www.zacks.com/momentumtrader Zacks Investment Research, Inc. 10 S. Riverside Plaza, Suite 1600 Chicago, Illinois 60606
Contents Introduction 2 Section 1: The Mental Aspect 4 Section 2: Getting the Most Out of the Momentum Trader 5 Section 3: Follow the Leader 6 Section 4: How to Read Momentum Trader Alerts 7 Section 5: How to Read Momentum Trader Daily Summary 8 Section 6: Virtues of Money Management 9 Section 7: Tying it All Together 10 1
Introduction: Mo-men-tum [moh-men-tuh m] n. force or speed of movement; impetus, as of a physical object or course of events In the world of stock trading when someone says momentum we think price momentum. A momentum stock is the sexy stock that everyone wants to talk about. It s the TSLA, it s the NFLX, it s the PCLN. It s the stock that just seems to keep on rising no matter what because it has the momentum of buyers piling into it, driving the stock price higher. What we are looking for here is more than simply stock price momentum, because I look at stock price as the end result. It s the end result of buyers and sellers agreeing on a price for the stock and, in the case of a momentum stock, agreeing on a higher and higher price. Looking at price only when on the hunt for stock ideas is like looking in your review mirror for the fastest car. By the time you realize which one is the fastest, it s zipping by you. The question is, how can we use the Zacks Rank and other tools we have at our disposal here to uncover stocks with other types of momentum other than just price momentum? Stocks that have earnings surprise momentum, earnings momentum, price momentum, and breakout momentum. Remember the earnings surprise portion of the Zacks Rank. It states that companies which have had earnings surprises in the past are more likely to have earnings surprises in the future. You can equate continued earnings surprises to a stock having earnings surprise momentum. There have been several studies that suggest stocks that have just hit 52 week highs are likely to make higher highs. I call this breakout momentum. Stocks that break through areas of resistance are more likely to break through further levels of resistance than stocks that haven t broken through resistance. Already we ve managed to stumble into a great momentum screen without getting too detailed and most importantly, putting theory first. Putting all our price and earnings indicators together gives us a pretty good starting point. We ve managed to funnel down the 880 stocks that carry a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) and sift out about 40 or so of these stocks that have four types of momentum. There s one part of this puzzle that is missing. Exactly when is the right time to buy these stocks and which ones exactly to buy? That s where the technical analysis side of the equation comes in. Remember, the screen we ran to find these stocks looked for stocks close to their 52 week highs so we 2
are going to see a few that have seemingly run away from us. I m not interested in chasing the last 5% of a big move; I m more interested in picking up these stocks as they pull back to, or at least near a support level. So the first scrubbing I m going to do is separating these stocks by the distance to their support by comparing them to various moving averages. That leaves me with a short list of stocks with great charts that haven t taken off through the stratosphere already. Then I use short term triggers that tell me exactly when is the right time to enter the trade, but more importantly in my eyes, when to get out of a trade. Keep in mind the Zacks Rank #1 track record of 26% per year since 1988. What if we were to find the best 7 or 8 of the 220 Zacks Rank #1 stocks out there? What would those results look like? Welcome to the most explosive investment formula in the world. Welcome to Momentum Trader. David Bartosiak Stock Strategist- Zacks.com 3
Section 1: The Mental Aspect It is important to realize how much investment success is related to what goes on between your ears. There are so many ways to get distracted and to question yourself while trading. You must be in the right frame of mind and have reasonable expectations to achieve success with this or any investment service. So be sure to pay attention to the tips in this section carefully; they will get you headed in the right direction. NOBODY IS 100% PERFECT First of all, there will be losing picks, but if we cut them out early to minimize losses and maximize gains on winners, then we can achieve phenomenal results. A little known fact is that the Zacks Rank, even with its 26% annual return, is only right 56% of the time. We are extremely confident that over time we will produce substantial returns, but it is important that you learn to take the losing picks in stride. COMPOUND YOUR RETURNS The Momentum Trader uses a system that identifies momentum stocks that have pulled back to support to achieve its vast outperformance. We let these stocks run when they start to move higher again. However, while there will be some big winners, it is having consistent smaller gains that will really add up over time. This is what we call the beauty of compounding and how it works to an investor s advantage. Albert Einstein is said to have called compound interest the eighth wonder of the world and this is a prime example. So don t get discouraged when you are only seeing small gains on each respective trade, because that is exactly what this product is designed to do. TIMELINESS INCREASES ROI Let me ask you a question. Would you rather make 10% or 20% on a trade? Yes, it s a trick question. The missing piece of the puzzle is how long each trade was held. So now let s say that the 10% gain was made in 3 months time, which computes to a 46% annual return. On the other hand, the 20% winner took 2 years to achieve and is really only good for a 10% annual gain. This example solidifies the power of timely stock trading that we will harness with this service. Most often we will only be holding on for a few months and stringing together a series of smaller winners. But from time to time we let winners run longer. 4
