Wiser Trader Stocks and Options Newsletter

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Issue No. 68   February 27, 2006                    Prescott, Arizona                       Systems@WiserTrader.com

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1.0   Trading

 

      The market has not favored us with a committed direction yet.

 

1.1 Sideways

 

        The S&P 500, the NASDAQ, the NYSE Composite and the DOW are all still trading at the top of their short-term and two-year trading ranges, as illustrated by the S&P 500 Index in Figure 1.  Each index has briefly broken above resistance and all remain overbought with falling volume.

 

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.

 

      On Wednesday, the NASDAQ and S&P 500 began to outpace the DOW and continued to do so for the rest of the week.  Since early February, the DOW has out gained the NASDAQ and S&P 500, signaling a lack of enthusiasm from speculators who move the markets.  Institutional investors, who favor the DOW when it outpaces the S&P have now stopped moving money into the DOW 30, possibly taking a wait and see position. 

 

      The DOW fell last week while the other major indices rose, implying continued market choppiness.  In this case, choppiness is defined by how frequently the major averages cross the Williams %R neutral line between overbought and oversold.  Three times or more in a single month is considered choppy. 

 

      Except for the second week of January, the Russell 2000 has outpaced the DOW all year and began to reaccelerate, with respect to the DOW, last week.  This indicates that small caps are outpacing large caps, as seen in Figure 2.

 

 

 

FIGURE 2

 

 

 

 

 

 

2.0 Market Analysis

 

      While the market is optimistic, it is still obsessed with inflation and interest rate increases.  It hovers at the top of long term and short term trading ranges, as if expecting a miracle that will eliminate two more rate increases expected from the Fed.  The longer it hovers there, the more dramatic a near term pullback will be if the current rate tightening cycle continues longer than expected.

 

      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

1.4%

-0.5%

1.8%

1.2%

-1.0%

NASDAQ Composite Index

-0.7%

0.2%

0.9%

0.0%

-1.8%

NYSE Composite Index

0.4%

0.2%

1.6%

0.2%

-1.5%

S & P 500 Index

0.4%

0.4%

1.4%

-0.3%

-1.2%

Russell 2000 Index

0.6%

0.8%

1.9%

-1.0%

-1.1%

GLD, GOLD

0.0%

1.2%

0.3%

-3.0%

1.6%

RKH, Banking

3.7%

2.0%

2.3%

1.6%

-2.1%

IYT, Transportation

3.4%

0.9%

2.1%

1.4%

-1.0%

SMH, Semiconductors

-3.3%

-2.5%

-0.6%

2.7%

-3.0%

BBH, Biotechnology

1.4%

0.9%

2.7%

-3.1%

1.1%

IYR, Real Estate

2.1%

0.6%

3.3%

-0.4%

-1.3%

OIH, Oil

-8.4%

2.5%

-4.4%

-4.6%

-2.2%

XLE, Energy

-5.3%

1.2%

0.9%

-4.9%

-2.5%

XLU, Utilities

0.4%

0.7%

1.6%

0.4%

-2.3%

XLB, Materials

0.4%

0.2%

2.4%

-0.6%

-1.6%

XLI, Industrial

3.3%

0.4%

2.1%

1.3%

-0.6%

XLK, Technology

0.0%

-1.0%

1.3%

1.7%

-2.0%

XLV, Healthcare

1.2%

0.0%

2.0%

0.1%

-0.9%

XLF, Financials

2.2%

1.4%

1.6%

1.1%

-1.8%

XLP, Consumer Staples

0.6%

0.2%

1.8%

-0.1%

-1.3%

XLY, Consumer Discretionary

0.1%

-0.5%

1.1%

0.4%

-0.9%

 

 

 

