Wiser Trader Stocks and Options Newsletter

______________________________________________________________________________

 

Issue No. 67   February 20, 2006                    Prescott, Arizona                       Systems@WiserTrader.com

______________________________________________________________________________

 

1.0   Trading

 

      The market has three reasons to form a short term top.

 

1.1 Formations

 

        One reason the market could be forming a short term top is that the S&P 500, the NASDAQ, the NYSE Composite and the DOW are all trading at the top of a two year rising wedge trading ranges, as illustrated by the S&P 500 Index in Figure 1.  Each has briefly broken above resistance.

 

FIGURE 1

 

© 2005 Desert Mountain Systems, LLC.  Members of wisertrader.com are neither licensed brokers nor licensed advisors.  Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio.  The newsletter and web site are for information only and should not be considered as personal advice.  While it is believed that the posted information is factual, mistakes can be made in transcription.  Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser.  Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.

 

However, a failure to breakout convincingly would imply a downward movement lasting for about three to four months. 

 

      So far, each index has danced along the resistance line, having arrived at the top of a new short-term formation, as shown in Figure 2.  The NYSE Composite is the most promising, having converted resistance into near term support.  Sustained breakouts for the other three are less convincing.  Having arrived at the top of these new short-term formations, a downward leg could be expected in the absence of positive market moving news.

 

     

 

 

FIGURE 2

 

 

      The third observation that leads to an expected near-term decline is that the 10-period Williams %R is overbought for all four indices, as well as, for the Russell 2000. 

 

 

2.0 Market Analysis

 

      The market is still obsessed with inflation and interest rate increases.  It is a little schizophrenic in that it gave Federal Reserve Chairman Bernanke a resounding vote of approval this past week because he is strongly against inflation.  At the same time, it is now almost a given that at least two more rate hikes are due, and possibly more, with the latest positive news on retail sales, new housing starts and industrial production plus the negative news that core inflation was up by 0.4%.  The prospect of additional rate hikes beyond March 28th and May 10th is supported by the news that with 86% of S&P 500 companies reporting, profits are up by 15%. 

 

      Key industry ETF’s in Table 2A are Biotech and Semiconductors, which confirm the NASDAQ.  Transportation confirms the Dow Jones Industrial Average according to Dow Theory.  Banking and Financials are confirming indicators for the S&P 500.  Gold and Real Estate are respective indicators for the inverse health of the currency (inflation) and the capacity for consumer spending. 

 

 

 

Table 2A

 
Indices, Key Industry ETF’s and Sector SPDR’s

 

1 month

1 wk ago

2 wks ago

3 wks ago

4 wks ago

Dow Jones Industrial Index

4.2%

1.8%

1.2%

-1.0%

2.2%

NASDAQ Composite Index

1.5%

0.9%

0.0%

-1.8%

2.5%

NYSE Composite Index

2.0%

1.6%

0.2%

-1.5%

1.8%

S & P 500 Index

2.4%

1.4%

-0.3%

-1.2%

2.5%

Russell 2000 Index

3.7%

1.9%

-1.0%

-1.1%

3.9%

GLD, GOLD

-0.4%

0.3%

-3.0%

1.6%

0.8%

RKH, Banking

5.2%

2.3%

1.6%

-2.1%

3.5%

IYT, Transportation

6.4%

2.1%

1.4%

-1.0%

3.8%

SMH, Semiconductors

1.3%

-0.6%

2.7%

-3.0%

2.2%

BBH, Biotechnology

0.0%

2.7%

-3.1%

1.1%

-0.5%

IYR, Real Estate

4.5%

3.3%

-0.4%

-1.3%

3.0%

OIH, Oil

-10.0%

-4.4%

-4.6%

-2.2%

0.8%

XLE, Energy

-6.0%

0.9%

-4.9%

-2.5%

0.4%

XLU, Utilities

-1.3%

1.6%

0.4%

-2.3%

-1.0%

XLB, Materials

5.1%

2.4%

-0.6%

-1.6%

4.9%

XLI, Industrial

5.1%

2.1%

1.3%

-0.6%

2.1%

XLK, Technology

3.1%

1.3%

1.7%

-2.0%

2.1%

XLV, Healthcare

2.3%

2.0%

0.1%

-0.9%

1.0%

XLF, Financials

3.5%

1.6%

1.1%

-1.8%

2.7%

XLP, Consumer Staples

2.0%

1.8%

-0.1%

-1.3%

1.6%

XLY, Consumer Discretionary

2.0%

1.1%

0.4%

-0.9%

1.5%

 

 

VTO Report on Market Sentiment Indicators

Sentiment Indicator

Current

Last Week

2 Weeks Ago

Complacent

Cautious

VIX **

12.0

12.9

13.0

< 20

> 50

VXN ***

15.0

16.9

17.5

< 30

> 70

Put/Call Ratio

0.595

0.583

0.698

< 0.6

> 0.7

%Bulls - %Bears

26.3%

26.3%

26.8%

> 29%

< 20%

**   Below 20 day SMA = Short-term buy signal.

*** Below 20 day SMA = Short-term buy signal.

 

 

 

 

 

 

 

 

 

 

 

 

      Figure 1 compares index tracking stocks for the major averages with key ETF’s and Sector SPDR’s.

