One Year Forward Return on S&P 500 Stock Market Looks Historically Positive From Here

The Stock Market as represented by the S&P 500 Index had a bad day, going down 60.66 points to 996.23 for a loss of 5.74%.

Historically, today is a unique day.

Previously, this blog made a study of the S&P 500 from 1950 to March 2008 and looked at the one year forward annual return based on the S&P 500 index in relation to the 52 week high and 52 week low.

We calculated a special value called HOLU which maximizes the distance away from the 52 week high, and minimizes the distance from the 52 week low.

From 1950 to March 2008, there are only 59 trading days where the HOLU value exceeded 30%. And the average one year forward return during those 59 days was a market beating 22.13%.

Today's HOLU Value is 36.79%, with the 52 week S&P 500 low of 996.23, and the 52 week high of 1576.09.

The highest HOLU value during this period was 44.11% on October 3, 1974.

The longest time period where the HOLU value remained above 30% was from August 14, 1974 to October 9, 1974 with the exception of two days in this period where the HOLU briefly went under 30%.

Time to Accumulate?

Based on this, now might be a good time to be a contrarian and start accumulating index funds or ETFs.

However, the market could still go lower and possibly approach the record 44.11% HOLU value on October 3, 1974.

But for the true long term investor, having a cost basis around this level or lower could be a profitable move.

Today's S&P 500

Two Stocks on My Screen in a Bad Market (OSIP, ISYS)

I recently ran one of my stock screens, looking for new ideas.

In this market, I managed to find two interesting companies.

1. Integral Systems (ISYS) builds satellite ground systems and equipment for command and control, integration and test, data processing and simulation. The stock is near its 52 week high despite the bad market. The company has a forward PE of 19, and a 5 year estimated growth rate of 22.5% for a PEG of 0.85 which is very good, having a PEG of less than 1.
   
2. OSI Pharmaceuticals (OSIP) is a biotech company that discovers, develops, and commercializes molecular targeted therapies for oncology, diabetes and obesity. Its flagship product is Tarceva, used to treat advanced non-small cell lung cancer, as well as other forms of cancer such as pancreatic cancer. OSIP has a forward PE of 18.4, and a 5 year estimated growth estimate of 34%. It has a PEG of around 0.5, which is very low. The stock is near its 52 week high despite the bad market.
   

Natural Gas Boom, Oil Sands, Rising Oil Prices, Breakout: Try CNQ, Canadian Natural Resources

What company benefits from all the trends below?

1. Crude oil is zooming.

2. Jim Cramer has proclaimed 2008 the Year of Natural Gas. In Jim Cramer's CNBC Show Mad Money, Jim Cramer expressed his optimism:

Cramer extended his optimism to the entire natural gas sector. With the growth rates for a natural gas drillers averaging 15%, he said investors will be hard pressed to find such high growth in any other sector. He also mentioned the sector's excellent visibility as another plus.

3. Oil Sands Exposure

Over the long term, as crude prices zoom higher, alternative sources of oil need to be found. Canada has the Largest Reserve of Crude Oil, and extracting the Oil from Canadian Oil Sands becomes a much more profitable experience. Right now, oil sands account for 50% of Canada's Production. By 2010, it is estimated to account for 70%.

This particular company has a Horizon Oil Sands Project and Phase 1 of the project is almost 100% complete.

4. Breaking Out, 52 week high

As of May 6, 2008, this company has broken out to a multi-year high.

The Company?

So what is the Company? The Company is Canadian Natural Resources (CNQ), and this company benefits from all the trends above. It has a forward PE of 14.5.

Canadian Natural Resources (CNQ) is a company worth looking into.

Stock Market and S&P 500 Bottom Indicator Based on Extension from 52 Week Low and 52 Week High

Is there a stock market (or S&P 500) bottom indicator based on the current (S&P 500)index value in relation to the 52 week high and 52 week low?

After research, there appears to be a bottom indicator based on these values.

The Equation

The thesis we wanted to test involves this equation:

HOLU Function = (% Below 52 Week High) - (% Above 52 Week Low)

In order to find a bottom, we wish to maximize The HOLU Function (HOLU = High Overextended Low Underextended).

Theory Behind the Equation

The theory is that we want to:

1. Maximize the Percentage Below the 52 Week High:
   
   The Greater the Percentage Below the 52 week high, the more likely the market has overextended to the downside, and the bottom may be near.
   
   
2. Minimize the Percentage Above the 52 Week Low:
   
   The stock market axiom "Buy low, Sell High", appears to be true, and minimizing the percentage above the 52 Week Low is a goal.
   

So by combining both goals, we have created the HOLU Function above and we wish to maximize the value.

Method

We used data on the S&P 500 From 1950 to March 31, 2008. We looked at the HOLU Function values in relation to the forward one year return on the S&P 500. We averaged the one year forward return on the S&P 500 based on different cutoff values.

The Results



In the chart above, if we have a HOLU Value greater than 10%, the average one year forward S&P 500 return is 13.55%, many percentage points above the average one year forward S&P 500 return of 8.51% if the HOLU value is less than or equal to 10%.

When we use a larger cutoff HOLU value of 20%, we get even better results, 18.26% to 8.82%. If we have HOLU Values greater than 30%, we have the largest gain, an average one year forward S&P 500 return of 22.13% (compared to 8.97%).

