here’s a theory that when the market is up a lot, there are likely to be fewer Graham “Bargain Stocks” (as identified by the NCAV Screen ). Conversely, when the market is down a lot, more stocks qualify for the screen, as we have seen recently.
I decided to test this theory a bit more to see if the correlation with the overall market is consistent.
As a comparison, I used the Russell 2000 Index mainly because it is comprised of the 2000 smallest securities by market capitalization. The Graham “Bargain Stocks” method is all about small-cap, even micro-cap stocks. Lots of them.
The easiest way to perform such a comparison is via a graph of the weekly number of bargain stocks in the screen vs Russell 2000 Index;
the Russell 2000 Index scale is on the left, and the number of Bargain Stocks from the weekly screen is on the right. The graph will automatically update weekly going forward.
The gaps in the blue line are weeks when the screen didn’t work for some reason, hopefully there won’t be too many of those.
The graph is interesting; the number of “Bargain Stocks” does seem to be correlated more with volatility in the index than the actual level of the index. I was also looking to see if the screen might be able to predict what the index might do. I’m not sure it does, except for divergence in the latter half of 2006 when the index was still rising even as the number of “Bargain Stocks” was increasing, which is anathema to what we might expect. Divergence is always a useful thing, because it tells you something is not right, and usually precedes a big move in the opposite direction!
On another note, I have added Piotroski Scores and Altman Z-Scores to the screens, where available. These should help weed out the losers a bit more easily. In fact, the added information led me to look at Maxygen (MAXY) yesterday. It is up over 5% today. Questions I always ask myself when looking at this screen are: how high has this stock been in the past and is it likely to ever get there again? I don’t know if MAXY will ever reach the dotcom highs from 2000, but at least it has plenty of room and the recent higher low is encouraging.
