Little-Known Indicator’s Buy Signal Led To Huge Profits
A few months ago, we told you about a little-known indicator that’s making a small group of investors a lot of money.
#-ad_banner-#We call this indicator the “Alpha Score,” because it consistently beats the market and often with less risk than buy-and-hold investing. It can flag exactly which stocks are about to jump double and triple digits in the coming days, weeks and months.
I’ll tell you more about the Alpha Score in a second, but just know that the indicator can range from 0 to 200. The higher the number, the more potential the stock has.
For example, you may not be familiar with Westmoreland Coal (NASDAQ: WLB). It operates six surface coal mines and two power-generating units in the western United States.
Westmoreland’s outlook was promising when we recommended shares just over a year ago. It had sold 95% of its future production under long-term contracts, and the market for coal looked stable.
But that’s not what attracted us to the stock. What most investors didn’t know about WLB is that it had an Alpha Score of 158. Less than 1% of stocks have a score that high at any given time.
The stock soared 33% within two weeks and 80% within three months. We recently sold locking in a 134% gain in less than a year. Not every stock with a high Alpha Score will jump this much. But Westmoreland is just one of many stocks that have crushed the market.
Of course, everyone would love to sell stocks at the very top, but that’s unrealistic. Had we not followed the Alpha Score’s sell trigger — when WLB’s momentum started falling — we’d be sitting on about a 90% gain instead of the 134% we walked away with.
Other recent trades posted gains of 66.1%, 114.1% and even 242.2%. In fact, our model portfolio holds eight stocks that are up over 30% within the past year.
The secret to the Alpha Score’s success is two-fold. It is derived by combining two of the market’s most effective triggers — a technical trigger and a fundamental trigger.
The technical indicator, or “Alpha Trigger #1,” as we call it, has been proven to beat the market by traders and academics alike.
One study by an investment manager named James O’Shaughnessy tested over 60 different market indicators. He conducted exhaustive back-tests of various fundamental and technical variables to identify which, if any, were predictive of future performance.
He looked at all kinds of metrics people use to buy stocks: low P/E ratios, low price-to-book ratios, high dividend yields, high profit margins, etc.
His research demonstrated that one technical indicator consistently beats the market — relative strength (RS).
RS assigns a numerical score from 0 to 100 to a stock based on its price performance relative to other stocks in the market over the past six months. It gives you a way to quantify the strength of a stock’s past performance, and therefore, how it is likely to perform going forward.
In other words, stocks that are outperforming the market now tend to continue to outperform over the next few months, and sometimes years.
That’s half of the Alpha Score formula. Remember, Alpha Scores range from 0 to 200. While relative strength helps us find stocks most likely to move higher, “Alpha Trigger #2,” the second part of the formula, ensures that the underlying company has solid financials and enough resources to keep its business growing.
Unlike earnings and other financial data, the second trigger can’t be easily manipulated by accountants. It’s a crucial indicator of success and is a favorite of legendary conservative investors like Warren Buffett and Peter Lynch. The indicator can tell us if a company is likely to buy back stock, increase its dividend or invest in new growth opportunities.
Based on my experience and the system’s performance so far, I’m confident the Alpha Score will continue to find big winners. In fact, there are currently four stocks in our portfolio flashing extremely rare Alpha Scores of 190.
This article originally appeared on ProfitableTrading.com: Little-Known Indicator’s Buy Signal Led to Huge Profits