Which Breakouts Give the Best Return?

There are often many stocks on our watchlists that meet the chart pattern, technical and fundamental criteria that we apply, but which ones should you focus on? We attempt to answer that today.

As every trader knows, stock picking is a percentage game. You will not pick winners 100% of the time, or possibly even 50% of the time, so you want to get the best possible return out of the winners that you do pick. (It is also important to minimize your losses through effective portfolio management but that is not the topic we are interested in today).

Every long position watchlist on our main site, breakoutwatch.com, has a backtest feature that allows you test various technical and fundamental conditions to see which ones are performing best over a recent time frame, up to one year. This allows you to fine tune the criteria you look for in a breakout to recent market conditions. The backtest tool requires that you test sets of filter conditions one at a time, but we also have a tool that allows us to simulate over many filter sets so we can analyze which ones work best. Its a resource hog so we don't make it publicly available but from time to time we run it and publish the results here. We published the results last in our August 1 newsletter. The results showed that choosing stocks with a minimum RS Rank of 91 and a minimum daily volume of 40k shares would improve your returns over all breakouts by 22%. Other factors were insignificant in selecting the best performing breakouts.

To see if current conditions have changed the outcome, we ran the simulation again on Friday, November 13 for the last 90 days. This time the results surprised us because we have never before found that using fundamental score as a filter criteria was beneficial*. Although the filters found in August still performed very well we found that adding a filter on fundamental score improved the return by another 50%.

Here are the results using the August filters:

Filter settings: RS Rank >= 91;BoV>=40k

Now, we find that adding a minimum fundamental score of 4 to the selection filter improves the return over all breakouts by 90%:

Filter settings: RS Rank >= 91;BoV>=40k; FS>=4

Using these filters would have found just seven confirmed breakouts in the last 90 days but this may be sufficient, depending on your trading style. The stocks that met the filter criteria and their performance is also available in our backtest software. They are:

Filter settings: RS Rank >= 91;BoV>=40k; FS>=4

Note that the older breakouts have made the biggest gains, so far. There is still time for the newer breakouts to make equally strong gains.

* This always seems surprising to CAN SLIM investors but we have always found that RS Rank and technical strength was most important in predicting future performance. The reason was that stocks with high fundamentals had already achieved a positive valuation and had less upside potential. Recent market conditions have changed that equation because all stocks were beaten down and investors and traders are now looking for security and have preferred stocks with strong fundamentals. Hence they have risen most.