Trade Alongside the Hedge Funds with PowerRatings

One of the great benefits of PowerRatings is their flexibility. They can be used as a stand alone tool, or as a way to add quantitative research to your existing trading. We have developed a number of successful trading strategies using PowerRatings, and over the next few weeks we are going to teach you some of our favorites.

The aim of this series is to help you focus on the best potential setups every day. The strategies we are going to teach you have shown extremely profitable historical returns. They are based upon our own quantitative research and actual trading.

PowerRatings Preferred List

The PowerRatings Preferred List is comprised of momentum stocks with high PowerRatings (7-10) that are widely held by major mutual funds, hedge funds, and momentum investors. Because these stocks tend to move rapidly, aggressive traders and investors find them highly attractive.

Our research shows that since 1995 the better returns have come from these types of stocks. PowerRatings can be used to help identify stocks that are in long-term up trends (as signified by the 200-day MA) that are experiencing pullbacks to levels from which they have historically risen.

We found that when stocks on the PowerRatings Preferred List pull back, they tend to rise much more sharply than other stocks. There are a number of reasons why this happens. Money managers view these pullbacks as an opportunity to buy good companies at better valuations. This leads them to buy in an aggressive manner. Another reason why is because these stocks are very often popular with short sellers. Therefore, as selling pressure wanes, the short sellers are forced to cover their positions, helping drive prices higher.

Ideally, you should focus on these types of stocks every day. The drawback to this strategy is that sometimes, usually after the market has experienced a sharp rise, there will be very few setups.

Here's an example from last week:

Under Armour (UA | Quote | Chart | News | PowerRating) reached a high of $52.30 on 01/30/07, then declined more than 12% over the next three days. This pullback resulted in UA making the PowerRatings Preferred List on 02/05/07 with a PowerRating of 7 (see chart). Over the next five days UA gained 5%. Over the same five day period the S&P 500 lost 0.7%.

How to Use this Information

These types of stocks are usually on the daily watch lists of major mutual funds, hedge funds, and momentum investors due to their high historical returns. PowerRatings traders should also monitor this list of stocks every day, in search of potential setups. We filter this daily list of stocks and display only those with high PowerRatings (7-10).

PowerRatings subscribers can access today’s Preferred List here. For a free PowerRatings trial, click here.

Please send me any questions or comments you may have regarding this article.

Ashton Dorkins is Editor-in-Chief of TradingMarkets.com.
editor@tradingmarkets.com

Click here to register for a free live presentation teaching you how to use this information.