Wiser Trader Stocks and Options Newsletter

Issue No. 11 – January 31, 2005

http://www.WiserTrader.com

Systems@WiserTrader.com

James A. Andrews

 

1.0 Down-Market Filter Experiment

 

      There are two things to discuss this week besides stock candidates and trades.  The first is progress on an experiment to study the validity of a down-market filter.  The second is that newsletter subscribers who have an interest in trading options are offered two months free membership in an options email alert service beginning February 1, 2005.  The free membership period ends March 31, 2005.  Sign up at the Option Alerts link.  See below.

 

      As suspected, stock price has had a significant effect on the tendency of a stock to decline in a falling market over the past month.  Stocks were observed in three categories.  The first group contains short term option candidates having great earnings growth, strong relative strength and minimum prices of $50.  The second contains candidates for covered call writing having great earnings growth, great relative strength and with maximum prices of $20.  The third group contains candidates for put options having recently poor earnings growth, mediocre relative strength and with prices greater than $20.  Refer to Table 1a.  Groups 1 and 2 differ only in price as their remaining screening criteria are identical.  Group 3 stocks are priced between those of groups 1 and 2 but have poor earnings growth and missed recent earnings targets.

 

Table 1a

Criteria for Three Filters

 

 

 

 

      Weekly price performance of the three groups over the past 4 weeks is compared with proxies for major averages in Table 1b.  From preliminary studies last week, it is not entirely surprising that higher priced group 1 stocks out performed the other two groups.  However, the fact that high performing group 2 stocks underperformed the poor stocks in group 3 is surprising.  Group 2 stocks are the lowest priced of all.  A closer look reveals that a couple of group 3 stocks were upgraded due to recent stellar earnings reports over the past week.  One group 2 stock was downgraded due to missing earnings expectations.  This illustrates a potential hazard of trading stocks without taking their earnings report calendar into account. 

 

Table 1b

Weekly and 1 Month Percentage Price Performance as of 01/29/05

 

 

 

      Rather than trying to anticipate investor acceptance of earnings reports, it would be easier to simply avoid being in a trade when earnings reports are scheduled.  It is possible to anticipate positive earnings reports based on insider buying.  But it is not a always valid to interpret insider selling as a time to short a stock.  In any case, the size of the staff at WiserTrader.com is too small to address insider activity.  So I will simply add a rule to time my trades so as to avoid scheduled earnings reports unless there is a substantive reason to expect a specific result. 

 

      Overall, the hypothesis seems to hold up that the Stock Candidate Filter produces group 1 stocks that are less likely to decline in a falling market compared to group 3 stocks produced by the Down-market Filter.  The experiment will be continued with ongoing results posted in the Forum area at http://www.wisertrader.com/.  Only brief mention of the experiment will be made in the newsletter unless there are some truly conclusive results.

 

Option Email Alert Service

 

      Newsletter subscribers are offered free membership in the Options Email Alert Service thru March 31, 2005.  Sign up for free alerts by clicking on the Option Alerts link at the home page.  This service provides email alerts just before put and call option trades are made for the portfolio.  Trade entry emails will be sent the evening before markets open.  Alerts will be posted in a secure area of the Forum up to a week prior to the normal Sunday evening posting on the open web site.  If you are interested, you can register for the Forum at http://www.wisertrader.com/.  The Forum Help link has a brief set of Quick Start Instructions to see you through the registration process. Trade exit alerts can be sent at any time.  So an email address is needed where you can be contacted during daytime hours.  I conservatively estimate minimum profits to range from 50 to 70% on an annualized basis.   This works out to be 3.44 to 4.52%, respectively, compounded monthly - easily doable.   More details will be posted.

2.0 Market Analysis

 

      Although the major averages are clearly down for the past month, markets remain undecided for geopolitical reasons.  It is true that institutions have been discarding more speculative stocks since the beginning of the year and have become more defensive.  Telecommunications stocks, although improving their profit margins, are taking a hit.  Varian, the leading provider of cancer technology, took a large hit even after reporting great year over year earnings with an improved outlook going forward.  Over 30% of the S&P 500 companies have reported earnings.  The percentage of companies beating estimates is in line with historical averages, as 67% have reported above the average forecast, and only 17% have reported below.  On balance, economic reports did not change expectations of 3% to 3 1/2% real GDP growth for 2005, and thus could be considered neutral to slightly bullish.  Things could turn very suddenly this coming week pending a positive outcome of events in Iraq and the OPEC meetings.

 

      The 5 day and 5 week RSI are neutral for the 3 major indices. 

 

Table 2a

Sentiment Indicators 01/29/05

 

 

      The industry leaders list contains the top 10 industries for four periods consisting of 1 week, 1 month, 2 months and 3 months.  Results are ranked highest to lowest based on the average percentage gain per week within any period times the number of appearances of an industry in the four top 10 lists. 

