Wednesday, May 4, 2011

Perfecting the strategy of 'buying high' while returning 4381% in ten years!

Last week I demonstrated to my readers that a simple strategy of buying a stock at a 52 week high and holding for any given period of time, can be a very successful LONG investment strategy.

Like any strategy it can be improved on, and in this post I'll try to do just that. Here I'll add another important consideration when buying a stock, the volume backing its price movement. To do that, let me introduce what I call the Volume Moving Average Ratio (VMAR). What this simply is, is the ratio of the 20 day volume moving average to the 75 day volume moving average (you can use other lengths of time as well):

VMAR = VMA(20 day) / VMA(75 day) 

What this tells us is how much the recent average volume is compared to the longer term volume. I used the simple moving average but an exponential would work as well. In theory, a VMAR >> 1 means a stock has significantly more investment activity than usual and, correlated with a price gain, indicates that perhaps its price movement IS warranted.

Now we could potentially cover a huge combination of VMARs and hold times. I'll leave it up to you, the reader, to find the best combination. But now I present to you two scenarios of short (1 or 3 month) hold times with VMARs greater than 1 or 2.

What we see is impressive...enormously impressive. In fact a strategy of 'buying high' backed with volume can make you a very wealthy person. Of course I make no promises, and any strategy that worked last decade may not this decade, and you should consider that. Also, don't forget commissions, as with any trading strategy, can easily take 1-2% off every trade. But these are the facts, and the numbers, and of that I am 100% certain. So here you go...enjoy!

1 Month Hold (VMAR > 1.5) 
                 10 Year performance       Avg. Return      Stocks meeting criteria 
 NYSE                   756%                     1.7%                        1947
 Nasdaq                 597%                     1.5%                       4653
 Amex                  1531%                     2.3%                        885

1 Month Hold (VMAR > 2) 
                 10 Year performance       Avg. Return      Stocks meeting criteria
 NYSE                   4381%                     3.2%                      330
 Nasdaq                  161%                     0.4%                     1507
 Amex                    1936%                     2.5%                      317

3 Month Hold (VMAR > 1.5) 
                 10 Year performance       Avg. Return      Stocks meeting criteria 
 NYSE                   314%                     2.9%                        1005
 Nasdaq                 539%                     4.3%                       2905
 Amex                    918%                     5.7%                        573

3 Month Hold (VMAR > 2) 
                 10 Year performance       Avg. Return      Stocks meeting criteria 
 NYSE                  1068%                     6.1%                        182
 Nasdaq                 248%                     2.3%                       1000
 Amex                    918%                     5.7%                        236