 

FIGURE 1

 

 


 

 

Table 2C

Market Summary


 
 
 

 
 Major Indices 
 For the Past Week:
 Dow Jones     +1.8%
 NASDAQ        +0.9%
 S&P500 Index  +1.6%
 Russell 2000  +1.9%
 NYSE          +1.4%
 
 30 Year Bond 4.509%
 10 Year Note 4.541%
 
 Leading Industries
 For the Past Week:
 Platinum & Precious Metals 
 Home Improvement Retailers 
 Mobile Telecommunications 
 Telecommunications 
 Commercial Vehicles & Trucks 
 Recreational Products 
 Fixed Line Telecommunications 
 Drug Retailers 
 Industrial Engineering 
 Real Estate Holding & Devel               
 
 Lagging Industries
 For the Past Week:
 Travel & Tourism 
 Oil Equipment & Services 
 Oil Equipment, Services & Dis 
 Distillers & Vintners 
 Insurance Brokers 
 Aluminum 
 Toys 
 Semiconductors 
 Broadcasting & Entertainment 
 Media Agencies          
 Leading Industries
 For the Past Month:
 Steel 
 Platinum & Precious Metals 
 Fixed Line Telecommunications 
 Railroads 
 Commercial Vehicles & Trucks 
 Telecommunications 
 Industrial Metals 
 Industrial Engineering 
 Building Materials & Fixtures 
 Investment Services   
 
 Lagging Industries
 For the Past Month:
 Tires 
 Internet 
 Travel & Tourism 
 Home Construction 
 General Mining 
 Exploration & Production 
 Pipelines 
 Toys 
 Auto Parts 
 Oil Equipment, Services & Dis                   
 
 Crude Oil $59.75
 
 Gold for the past 30 days:
 USD    +1.51%
 CAD    -0.30%
 CHF    +3.76%
 GBP    +2.85%
 EUR    +2.93%
 JPY    +4.08%

 
 
 
 
 
 
 
 
 
 

3.0 Procedure

 

      The following watch lists contain stock candidates for consideration.  They are not necessarily trades.  Categories include checklists for insider buying and cash rich companies, as well as, filters that employ stock picking methods used by master traders. 

 

      Current stock rankings are based on the degree to which stocks are overbought or over sold based on the 28-period Williams %R for the past two trading days.  Two columns are labeled “%R1” and “%R2” with “%R2” indicating the Williams %R for the most recent trading day.  Of course, values more negative than -80 are oversold and those less negative than -20 are overbought.

 

      One should keep in mind that oversold stocks are not necessarily ready to move upward.  They could very well be in a condition of continuous decline.  The lists are meant to serve as a starting point for further due diligence. 

 

      A column labeled “Monthly % Gain” was added to show the inverse relationship between price action over the past month and the Williams %R.  The change from a 10-period Williams %R with a weekly percent change to a 28-period Williams %R with a monthly percent change was done to reflect a longer term view.

 

      The “Reference” is the date that a stock passed the indicated filter and was first added to or returned to the list.  The “% Change” is how the price has changed since the reference date.  Stocks that are down 10% or more after being listed are removed for a period of about two months.  The “% from Max” is the percentage the price has declined from the maximum price reached since the reference date.  Stocks that are down 8% from their highs after being listed are flagged in yellow.  Stocks that are down 15% from their highs after being listed are removed for two months.  More information on filters is available on the web site.

 

      A performance summary of filtering techniques for checklists and master trader selection methods is given in Table 3A. 

 

 

Table 3A

Stock Filter Summary

Filter

Avg. % Change Since Listed

Avg. % Change Friday

1 Month

1 Week Ago

2 weeks Ago

3 Weeks Ago

4 Weeks Ago

Net Insider Buying

10.7%

0.2%

0.7%

0.7%

-2.1%

0.8%

1.0%

Cash Rich Companies

3.7%

0.0%

-1.8%

0.2%

-0.8%

1.1%

-2.1%

Price to Free Cash Flow

1.4%

-1.0%

1.3%

-2.7%

1.2%

-4.3%

7.5%

Growth Momentum Stocks

14.1%

0.3%

7.2%

1.6%

1.2%

-0.5%

4.9%

Lynch Stocks

20.4%

-0.2%

3.9%

0.7%

-0.8%

-0.3%

4.4%

Buffett Stocks

15.9%

-0.4%

4.1%

0.6%

-1.4%

-0.4%

5.3%

Graham Stocks

13.2%

0.8%

0.3%

2.4%

-0.1%

-2.7%

0.9%

Templeton Stocks

3.7%

-0.2%

2.9%

1.4%

-0.3%

0.4%

1.4%

 Zweig Stocks

17.9%

-0.1%

6.7%

2.3%

-0.2%

0.5%

4.0%

Average Long Stocks

11.2%

0.0%

2.8%

0.8%

-0.4%

-0.6%

3.0%

 

 

 

Key

Passed Recent Filter

Price declined by half of stop loss setting

Oversold  based on  Williams %R  (%R2 is most recent)

Overbought based on Williams %R  (%R2 is most recent)

 

 

 

      Companies that have experienced net insider buying within the past 6 months of 5% or more of issued stock are listed in Table 3B.  These stocks should also appear in one of the master trader screens or meet additional screening criteria before being given serious consideration.  This list is a mixture of stocks that are optionable and those that are not.

 

 

Table 3B

Net Insider Buying Check List

Stock

Reference

% Chg

Company

Sector

Industry

% from Max

Monthly % Gain

%R1

%R2

MWY

02/10/06

0.0%

Midway Games Inc.

Technology

Software & Programming

-2.8%

-32.3%

-96

-94

TRMA

01/06/06

8.3%

Trico Marine Services Inc

Energy

Oil Well Services & Equipment

-13.3%

-4.6%

-66

-85

NTOP

01/20/06

-0.5%

Net2Phone, Inc.

Services

Communications Services

-1.5%

-0.5%

-50

-67

CWEI

12/09/05

0.0%

Clayton Williams Energy, Inc.

Energy

Oil & Gas Operations

-14.3%

-8.8%

-73

-66

VSTA