Section 2: Getting the Most Out of Momentum Trader It is our job to provide you with timely and profitable stock picks, but there are steps that you can take to ensure your success with Momentum Trader. Here are a few things you can do to get the most out of the product. 1. Read this guide carefully This guide is your friend. It has valuable information on how to use the product and succeed with the assistance of Momentum Trader. It gives you step-by-step instructions on how to receive alerts and what to do when you receive them. It has important money management tips. 2. Have a working email address This is necessary to receive trading alerts. Make sure you can access your email in a timely fashion because acting on trades is essential to success. The Daily Summary email will be sent at 8:00 p.m. EST, which summarizes the positions as well as what happened on Wall Street during that trading day. Intra-day trading alerts, while rare, will typically be sent within the first hours of the trading day. Unfortunately, many Internet service providers have software programs that filter out emails you want to receive, like Zacks Momentum Trader Daily Summaries. To get optimal delivery of our emails follow this link for quick and easy instructions. 3. Have an online trading account We are not advocating any particular company for this, but ideally lower commissions will help you achieve a higher overall return. You will make several trades a month, and high commissions can really eat into your profit margin, especially if you have limited capital. 4. Access the site To access the site, go to http://www.zacks.com/momentumtrader and enter your username and password. This will take you to the main page where you can view the portfolio, any pending trades, and the commentary. 5
Section 3: Follow the Leader The process to receive our trades is very simple, yet we feel it is so important that we are going to spell it out for you. Here are the four steps. Here are the four steps: Receive the email with the daily summary or intra-day signal. Read the email to determine appropriate action. Place trades through your broker with the appropriate % allotted. Follow the daily summaries to determine when to sell. ACT PROMPTLY = MOST SUCCESS And if you don t beat the market, you can take advantage of our 100% Money Back Guarantee. SPEAKING OF THE GUARANTEE... We feel that if we are not able to live up to our word and help you beat the market then we shouldn t be deemed worthy enough to take your money. So in addition to the 90-day, no hassle guarantee, there is a 100% Money Back Performance Guarantee. There are a few conditions that have to be met first, but the bottom line is that we have to perform. Click here for details. 6
Section 4: How to Read Momentum Trader Alerts From time to time, this strategy will have a trading alert during the trading day. When a Buy Alert or Sell Alert is sent out, you should receive the alert within the first hours of the trading day detailing what stock is being added or sold and the rationale behind the move. It is important that you act as soon as you can. Here is an example: Signal = The type of alert. It will be a green ball to initiate a position or a red ball to close a position. Company Name = The name of the company that is being added to or sold from the Momentum Trader portfolio. Symbol = Ticker symbol of stock being added to or deleted from the portfolio. Date Added = The date on which the stock was added to the portfolio. Mkt Val % = The percentage of your allotted portfolio to allocate to this position Momentum Trader Portfolio Commentary = As part of the alert, David will explain his rationale for the addition. You will learn her reasoning for adding or selling the stock and the current price at which the stock is trading. Intraday alerts use the average of the price at the time of the alert and the closing price that day. Recommendations that use stops or limits will use that price for performance figures. 7
Section 5: How to Read the Momentum Trader Daily Summary The Daily Summary provides a wide array of details for Momentum Trader each trading day. This summary may have new signals as well as the current open portfolio with daily commentary. The % allocation for each stock is also shown. This is valuable information as it conveys what our game plan is, why we are in each stock, when to get out and why, as well as any relevant news. This is emailed to you at 8:00 p.m. EST. In regards to the price added/deleted for the portfolio, Zacks uses the average of the price at the open and the closing price on the day the stock is added or deleted. 8
Section 6: Virtues of Money Management Money management can be the difference between realizing large gains and going broke, even if the winning percentage is the same. How can this be? The key point is that winning investors know to ride their winners and cut their losses quickly, and to stick with a plan that has proven to work in the past. Here are a few rules that you can follow to further improve your returns: First of all, don t dump your entire portfolio into these Momentum Trader picks. Only allocate that portion of your capital that can be comfortably devoted to speculation. This portfolio will typically hold around 7 positions. You should be able to sleep soundly and act rationally if you are only trading with your speculative money. Keep in mind that reinvesting profits and the power of compounding are your friends in this portfolio. Those frequent singles add up to large gains in the end when the phenomenon of compound interest works its magic. EVER-PRESENT CLICHÉ RINGS TRUE The Momentum Trader is a great service, no doubt. It has been said millions of times before, but it is so important it needs to be said again: Don t put all your eggs in one basket. Even if you are the most brilliant investor in the world, there will be losing trades. The key is staying in the game and building your equity over time in a systematic way. This can only be done when diversification is put to use. Not that we have to remind you, but the main point is that your capital was earned through years and years of hard work. Capital conservation sounds boring, but without it, you are fighting a losing battle. We don t want to see the money you have put your blood, sweat, and tears into evaporate due to lack of discipline. 9
Section 7: Tying it All Together It is our goal at Zacks to enhance your trading results via the Momentum Trader service. This booklet touches upon the details of the service and provides several useful tips to realize the vast potential that Momentum Trader can yield. We feel it is our job to let you know that we are here to help you get the most out of Momentum Trader. Again, let s go over some of the important points made in this booklet. Small Gains Add Up To Big Results Not Every Trade Will Be A Winner Timeliness Is Of The Essence Money Management Matters Greatly Have A Working Email Address We Are Here To Help The last point is important as we have free customer support that should be taken advantage of. Any additional questions that you may have can be answered by just picking up the phone and giving us a call or emailing us: 1.888.775.8348 (outside the US, 1.312.265.9309) momentumtrader@zacks.com 10