So the HOLU Function/Equation above appears to generally true. With HOLU Values above 10%, 20% or 30%, we increase our chances of having a good one year forward return if we can assume that history holds. We can use a high HOLU Value above 20% or 30% as a stock market (S&P 500) bottom indicator.

Sample Bottom Days

Here is a sample of the 59 days where the HOLU Value is greater than 30%.

Date	HOLU	One Year Fwd Return	% Below 52WeekHigh	% Above 52WeekLow
10/9/2002	33.75%	33.79%	33.75%	0%
7/23/2002	34.65%	22.70%	34.65%	0%
9/21/2001	33.84%	-12.68%	33.84%	0%
12/4/1987	33.51%	22.23%	33.51%	0%
10/19/1987	33.24%	22.41%	33.24%	0%
12/6/1974	30.48%	34.75%	34.86%	4.38%
10/3/1974	44.11%	34.16%	44.11%	0%
9/13/1974	41.49%	28.51%	41.49%	0%
5/26/1970	33.03%	46.21%	33.03%	0%

Please note that October 19, 1987 is Black Monday!

Today's Value

As of March 31, 2008, the S&P 500 is 1322.70. 52 Week high is 1565.15 and 52 Week Low is 1273.37 (Closing Low).

HOLU = (% Below 52 Week High) - (% Above 52 Week Low)
= 15.49% - 3.87%
= 11.62%

While we would like HOLU values greater than 30%, 11.62% seems like a decent HOLU value if we look forward one year to the future.

Other Bottom Indicators

1. Stocks above 50 and 200 Day Moving Average
   
2. Put-Call Ratio
   
3. New High-Low Index
   
4. Ratio of Stocks Above 200 Day Moving Average to 50 Day Moving Average.
   
5. Bull Bear Ratio and Bullish Percentage
   
6. Oscillators
   

Growth Stock Valuation (September 25, 2007)

Growth Stocks such as Apple (AAPL) and Google (GOOG) have been doing well and have recently reached their 52 week or all time highs. But when are these growth stocks overvalued?

One rule of thumb that is very useful with stocks (especially growth stocks) is to use the PEG ratio, or the Forward Price Earnings ratio divided by the 5 year estimated growth. A PEG ratio over 2 is considered overvalued, and a PEG ratio under 1 is considered very cheap.

Table of Selected Growth Stocks

Here are a few growth stocks with different PEG ratios. Data from Yahoo Finance, Tuesday, September 25, 2007:

Symbol	Stock Name	PEG	Forward PE	5 yr growth
AMX	America Movil	0.46	15.12	32.65%
HRS	Harris	0.56	15.17	27%
TDG	Transdigm Group	0.65	18.58	28.50%
HANS	Hansen	0.66	25.74	39.09%
WBD	Wimm Bill Dann	0.67	23.53	35.00%
SNDA	Shanda Interactive	0.71	20.73	29.39%
ABB	ABB	0.78	19.43	25.00%
GOOG	Google	0.87	29.13	33.65%
CROX	Crox	0.96	25.55	26.57%
RIMM	Research in Motion	1.12	34.46	30.82%
CSCO	Cisco	1.15	17.73	15.43%
JSDA	Jones Soda	1.15	42.77	37.07%
ISRG	Intuitive Surgical	1.35	54.20	40.05%
GME	Gamestop	1.40	29.10	20.75%
AAPL	Apple	1.46	34.66	23.67%
BIDU	Baidu	1.48	81.06	54.60%
GRMN	Garmin	1.56	30.15	19.38%
NVT	Navteq	1.69	39.81	23.49%
YHOO	Yahoo	1.99	48.20	24.19%
AMZN	Amazon.com	2.59	60.70	23.42%

Chart of Growth Stocks

Here's a Chart of the different growth stocks sorted by PEG. In the graph, PEG is multiplied by 20. So an adjusted PEG of 15 means PEG is 15/20 or 0.75:

Cheap Growth Ready to Breakout Screen

In order to get more consistent results in the market, I've been trying to find good quantitative stock screens.

I managed to find one screen that seems to be working well:

1. Forward PE < 20
2. 5 Years Growth > 20%
3. Price above 200 day moving average
4. Price between 0 to 5% above 50 Day moving average
5. Price within 5% of 52 Week High.

My theory is to buy stocks that have great growth but are undervalued in the market. In addition, the stocks should be making higher highs, be within reach of a breakout, and yet be at a good accumulation point (slightly above the 50 day moving average).

In a question regarding whether to buy 52 week highs or 52 week lows, Jim Cramer on Stockpickr.com) says that:

"They dont get on the 52-week-high list for nothing.
Companies that get on it get there because they are in
the right sector and have the best execution. That's a
better list to buy on than just about anyone i know,
particularly on a 5% pullback.

Source(s):

I like IBD for this and Lee Cooperman, one of the great
investors, who emphasized this view to me when he was
running research at Goldman."

Part of the screen I developed seems to match what Lee Cooperman of Goldman Sachs has found out. It is good to buy 52 week highs especially on a 5% pullback.

Also, rather than using pure PE to Growth ratio, I prefer to use a PE of less than 20, and 5 year growth rate of greater than 20, guaranteeing us a PEG of less than one. Since the 5 year growth rate is less reliable than the forward PE, by choosing stocks with a low PE, we'll have a greater level of safety if a companies 5 year estimate starts going down.

I managed to create three portfolios using this screen in the past and in another article (here), I will check on the performance of all three portfolios.