By: Chris Rowe — June 6, 2021
Here's What the "7-1 month" List Is All About
Today I have something special for you. It's a brief video about an indicator you probably haven't heard about.
Although this indicator is not widely-known, it's extremely powerful.
In a nutshell, it can not only put you into the strongest stocks, but it can ensure that you are not buying at the top.
(Click any image to enlarge)
Now, many of our readers notice that, sometimes, when we grab a list of high-probability stocks from our Sector Prophets platform, that there's a column with a strange header saying "7-1 mo %".
This is one of the methods we offer on the Sector Prophets platform that helps us identify stocks within a sector that have a high probability of outperforming their peer group, and probably the stock market as a whole.
Please note that the following video was originally recorded by Costas Bocelli for members of Sector Prophets.
But it's such a useful tool (and a great tool for finding the strongest stocks) that Costas an I both wanted you to see it.
(Click the lower right of the player to make the video bigger)
The video, above, shows the advantages of using the 7-1 month % method over the 6 month % method.
I've added more detail on relative strength investing and how it ties in to the 7-1 month algorithm, below.
If making big money in the stock market bores you, then don't read it. Losses can be exciting too!
Bad joke. Sorry...
But do spend some time on this. Consider how much time you spent studying and training for the career that got you that money to invest to begin with. You should be willing to spend some time to learn how to dramatically increase your odds of profiting (instead of losing).
What The Heck is 7-1 mo?
On this page in Sector Prophets, our lists of stocks/ETFs can be organized by performance. You just click the column header (the top of the column) that says either "6 mo %" or "7-1 mo %").
In short, the "7-1 month %" (circled) is the 6-month performance of the stock as of 1 month ago.
If you're looking at it on June 1st, then it's showing you the performance of the stock from December 1st to May 1st.
Why do you care about the performance as of 1-month ago? Because this way, you'll be viewing a list of the big winners that had a chance to pull back to reasonable prices, instead of looking at a list of stocks that are at a high.
It's that simple.
But you should understand the power of momentum investing to understand the importance of this algorithm.
But first, you can take a look at how investing based on the 7-1 month improves your odds of success by checking out a study that was published in March 2010 by Dr. Tom Hancock -- the co-head of the GMO global quantitative equity team and lead manager for international quantitative portfolios.
.What is Momentum Investing?
There are many styles of investing. Investing styles are called "Factors".
One such style/factor, "momentum investing" invests in stocks or groups of stocks based on price momentum. It has a long history as a successful stock selection strategy.
Momentum investing is buying what's been working and selling out of what hasn't and replacing those sold positions with whatever is now among the top price performers.
This system has proven to work very well after being tested and applied in hundreds of different ways.
The basic thesis behind momentum investing is that leadership within the market persists for enough time that, on average, one can beat the market simply by rotating into stocks (or groups of stocks) that are outperforming the average stock.
Most investors know that prices trend. Price-trends occasionally reverse and they typically stay in place for the vast majority of the time.
In the above 3-year chart of Apple Inc. (AAPL), I've highlighted when trends were in place. Notice that it's most of the time.
The arrows point to the infrequent occasions when they reversed. Most of the time, trends are in place.
In other words: If a stock or sector is trending up, then chances are it's going to keep trending up for the foreseeable future.
What most investors may NOT understand is that LEADERSHIP also tends to trend. Read that last sentence one more time please and then pause and think about it for a minute - this might be the most profitable minute you'll ever invest your focus in.
In other words: If a stock or sector is leading (moving up at a faster pace then most other stocks or sectors), then chances are it's going to keep leading for the foreseeable future.
And so if you make it a habit of investing only in stocks or sectors that have been leading then you're more likely to beat the market averages. After all, even if the leader is no longer the strongest stock or sector, chances are it won't suddenly become a laggard.
It would more likely go from being in the top 10% strongest performers to being in the top 20% or top 30% strongest performers. Think about an olympic gold medal runner, running in a race with runners of various calibers. Chances are, even when that olympic gold medal runner weakens, she will still lead or be in the top 2 or 3.
Beating "the market" (S&P 500, Dow Jones, Nasdaq, etc) may not sound that exciting, but 85%+ of all fund managers fail at this... and our approach succeeds.
There are too many (similar) versions of this approach to discuss here, but they all seem to point to the same thing: Momentum investing is far superior to benchmark performance.
What you're about to read will cite one of those studies to prove to you how you can tweak the results to perform even better.
Before diving into the study, it's important to understand that at Sector Prophets (the website with that list of stocks organized in order of 7-1m performance), we take relative strength/momentum investing to another level, adding layers of probability on our side.
The study by "GMO" starts with a universe of 1,000 stocks.
It then narrows the list down to the best 250 stocks. Every month it rebalances - meaning every month the hypothetical investment account would start over again by owning the top 250 strongest-performing stocks (in 7-1month).
What We Do Is Much Better
We focus on the performance of sectors before doing anything else. If you do the same, we believe your investing performance is extremely likely to improve and your quality of life will likely go way up.
Institutions buy a large number of stocks, in the same group, at once. They can push one button and buy 100 stocks. When a sector (such as Internet stocks, or Biotech stocks) are strong, most stocks in the sector are more likely to move higher.
You see, approximately 80% of a stock's movement has to do with the sector, or industry group, it's a member of.
An old stock market adage says, "A rising tide lifts all boats". But that's a dramatic and dangerous over-generalization! It just isn't true.
For example, in 2007 the energy sector (energy stocks) gained approximately 30% but in the same timeframe the financial sector (financial stocks) declined 30%.
Just to drive the point home, here are a few more examples:
1999 - Tech stock gained about 60% while Consumer Staples declined 18%.
2001 - Consumer Cyclicals were up about 13% when Energy declined about 20%.
2005 - Energy was up about 52% when Cyclicals were down 5%
So, "a rising tide lifts all boats" is a bunch of B.S. But what IS very true is that stocks that are members of the same sector tend to move in unison. So apply that old adage to sectors and it will be a lot more accurate.
The 7 - 1 month feature shows you the list of stocks in order of 6-month performance, as of 1 month ago. So if today is July 1st, then you're looking at performance of stocks from December 1 - June 1.
Also keep in mind that the study we mentioned earlier uses a 12-month look-back instead of the 6-month (or 7-1-month) look-back we provide.
This is because, through lots of experience and many other studies, we have discovered that our look-back is ideal. Momentum investing has a sweet spot, which is the "intermediate-term" (weeks to months). For that type of time frame, it's ideal to look back 6 months.
Thanks as always for your time and attention, and I hope you find this very useful!
See you soon,
Founder, True Market Insiders