 

 Market Summary

 Week ending 01/29/05:

 Indices for the Week:

 Dow Jones     +0.3%

 NASDAQ        +0.1%

 S&P500 Index  +0.3%

 Russell 2000  +0.3%

 Industry Leaders:

 Home Construction

 Health Care Providers

 RE Holding and Develop

 General Mining

 Steel

 Coal

 Toys

 Pipelines

 Tires

 Personal Products

 Tobacco

 Heavy Construction

 Marine Transportation

 Drug Retailers

 Hotels

 Personal Goods

 Distillers and Vintners

 Medical Supplies

 Business Training and Employ.

 Exploration & Production

 Travel and Tourism

 Gold for past 30 days:

 USD    -3.53%

 CAD    -3.88%

 CHF    +0.11%

 GBP    -1.23%

 EUR    +0.08%

 JPY    -4.38%

3.0 Procedure

 

      The following stock screens were generated with tools from AAII.  The short term trading filter used for Table 3a looks for optionable stocks whose percentage relative strength over the past 6 months is greater than 90%, EPS Growth over the past 12 months is greater than 80% and are within 5% of their 52 week high with a minimum price of $50.   When a trigger has been received, call or put options are supplied depending on the direction of trend as reflected by the respective positive or negative slope of the 30 day SMA. 

 

Table 3a

Short Term Options (Original Stock Candidate Filter) as of   01/29/05

 

 

Key

 

      Stocks from an experimental down-market filter are listed in Table 3b.  This filter looks for stocks having the potential to decline in a down market.  They are optionable stocks priced above $20 having negative year over year EPS growth, a recent negative surprise, PE above 50 and a four week %Rank Relative Strength of less than 50%.  PLB was removed from the list because it recently reported earnings that exceeded analyst’s forecasts.  New entries this week are KCI that just reported profits below consensus estimates, CMCSA that is due to report on February 3^rd and TIN that is due to report on February 7^th.

 

Table 3b

Experimental Down Market Candidate Filter (Short Term Options) as of   01/29/05

 

 

 

      The stock filter resulting in Table 3c is for the potential to write covered call options.  The only difference between screens for Tables 3a and 3c is that in 3c the maximum stock price is $20.  No new stocks filtered through the screen this week for the second week in a row.  All are from previous weeks.

 

Table 3c

Short Term Covered Call Writing Screen as of   01/29/05

 

 

 

      For the screen in Table 3d, the number of selections is reduced by eliminating stocks having P/E’s greater than 30.  One new stock, BSTE, filtered through the screen this week.  The others that are highlighted passed this week’s screen and are repeats from previous weeks.

 

 

Table 3d

Growth Momentum (Intermediate Term) Screen as of   01/29/05

 

 

 

 

      For the Peter Lynch screen in Table 3e, again the number of selections for this screen is reduced by eliminating stocks having P/E’s greater than 30.   New stocks that filtered through the screen this week are CAJ and PCU.

 

 

 

 

Table 3e

Peter Lynch Value  (Intermediate Term) Screen as of   01/29/05

 

 

 

 

      The filter for Warren Buffet style stock picking in Table 3f is for the intermediate to long term.  Two requirements were added.  One was to include only optionable stocks in order to find LEAPS opportunities.  The other requirement was to include only those stocks having a PE of 17 or less.   New stocks passing the filter this week are COLM, ELBO, NUE and SU.

 

Table 3f

Warren Buffett Value (Long Term) Screen as of   01/29/05

 

 

 

      The filter for Benjamin Graham’s style of utility investing is in Table 3g.  One new pick filtered through the screen this week, PNM.  All of those from the previous weeks filtered through this week, except PNW.  A requirement was added to include only those stocks having a PE of 17 or less.  

 

Table 3g

Benjamin Graham Value (Long Term) Screen as of   01/29/05

 

 

 

 

4.0 Results

 

      Short term trades for Consolidated Mercantile (CSLMF), Mobile Tele Systems (MBT) and Del Monte (FDP) were added to Table 4a.  CREAF was opened the previous week while selling the February $15.00 Covered Call for $2.50.  The stock declined after its quarterly report and the option declined to $0.25.  I repurchased the call option to regain some flexibility.  

 

Table 4a

Stock Portfolio as of 01/29/05

 

 

      SFI in Table 4b is the first trade based on the down-market filter.  US Steel (X) was opened based on China’s continuing consumption of raw materials.  May open more trades based on this premise.  MTH has already reported with reasonable results.

 

 

 

Table 4b

Option Portfolio as of 01/29/05

 

5.0 Conclusion

     

      The average portfolio P/L is 4.8%, with 0.4% for stocks and 10.4% for options. 

 

      Optimism and complacency in the markets continues.  Slopes of the 30 day simple moving averages for the DOW, NASDAQ, S&P500 and Russell 2000 remain slightly negative. They all rose fractionally this past week.   I expect, but can not predict, that markets will track sideways for the next couple of months. 

