How the Stock Picking Model works
This Stock Picking Model is based on the Golden/Death Cross Model with Initial Claims filter.
The Golden/Death Cross Model states that you should be 100% long stocks when the S&P 500 makes a “golden cross”, AND… the 50sma remains above its 200sma for 5 consecutive trading days (in other words, the S&P made a “golden cross” 5 days ago).
The Golden/Death Cross Model states that you should be 0% long stocks (100% cash) when the S&P 500 makes a “death cross” AND Initial Claims is above its 52 week (1 year) moving average for 8 consecutive weeks (2 months).
The Stock Picking Model takes the Golden/Death Cross Model 1 step further.
It states that
- When the Golden/Death Cross Model with Initial Claims filters says “BUY stocks”…
- Buy the 10 stocks with the highest expected 5 year forward earnings growth. (This is the expected average annual earnings growth for this stock over the next 5 years.)
- Each stock has the same position size. So 10 stocks means that each stock = 10% of the overall portfolio.
- Only shift to 100% cash when the Golden/Death Cross Model with Initial Claims filter says “SELL stocks”. Otherwise, buy and hold the 10 stocks with the highest expected earnings growth.
Here’s an example demonstrating Microsoft’s expected 5 years earnings growth.
How do you pick these 10 stocks?
Take the 50 largest S&P 500 companies by market capitalization. Pick the 10 stocks out of the list of 50 with the highest 5 year expected earnings growth.
Rebalance the portfolio
Rebalance your portfolio at the end of every Friday to own the 10 stocks with the highest expected forward earnings growth from this list of 50 stocks.
- You will get rid of the stocks that no longer rank in the Top 10 in terms of expected earnings growth.
- You will buy the stocks that recently joined the list of Top 10 in terms of expected earnings growth.
Logic behind this model
Stock picking on its own isn’t very useful.
- 99% of individual stocks will tank if it’s a bear market for the entire stock market (remember 2008).
- Most stocks will go up over the long term if it’s a bull market for the entire stock market.
That’s why it’s important to first and foremost predict whether it’s a bull or bear market for the entire stock market. That’s what the Golden/Death Cross Model with Initial Claims filter does.
The stock picking component merely helps us predict which individual stocks will outperform when the broad stock market’s trend is UP.
Historically, stocks with the strongest earnings growth tend to outperform AS LONG AS the broad stock market is still in a bull market. This is similar to the concept behind William O’Neill’s CANSLIM strategy for picking stocks. Earnings growth is the single best predictor for a stock’s future performance over the medium-long term.
Contrary to what some people might believe, valuations don’t matter AS LONG AS the broad stock market is in a bull market. In a broad bull market, investors and traders love buying the hottest growth stocks, regardless of valuations. High-growth stocks almost ALWAYS have higher valuations than low-growth stocks.
*These insanely overvalued stocks will crater in a bear market, but that’s why the Golden/Death Cross Model with Initial Claims filter predicts those bear markets.
There’s no better example for this than Netflix. Netflix stock has been insanely overvalued for almost a decade. But despite very high valuations, Netflix has continued to soar because its earnings growth is superb.
In other words, stocks with high earnings growth tend to lead the broad stock index.
High-growth stocks tend to make bigger corrections during bull markets. But they also lead the stock market’s recovery. Here’s an example from May 18, 2018.
The S&P 500 made a correction, and it’s still 5% away from its all-time high.
Meanwhile, high-growth stocks have already exceeded their January 2018 highs.
Click here to learn more about why growth stocks outperform value stocks during bull markets.
This chart demonstrates that high earnings growth stocks tend to outperform (have higher P/E valuations) as long as it’s a broad equities bull market. Conversely, low earnings growth stocks (that have lower P/E valuations) tend to outperform during broad equities bear markets.
Stock Picking Model’s holdings for May 29 – June 1, 2018
Long the following stocks, from these prices:
- Amazon: long from $1610.15
- Facebook: long from $184.92
- Exxon Mobil: long from $78.71
- Alphabet (Google): long from $1075.66 (Google C class)
- Visa: long from $131.28
- Mastercard: long from $191.17
- AbbVie: long from $101.08
- Netflix: long from $351.29
- Adobe: long from $243.56
- Book Holdings: long from $2110.62
I will update this list once every weekend to show you the model’s latest positions.
- Model’s positions for May 29 – June 1, 2018
- Model’s positions for May 21 – 25, 2018
Historical backtesting for this model
Unfortunately I have been unable to do the historical backtesting for the individual stocks component of this Stock Picking Model.
That’s why this is a LIVE model. I will be update the LIVE results for this model each week on this webpage.
List of 50 largest S&P 500 companies by market cap
Here’s the list of 50 largest S&P 500 companies by market cap. We update this list at the end of each Friday.
- Apple: 11.7% earnings growth
- Microsoft: 11.9% earnings growth
- Amazon: 30.2% earnings growth
- Facebook: 24.4% earnings growth
- JPMorgan: 6.6% earnings growth
- Berkshire Hathaway: 7% earnings growth
- Alphabet (Google): 15.9% earnings growth
- Exxon Mobil: 14.9% earnings growth
- Johnson & Johnson: 8% earnings growth
- Bank of America: 8% earnings growth
- Intel: 8.4% earnings growth
- UnitedHealth Group: 13.4% earnings growth
- Visa: 16.4% earnings growth
- Chevron: 7% earnings growth
- Wells Fargo: 7.9% earnings growth
- Home Depot: 13.6% earnings growth
- Pfizer: 6.1% earnings growth
- Cisco: 7.5% earnings growth
- Boeing: 12.2% earnings growth
- AT&T: 4.1% earnings growth
- Verizon: 5.4% earnings growth
- Procter & Gamble: 7.1% earnings growth
- Mastercard: 19.3% earnings growth
- Netflix: 26.6% earnings growth
- Citigroup: 6.4% earnings growth
- Coca-Cola: 5.8% earnings growth
- Merck: 6.4% earnings growth
- Walt Disney: 8% earnings growth
- Nvidia: 10.2% earnings growth
- DowDuPont: 9.5% earnings growth
- AbbVie: 14.5% earnings growth
- Comcast: 10.6% earnings growth
- PepsiCo: 7.3% earnings growth
- Oracle: 9% earnings growth
- McDonalds: 8.8% earnings growth
- Adobe: 16.2% earnings growth
- Philip Morris: 8.9% earnings growth
- IBM: 4.9% earnings growth
- Amgen: 7.1% earnings growth
- Wal-Mart: 5.3% earnings growth
- 3M: 9.4% earnings growth
- General Electric: 11% earnings growth
- Medtronic: 7% earnings growth
- Union Pacific: 8.4% earnings growth
- Honeywell: 9.4% earnings growth
- Texas Instruments: 9.6% earnings growth
- Broadcom (AVGO): 14.31% earnings growth
- Abott Laboratories: 10% earnings growth
- Altria: 7.5% earnings growth
- Book Holdings: 16.2% earnings growth
- Accenture (ACN): 13.13%
- Nike (NKE): 12.41%
- Paypal (PYPL): 17.67%
- Salesforce (CRM): 24.94%
- Schlumberger (SLB): 9.7% earnings growth
- United Technologies Corporation (UTX): 8.53%
- Gilead Sciences (GILD): -0.1%
- Caterpillar (CAT): 4.25%
- Costco (COST): 10.61%
- Twitter (TWTR): 23.1%