This article is a website version of our weekly FREE Best Ideas Newsletter sent on 20.06.2023. Sign up here to get it in your inbox every Tuesday.
A subscriber sent us an interesting question last week.
He wanted to find companies that have moved up a LOT over six months but where the price has corrected.
A short term 12-1m momentum indicator
He was basically looking for a shorter term indicator compared to the 12-1 month momentum or Price Index 12m Minus 1m as we call it in the screener.
As a quick reminder Price Index 12m Minus 1m is calculated as the Stock price 1 month ago / Stock price 12 months ago. It ignores the price change over the past month.
As we didn't have it, I spoke to our data specialist, and he had a great suggestion.
The ultimate buy the dip indicator
He suggested that the customer set up the following screen:
- First, select the 30% of companies with the best six months price momentum. In other words, the 20% of companies that went up the most in price over the past six months.
- Second, from this group, select the 20% of companies with the worst one-month momentum. In other words, companies that have fallen in price the most in the past month.
It makes intuitive sense
I'm sure you'll agree that it makes intuitive sense.
The companies that have gone up the most in the past six months are bound to correct. And if they are going to go up further (as a buy the dip strategy assumes) buying them after a bad month is a great time to get in.
This is what the screen looks like
In case you were wondering this is what the screen looks like:
I also thought of a different way of how you can screen for this
You may remember that we also have a 90 day adjusted slope indicator which lets you find companies with a smooth upwardly sloping stock price over the past 90 days.
It removes companies that have a jump in price. For example, because of a takeover offer or a positive profit announcement.
As suggested above you can screen for the 30% best adjusted slope 90-day companies and then from this list select the companies with the worst performance in the past month.
This is what the screen looks like:
If you are looking for companies with a longer term smoothly upward sloping stock price you can of course use the adjusted slope 125/250 day indicator the same way as above.
This is what this screen would look like:
I'm not a buy the dip investor
I am not a buy the dip investor, you know I prefer undervalued companies with the upward moving stock price (like the ones we recommend in the newsletter) but that doesn't mean that you can't make a lot of money with a buy the dip strategy.
Remember to manage your risk
As you know limiting your losses through position sizing as well as a hard rule on when you will get out helps you take care of the downside and let your profits take care of themselves.
Make sure you have these in place to make your investing successful.
Your, helping you buy the dip analyst
PS To find great companies that exactly meet your investment strategy right now click here.
PPS It is so easy to forget, why not sign up now before you get distracted?
Fresh Content 📖
Why we are not invested in all ideas
These Japanese companies are making smart buyback decisions
These zombie companies are a danger to your portfolio - 2023 update
Best Price to Book Piotroski F-Score stock ideas for 2023