 

      The Down-Market Candidate Filter has shown promise against the original Stock Candidate Filter for its ability to construct a watch list of falling stocks in falling and sideways markets.   

 

      Have a great week.

Appendix

Investment Conference Schedule

     Some of the finest investment ideas can be introduced and catch fire at conferences.  Below are links to conference registration sites where you can sign up.  

• 02-01-05 Rancho Mirage, CA - Nanotechnology continues to receive growing attention from venture capital investors. Government, universities, labs, and corporations are fueling the growth of nanotech research into profitable commercial applications. "NanoTech Investing Forum"
• 02-02-05 Rancho Mirage, CA "The Clean-Technology Investor Summit"
• 02-02-05 Orlando, FL "World Money Show"
• 02-03-05 Rancho Mirage, CA "Corporate Venturing & Strategic Investing (7th Annual)"
• 02-08-05 Cape Town, South Africa  - Africa's most important mining event and the world's leading gathering of global policy makers and international finance, the Mining INDABA has raised billions of dollars and introduced the international investment community to mining interests throughout Africa. More than 350 leading companies and 35 African governments have sponsored the Mining INDABA. "Investing in African Mining Conference"
• 02-09-05 Las Vegas, NV "Premier Forum on Tranche B/Second Lien & Junior Debt Financing"
• 02-10-05 Pasadena, CA "Reflections and Insights: Provocative Thinking on Investment Management"
• 02-21-05 Phoenix, AZ "Profits at The Peak Traders Conference"
• 02-24-05 Miami, FL "Pensions&Investments Defined Contribution/401(k) East Coast Conference (13th Annual)"
• 03-09-05 Delray Beach, FL "Investment University"
• 03-17-05 San Jose , CA "INSEAD Presents Growth Ventures in Emerging Markets: Seizing the Opportunity"
• 03-20-05 San Jose , CA "6th Annual Mid-Market March Madness - M&A & Buyouts"
• 04-10-05 Calgary, Alberta "Calgary Resource Investment Conference"
• 04-10-05 Calgary, Alberta "Calgary Resource Investment Conference"
• 05-02-05 Chicago, IL "2005 Healthcare M&A & Corporate Development"
• 05-03-05 Acapulco, Mexico "SRI Conference on Foreign Investment Opportunities in Mexico's New Consumer and Small Business Lending Industry "
• 05-04-05 Atlanta, GA "Global Debt Collection Summit"
• 05-11-05 Minneapolis , MN "Medtech Investing Conference (4th Annual)"
• 05-11-05 New York, NY " IIR's Inaugural Forum on IP Rights Protection in Financial Services - Strategies for Building Patent Portfolios and Managing IP Risk "
• 05-17-05 London, United Kingdom "Corporate Venturing & Spinouts Conference "
• 05-17-05 New York, NY "Hedge Funds Regulation and Compliance 2005 - Gain Advanced Operational, Legal and Accounting Strategies to Achieve full Compliance in Today's Regulatory Environment "
• 05-23-05 New York, NY -Both professional and sophisticated private investors meet with the world's leaders in gold, silver, precious metals, copper and oil and gas exploration and production "New York Institutional Gold Conference"
• 06-01-05 San Francisco, CA "Venture Capital Investing Conference"
• 06-12-05 Vancouver, BC - Resource Investment Conferences featuring small cap opportunities in gold, diamonds, oil & gas, industrial and emerging growth situations are being presented in Canada. Pre-registration is complimentary to: investors who are clients of sponsoring firms which include discount and full service brokerage houses; subscribers of participating newsletters, sponsoring media and sponsoring internet investment services; shareholders of participating exhibitors; accredited investment advisors and investors who take an interest in managing their own personal portfolios. "World Gold, PGM & Diamond Investment Conference"
• 09-07-05 Las Vegas, Nevada "Gold and Precious Metals Investment Conference"
• 09-29-05 Las Vegas, Nevada - Trade Station World Conference and Expo, the premier conference for TradeStation users, is coming to the Venetian Hotel in Las Vegas, September 29 - October 2, 2005. Here's where you learn about how to design your personal trading strategies, and to test those strategies against historical data. "Tradestation World Users Conference"
• 10-02-05 Toronto, Ontario "Toronto Resource Investment Conference"
• 10-30-05 New Orleans, LA "New Orleans Investment Conference"
• 11-10-05 Millbrae, CA - Continuing advances in genomics, proteomics and enabling technologies makes the Biotech sector a favorite among private equity investors and venture capitalists. The Biotech Investing Conference is an industry gathering of the leading private equity investors, venture capitalists, biotech companies, pharmaceutical companies, corporate investors and institutional investors.  "Biotech Investing Conference"
• 11-27-05 San Francisco, CA "Gold and Precious Metals Conference"
  

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