What are we looking for?
U.S.-listed equities that are attractive from a trend-following perspective.
The S&P 500 surpassed a key resistance level on July 27 and is now within 2 per cent of its record high set on Jan. 4. Our interest now lies in identifying stocks that are maintaining positions close to their 52-week highs, driven by robust price momentum and technical strength. These metrics hold particular significance for traders who closely align with a trend-following strategy – a focus area of our analyst team.
An equities trend-following strategy involves spotting trends in stock prices and making trades to ride those trends, using signals like moving averages. Traders use technical indicators to confirm trends and manage risks with tools like stop-loss orders. Success depends on adapting to changing market conditions and careful risk management, particularly in U.S. stock markets that may experience volatility or sideways movement.
The screen
Our initial screening process targeted U.S. stocks with a market capitalization exceeding US$1-billion. Stocks in this category typically provide advantages such as enhanced financial stability, well-established market presence, and potentially lower volatility when compared with smaller-cap stocks.
A trend-following approach emphasizes stocks that consistently set higher highs and higher lows. In our screening process, we specifically looked for stocks trading within a 10-day range of their latest 52-week high. We like to “buy high and sell higher” and only liquidate when our trailing stop-loss order has been activated.
The TC Quantamental momentum factor highlights the tendency of successful stocks to sustain their positive performance in the short term. In our screening process, we focused on stocks with a rating of at least 70 out of 100, evaluating the stock’s price trend and investor interest relative to its industry peers. This approach aims to identify stocks with robust momentum and favorable prospects within their respective sectors.
Finally, we added two technical analysis features with a focus on breakouts to the upside and bullish trend-following indicators, all detectable using TC Strategy Builder.
We have also included year-to-date and one-year return for informational purposes.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options, and commodities. Strategy Builder, our stock screener is available through leading retail brokers in Canada and worldwide.
What we found
The results were spread across a broad range of industries – however two biotech stocks stood out.
Topping our list is biopharmaceutical company Insmed Inc. INSM-Q, which focuses on the treatment of rare diseases. The stock has a market cap of US$4.11-billion, a TC Momentum Factor rating of 82 and just confirmed a bullish flag pattern. A bullish flag pattern occurs during a dynamic market rally, representing a brief pause as the market catches its breath before running off again in the same direction. The pattern consists of two parallel trend lines, often sloping downward against the prevailing uptrend, and is confirmed when the price breaks through the upper boundary to resume the rise.
CymaBay Therapeutics Inc. CBAY-Q, a clinical-stage biopharmaceutical company focused on developing therapies for patients with liver and other chronic diseases, has the highest TC Momentum Factor rating on our list at 89 out of 100. The stock has the best year-to-date and one-year price performance at an impressive 240.8 per cent and 422.5 per cent, respectively.
Incorporating a stop-loss is imperative when engaging in trend-following methodologies. This tool serves as a risk management mechanism, automatically initiating a sell order should a trade deviate from the expected trend, thereby curbing potential losses and safeguarding capital.
Trading Central Strategy Builder offers a back-testing feature, allowing users to assess the historical performance of an investment strategy. Utilizing a five-year historical period with quarterly rebalancing, the described screen demonstrates a remarkable 29-per-cent annualized total return, outperforming the S&P 500 Index, which achieved a 12-per-cet annualized total return over the same period.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.