each year.
The HiMARQ strategy gave us a fantastic pass at biotech and telecom stocks in December 1999, and a very good shot at semiconductor stocks in January. It performed a lot less well with Internet and brokerage stocks in January. In the future, I'm going to focus less on choosing names from sectors with good monthly HiMARQ scores and more on the best stocks with both strong HiMARQ scores and a decent chart and fundamentals. Keep in mind that this strategy is still highly experimental, and the object is just a one-month trade. In the SuperModels Web Community, I've posted a note listing proposed stop limits and targets for each stock. We won't be following those limits in our official HiMARQ portfolio; they're just for your education.
The sectors with the best HiMARQ scores for February are retail, brokerages and airlines. Unfortunately there just aren't many stocks in those groups with healthy charts.
- My top choices in retail are
Ross Stores (ROST) - Get Report,
Consolidated Stores (CNS) - Get Report and
American Eagle Outfitters (AEOS) . I'll also broaden out and take
Adecco (ADECY) , which is a Swiss-based company that is the world's leading provider of temporary sales help. Ross is up an average of 12% in each February over the past 13 years, with a record of nine positive Februaries to four negative Februaries. Consolidated is up 11.6% in Februaries over the past 12 years, with an 11-1 record. American Eagle is up 14.3% on average over the past five Februaries, with a 4-1 record. Adecco is up 11.86% on average over the past five years, with a 5-0 record. (I'm not putting
Amazon.com (AMZN) - Get Report on the list, but for the record, it is up 20% on average in Februaries with a 2-0 record.)
- Brokerages look pretty weak, but my top choice would be
Citigroup (C) - Get Report, parent of
Salomon Smith Barney, which is up 3.8% on average over the past 16 years for a 12-4 record. Another is
Amvescap (AVZ) , which is the British-based owner of mutual fund giants
AIM Management; it's up 13.5% over the past four years, with a 4-0 record.
- Among airlines, the strongest chart and fundamentals belong to
Ryanair Holdings (RYAAY) - Get Report, which is a renegade low-fare airline based in Ireland. It's up 30% on average over the past two Februaries, with a 2-0 record. All of the U.S. airlines look dreadful. (I'm not putting any others on the list, but if the sector really does rally in February, the most likely candidate is
AMR (AMR) , which is up 3.3% on average over the past 16 Februaries for a 10-6 record.)
- Among other stocks, my top picks are
Siebel Systems (SEBL) , an enterprise software company focused on customer relationships; it's up 8.9% on average over the past three years with a 3-0 record;
Teligent (TGNT) , a competitive local exchange carrier that specializes in fixed-wireless systems, is up 21% over the past two years with a 2-0 record; and
Ion Networks (IONN) , a network management software company, which is up 25% over the past four years with a 4-0 record.
Let me repeat: The HiMARQ strategy is still just an experiment that we're testing and observing in public. Many readers who used the technique in December and January reported great results, but I wouldn't recommend anyone diving in with abandon.
MonthTrader Portfolio, Version 2000.2
The SuperModels month-trader portfolio, which enjoyed an unbelievable advance of 1,076% in 1999, came back to Earth in January by suffering a 33% decline. Detractors of the momentum style of investing have pointed to this plunge as evidence of folly. Yet in all fairness, January was a lot less traumatic for readers who had been following the month-trader strategy since the fall. These readers were holding Qualcomm, BroadVision and Emulex over from December portfolios, and are still up 43% since Dec. 1, a nice contrast to the 1% advance in the S&P 500.
If you're just catching up, month-traders run our Flare-Out Growth screen once a month and purchase the top three stocks in equal dollar amounts. On the same day in the following month, they run the screen again. They retain the stocks that are still ranked at the top of the list, but sell the ones that have dropped and replace them with the new top-ranked names. If a stock falls off the screen in the middle of the month, you still hold it until your rebalance period.
Officially, we rebalance our month-trader portfolio on the first trading day of each month using the names netted in our screen on the last trading day of the month. Strictly for mundane bookkeeping purposes, we use the closing prices of the first trading day for both our sale prices and our purchase prices. The rebalance dates you use, and the prices that you obtain, may vary.
In addition, many month-traders decide to trade more than three stocks each month, and use more than just our Flare-Out Growth (FOG) screen. For instance, many take additional names from a second FOG screen that requires lower trailing 12-month sales and profitability because historically it has outperformed our classic screen, though with more volatility.
The names for our official list in February are
. The first two make components for the world's fiber-optic network buildout; the latter makes key components for cellular telephones. The names for the more high-risk screen are
Optical Coating Laboratory
. These three stocks also make components for wireless or fiber-optic networks.
The Fine Print
There will be no new recommendations this week for our portfolio of stocks that could be up 10,000% over the next 10 years, but I promise one in my next column, which will be published Feb. 16....Quick update on past members of our 100x10y club:
announced another split and a few new customers for its Mirror Image Internet subsidiary over the past two weeks....Fuel-cell manufacturer
has also bucked the market's downtrend since being added to our portfolio, advancing 260% since Jan. 5. That's the sort of gain I expected to see over the next year, not a couple weeks, so consolidation would not be surprising....The new owners of
were reportedly in New York in mid-January for meetings with investment bankers about a private placement of stock. The Israeli-based company, which is expected to change its name to
, showed off its wireless Internet access technology to the bankers and was well received....
founder and Chief Executive Officer John Fan wowed a CNBC audience Jan. 27 by telling anchor Mark Haines that his ambition is to have a Kopin transistor inside every cell phone and a Kopin CyberDisplay on the front of every cell phone. That's the kind of big ambition that I'm looking for in this portfolio's stocks.
Jon D. Markman is managing editor for MSN MoneyCentral Investor. At time of publication, he was long Amgen, BroadVision, Cisco, Digital Lightwave, EMC, Emulex, Gemstar International, Home Depot, ION Networks, Microsoft, NEXTLINK Communications, Nokia, Oracle, PMC-Sierra, Qualcomm, SDL, Siebel Systems, Sun Microsystems and Xcelera.com, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
Rowland's Watch Portfolio