Tactical Trading Process
In our Tactical Trading Strategy C.J. Coletta & Company, Inc. primarily utilizes the proprietary ratings created by William O’Neil & Company to screen for potential investment candidates. William O’Neil & Company provides equity investment ideas, securities data research, analytic tools, and trading services to institutional money managers.
As background, William J. O’Neil, from his research pioneered and developed the use of historical precedent to analyze equities in tandem with fundamental and technical analysis. The guiding principle behind the methodology is historical precedent, which asserts that the characteristics and movements of the most winning stocks since the 1880s still define those outperformers today. Drawing from these discoveries, he created the CAN SLIM® Investment Discipline, focusing on the trends and patterns of stocks as they became top performers or underachievers. He identified seven basic “factors” that occurred over and over again in almost all top-performing companies as studied over eight different market cycles. William J. O'Neil is also the founder of Investors Business Daily.
Multi Step Process
CJCC uses a multi step process to actively manage our client’s accounts.
First, the portfolio managers take a broad look at the overall health of the market to determine what phase the market is currently in to adjust portfolio allocations.
Leading growth stocks have the potential to make outsized returns when compared to the indexes however, the majority of growth stocks will decline more than the averages during severe downturns. It is not uncommon to see a growth stock correct 20-30% in a normal 10% correction in the market. During severe bear markets in which the indexes may drop 30-50% former leading growth stocks may sometimes fall as much as 70-80% from their highs.
Dependent on the phase of the market we will allocate capital to our Tactical Trading Strategy and raise cash as the market moves from Bull (Accumulation) to Bear (Heavy Distribution). Our Tactical Trading Strategy is designed to preserve capital during bear markets and have the ability to go to 100 percent cash during turbulent times. The ability to go to cash provides the possibility of avoiding severe losses caused by Bear Markets. For traditional advisors employing a buy and hold strategy benchmarked to an index this is not possible.
Second, the portfolio managers (pms) will quantitatively screen for opportunities for each client portfolio that meet each of our criteria. All of the quantitative screens we employ utilize both fundamental and technical parameters. With thousands of stocks to choose from our screening process is meant to separate the wheat from the chaff. Described below it utilizes the proprietary statistics, ratings, and rankings developed by William O’Neil and Company. We utilize William Oneil & Company’s database WONDA (William Oneil Direct Access) to perform our quantitative research. With information dating back as far as the 1880’s, their database is one of the most robust in the industry.
Third, the pms will do additional fundamental work and qualitative analysis to understand each company’s competitive advantage and position within the industry. CJCC will emphasize companies that are innovative and have strong earnings growth.
Fourth, the pms will utilize technical analysis to assist in the identification of trends, momentum, buy and sell signals. The use of technical analysis adds an additional layer of risk management to our client portfolios. Historically technical sell signals for leading growth stocks have often come before the deterioration of a company’s fundamentals is widely known or accepted within the investment community.
Fifth, the pms will employ money management strategies to construct the portfolio and manage the risk. Our Tactical Trading Strategy incorporates many layers of risk management in our portfolio management process. Our portfolio management process is designed to deliver a strong offense by putting more capital to work in bull markets and a strong defense by raising cash during turbulent times that lead to bear markets.
The CAN SLIM® Discipline stands for the 7 powerful attributes William J. O’Neil discovered in his research that every great performing stock possessed before they made their biggest gains.
- C: Current earnings per share and quarterly sales growth. Leading stocks demonstrated rapid earnings and sales growth that in many cases was accelerating quarterly.
- A: Annual Earnings Growth. Leading stocks consistently demonstrated strong annual earnings growth.
- N: Leading stocks normally had at least one of the following attributes fueling earnings growth: New Products, New Services, New Management, or New Industry Conditions. In addition, leading stocks normally advance to new highs after a period of consolidation.
- S: Supply and Demand, strong demand for a limited supply of shares will push a stock’s price up. On the flip side, an oversupply of shares and weak demand will cause the price to sag. Leading stocks demonstrated strong demand for their shares and an increase in trading volume as the price increased.
- L: Leader vs. Laggard. Top performers were normally leading stocks in leading industries. Underperformers were normally lagging stocks in lagging industries.
- I: Institutional Sponsorship. Leading stocks normally had at least several institutional owners. It was preferable to see the number of institutional sponsors increasing as well on a quarterly basis.
- M: Market direction. The ability for a stock to outperform was greatly influenced by market conditions. The state of the market, i.e., uptrend, correction, downtrend was a critical factor for the performance of leading stocks.
The study of these seven factors yielded a number of powerful proprietary statistics, ratings and rankings including but not limited to:
- Datagraph Rating–An overall rating for all major technical and fundamental elements incorporating many characteristics that may influence stock prices. The rating is based on a proprietary formula that assigns certain weightings to reported earnings, capitalization, sponsorship, relative strength, price and volume characteristics, group rank and others.
- EPS Rank–. A single earnings measure that gives great insight into one of the most important factors–Earnings. EPS Rank is a proprietary formula weighting four different factors: percentage increase/decrease in the most recent quarter versus the same quarter a year ago, percentage increase/decrease in the prior quarter versus the same quarter a year ago, the 5 year growth rate, and stability.
- SMR Rating–proprietary rating used to identify companies that show superior sales growth, profit margins and return on equity when compared to all other stocks.
- Industry Group Rank–Looks at above average stocks in each group as well as performance of the entire group against all other groups in the database. Industry group rank is a proprietary number obtained by calculating a least-squares curve fit of summed prices on certain stocks within that industry. Another calculation is done using all companies in the group. Separate weightings are used for different time periods.
- Relative Strength Rating–measures the stocks price change over the past year compared to all other stocks. Extra weight is assigned to the latest 3 month period (with each of the other quarters receiving 20%). This rating gives insight into where momentum is coming from.
- Accumulation Distribution Rating–uses moving averages of inter and intraday price and volume statistics to assist in showing accumulation or distribution of equity shares. The rating gives insight into where money is flowing. The formula utilizes an exponential moving average and the effect of a single day’s trading becomes insignificant after about 60 days.
The CAN SLIM Investment System was created by William J. Oneil and popularized in his book “How to Make Money In Stocks…A Winning system in Good Times or Bad.” It was a system designed for retail investors that may be handling their own accounts and are not facing the restrictions an institutional money manager may be facing (i.e., Liquidity Issues regarding Position Size and the impact it may have on execution and trading, etc.) and is taught by Investor’s Business Daily through their educational seminars.
Due to the fact we will be operating as an institution we apply our own proprietary money management strategies in regards to entering and exiting of individual positions to help avoid liquidity issues that may arise as the size of our individual positions within the firm increase over time.
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