Volatility Indices

Indicator

Current

Last Week

2 Weeks Ago

Complacent

Cautious

VIX **

11.5

12.0

12.9

< 20

> 50

VXN ***

15.2

15.0

16.9

< 30

> 70

**   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     -0.5%
 NASDAQ        +0.2%
 S&P500 Index  +0.2%
 Russell 2000  +0.8%
 NYSE          +0.4%
 
 30 Year Bond 4.515%
 10 Year Note 4.587%
 
 Leading Industries
 For the Past Week:
 Coal 
 Steel 
 Heavy Construction 
 Mining 
 Gold Mining 
 Home Construction 
 Water 
 Transportation Services 
 Mortgage Finance 
 Recreational Products                
 
 Lagging Industries
 For the Past Week:
 Automobiles 
 Recreational Services 
 Automobiles & Parts 
 Computer Hardware 
 Semiconductors 
 Fixed Line Telecommunications 
 Medical Equipment 
 Commodity Chemicals 
 Telecommunications 
 Technology Hardware & Equipt       
          
 Leading Industries
 For the Past Month:
 Commercial Vehicles & Trucks 
 Fixed Line Telecommunications 
 Industrial Engineering 
 Steel 
 Telecommunications 
 Real Estate Holding & Devel 
 Waste & Disposal Services 
 Defense 
 Building Materials & Fixtures 
 Trucking    
 
 Lagging Industries
 For the Past Month:
 Tires 
 General Mining 
 Internet 
 Automobiles 
 Travel & Tourism 
 Automobiles & Parts 
 Oil Equipment & Services 
 Oil Equipment, Services & Dis 
 Exploration & Production 
 Auto Parts                    
 
 Crude Oil $62.91
 
 Gold for the past 30 days:
 USD    -0.83%
 CAD    -0.63%
 CHF    +3.46%
 GBP    +1.68%
 EUR    +2.49%
 JPY    +0.25%

 
 
 
 
 
 
 
 
 
 

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

11.9%

0.4%

1.8%

0.2%

1.1%

-1.3%

1.7%

Cash Rich Companies

3.4%

0.3%

-3.2%

-1.3%

1.1%

-0.3%

-2.9%

Price to Free Cash Flow

-0.7%

1.8%

-7.3%

-2.7%

-1.4%

0.3%

-3.6%

Growth Momentum Stocks

15.3%

0.3%

3.7%

1.6%

1.6%

1.1%

-0.6%

Lynch Stocks

23.6%

0.9%

2.3%

2.8%

0.7%

-0.8%

-0.3%

Buffett Stocks

17.7%

0.2%

0.6%

1.6%

0.3%

-1.0%

-0.3%

Graham Stocks

13.8%

0.0%

0.0%

0.5%

2.4%

-0.1%

-2.7%

Templeton Stocks

4.6%

0.3%

2.3%

1.1%

1.4%

-0.4%

0.2%

 Zweig Stocks

19.2%

0.6%

4.4%

1.9%

2.0%

0.0%

0.4%

Average Long Stocks

12.1%

0.5%

0.5%

0.6%

1.0%

-0.3%

-0.9%

 

 

 

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

VSTA

10/21/05

3.6%

VistaCare, Inc.

Health Care

Healthcare Facilities

-8.2%

-2.7%

-77

-81

TRMA

01/06/06

11.1%

Trico Marine Services Inc

Energy

Oil Well Services & Equipment

-11.1%

-9.3%

-73

-72

CWEI

12/09/05

0.0%

Clayton Williams Energy, Inc.

Energy

Oil & Gas Operations

-13.7%

-10.6%

-82

-69

ULBI

02/17/06

-1.9%

Ultralife Batteries, Inc.

Technology

Electronic Instruments & Controls

-1.9%

-1.9%

-80

-67

NTOP

01/20/06

-0.5%

Net2Phone, Inc.

Services

Communications Services

-1.5%

-1.5%

-67

-67

NAHC

02/24/06

0.0%

National Atlantic Holdings Corporation

Financial

Insurance (Property & Casualty)

0.0%

-3.2%