A mechanical strategy that I’ve been using lately, with good effect, is to hunt on Stockopedia for the following criteria:
* Value >= 70
* Quality >=70
* 14-day oversold in last 5 days
I’m looking for sufficient value and quality that is being dumped by the market. My reasoning behind not ratchetting up the Value level to, say, 90, is that good results can be had even from companies that aren’t ridiculously cheap (see my post on Perfect, Putrid and Mediocre portfolios http://wp.me/p2eZvw-MH)
The strategy would have worked well if you had bought housebuilder TEF.L (Telford Homes), like I did, on 11 August at 277p. By an amazing coincidence, it was tipped by Jim Slater shortly thereafter, and has now sky-rocketed to 342p. That’s a gain of over 20% in a couple of weeks.
It was luck on my part, to be sure, but I think it is the right principle to follow.
By way of another example, consider telecomm equipment manufacturer VLK (Visilink). It is having a great surge today on the back of a tip by Simon Thompson. I had bought in January at 45p. After yoyo-ing around, it currently trades at 47.15p. A bit of a gain, but nothing to write home about. My mistake was that I bought when the RSI was well above 30. If I had waited until the RSI was below 30, I could have picked up the shares at 40.8p in March or 41.8p in late July. In August, another oversold opportunity was available at similar prices. If you were really lucky, you would have bought at the bottom at 39.8p. If you weren’t so lucky, you might have picked them up at 45.06p in June. That is, admittedly, slightly higher than my entry price. On the other hand, you could have done something more productive with your money in the meantime. Also, you would have likely increased your odds of getting a good entry point.
It’s hardly a perfect system. It’s more about odds than guarantees.
A good time to sell is when the company is looking overbought. TEF and VLK are at that point.
Another desirable property of the company is good
liquidity. If you look at the charts of the 14d RSI oversold, you will see that some companies have jerking jumps. Avoid those. An example of such a company is THRL (Target Healthcare REIT):
See how the the company swings from under- to over- sold violently, and it has big intraday movements? Avoid the micro caps. Some small-caps (£50m-£350m) are OK, some not. Most of them look unsuitable, although the higher cap ones should be OK. You may want to set a threshold, like £200m.
Currently, there are no large-cap (>£2.5b) stocks that qualify under this screen. TSCO (Tesco) come close, but their quality is just shy of the quality threshold. The same applies to mid-caps (£350m – £2.5b) and small-caps. I’m not even considering the micros.
So it looks like a case of sitting on the sidelines with any cash that you have until an opportunity comes along.