Equities Lab has historically focused our screening efforts on identifying companies with strong fundamentals that are undervalued in the market, and investing in that value. However, as time goes on we want to push both our own investment philosophies and our system capabilities. After looking around for a bit I stumbled up the SCTR, the StockCharts Technical Rank.
Originally the brain child of Mr. John Murphy, an author and contributor on StockCharts, this score is based on six different indicators weighted according to term.
Alright, let’s talk about the actual screen.
This entire screen is based on one thing – the SCTR formula. Here we are simply looking for companies that are ranked in the top 90% percent of the market based on that formula that also have a market cap of greater than $1 billion.
Here is an in depth look at the PPO Histogram. Click on the photo below to learn exactly how to calculate it.
I know the editor of the SCTR looks complicated, but it’s actually incredibly simple. I went into this screen thinking that is was going to take a few hours to properly put the indicator together, but in reality, I was able to knock it out in less than 30 minutes.
In its raw form this screen returns a large number of potential companies – even though we are isolating the top performers in our editor.
There are over 200 matches for this screen. There’s no way I’m going to go through and analyze each of these companies, and I don’t have enough capital to comfortably invest in each one of these.
That’s where max holdings come into play. You can add a max number of positions you’d like to hold in the trading rules tab. Once you add a max, an order_by tab will be created automatically. This tab will rank the companies based on whatever you decide and the screen will only return up to the number of companies that you stated earlier.
We are going to order these results by their income statement score added to num times large charge multiplied by negative 1.
This is a much more reasonable number of companies for me to analyze. There are also a few companies that I recognize, which gives me hope for how this screen will actually perform over the past 20 years.
When trading on a quarterly rebalance since 1995 you would have returned over 22% annually – totaling to over 11,000% in that time frame.
The benchmarked S&P 500 has been crushing it since the crash in 2008. 2015 was pretty flat, but overall, the SPY would have been a good investment at the end of the crash. I say this because it has become moderately difficult to find a screen that consistently beats the market over the past few years. This screen not only beats the market these past few years, but has beaten the market every year since 1999. That’s what I call consistency.
We also want to make sure this screen has a winrate that is higher than 50%. They don’t all have to be homeruns, but we’d like the majority to be positive. We have set the great return and bad returns values to .01 and -.01 respectively to illustrate a clear picture of how well this screen does. Finally, checking the report we generate about the backtest we have a sharpe ratio of double the S&P 500.
StockCharts has created a wonderful score that is honestly the first incredibly successful technical indicator that can be traded with longer term investing in mind. After testing this formula and screen extensively, I believe that this screen deserves to be located on our “Featured Screens” list within the Equities Lab system, and that is where this screen now lives.