A stock satisfies the Contrarian Buy Rules if it is:

What does the contrarian view contribute to rolling stocks? Let's consider these elements as related to rolling stocks.

First, the "down-by-half" rule: We took a block of Pro-fundity picks over ten weeks starting with the week ending April 2, 1999. This represents a population of 100 stocks, chosen for Pro-fundity as described on the page. The following table shows the aggregate return for each week; One week later and 14 to 23 weeks later as shown.

The returns shown are found by dividing the ticker price on Friday, September 10, by the ticker price on the Friday it was picked. This return would be ours if we bought and then held the stock for that time interval. Note: This return does not consider the amount invested or the cost for commission.

Notice the relationship between the One-week and the Several-week returns. There is basically no correlation. Our "How'd we do last week" is an academic exercise, with no value relative to ultimate returns.

The "down-by-half" concept was tested on the 100 stocks represented in our sample. There was no correlation between those that were "down by more than half their 52-week high" and the return success. The contrarian approach holds a position for up to three years. Rolling stocks can be turned several time during one year.

Both confirming indicators for the contrarian are valuable for rolling stocks. Insider trading is a powerful tool to use frequently. Insider buying is a stronger signal than insider selling. Selling can result from numerous causes, from college costs to a trip to the Caribbean. But insider buying means one thing, those close to the action think the price is going up.

Each fundamental indicator shown on the contrarian's list is equally valid for rolling stocks. Buy sound and stable stocks. Even though the rolling strategy deals on a shorter time frame, it is far better to have a selected stock roll up and away from a channel than down and out.

Now consider the results obtained by using the "Up-tick, Down-tick" strategy we have described in previous Guideposts. This strategy utilizes alternative orders (buy-stop, sell-stop) in the following way:

1. Watch for one (or two) successive up-ticks in the price as proof of strength.
2. Place a buy-stop order a few percentage points above the last price.
3. If the price increases further, the stop will trigger and we will take a position in the stock at or near our buy-stop price.
4. If the stock turns down, we don't fill and may want to watch for support at a lower (better) buy level.
5. Follow some pattern to sell: Watch for one (or two) down-ticks to suggest a pending weakness, to help your exit before the roll starts down.
6. This way we can strengthen our understanding of "support" and "resistance" with practical steps to maximize our returns.

We cover this in the chapters on paper trading in our book Provident Investing, showing how some price patterns work better with one up-tick, others work better with two, etc., etc. In the analysis that follows, we studied the 10-week block of picks trying all combinations of one or two up and down ticks. A perfect strategy can be found for any price pattern, using historical data and up and down ticks with an added small percentage move. Hind-sight is 20-20, but oh, what we can learn from it. We did that in this exercise, for grins, but it is strictly academic. The chances of getting the exact price pattern again are slim to none. What we can learn is the patterns that develop for the up & down ticks. Study the results in the two tables that follow carefully to see if there is a strategy you might like to try.

This exercise is not to focus on any single stock and find what might work for that stock. Rather, it is done on a group of stocks to find the likelihood of success for one strategy or another over a long time period. Granted, when we buy a stock we're only working with one at a time, not a group. But understanding how a group responds can help us understand the likelihood of it working on a single stock.

Don't be overwhelmed by the busy data. Focus on the average results at the bottom of each table. Observe the following:

1. As before, there is no correlation between the 7 day return and the many-week return.
2. The columns are headed by "1U&1D, 0%-0%", etc. This means the stock was bought on one up-tick with zero %, and sold on one down-tick with zero %. "2U&1D" means two up-ticks were the buy trigger and one down-tick was the sell trigger (again with no percentages added).
3. The last column shows the best return available for some combination of upticks & downticks with a small percentage added to find the "sweet spot." This is a dream, however, as we've said. The averages at the bottom of the table show the results for the four combinations of up and down ticks.
4. Table II was chosen for this example as the best of the ten weeks so far as the percent return tracking was concerned. Table III had the worst return in the group. In both cases, by working the rolling nature of these price patterns, the return was much better than a "buy and hold" return for both the worst and the best of the ten.
5. As we use these strategies as a game, by either back-trading, going over historical data - or paper trading, going forward, we will strengthen our understanding of what is more likely to work under what conditions better than anything else we can do.

Note: In both Table I and Table II, the rolling performance is calculated using an initial $1,000 investment with $20 commission included with each trade.

Table III
Tickers picked on 5/14/99 with returns.
This week had the lowest static return of the
block of 10 shown in Table I



We find this ten-week study on rolling stock strategies.... exciting.

We also found the contrarian view had useful tools for stock selection. In coming weeks we will study the opposite of the contrarian view, momentum investing. We will find much useful information for rolling stocks in this material. We will also provide from time to time a better measure of our rolling performance than a seven-day "How'd we do last week..." Stay tuned.

Understanding:

It is our intent to help our subscribers understand market strategies well enough to make informed decisions and understand the risks.

We provide TC-2000 tutorials to members. See the Member Login page.

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