Wiser Trader Stocks and Options Newsletter

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Issue No. 69   March 13, 2006                       Prescott, Arizona                       Systems@WiserTrader.com

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1.0   Trading

 

      The market is beginning to show weakness as measured by relative gains in major indices.

 

1.1 Outlook

 

      Market outlook can be judged by comparing the difference between percentage gains of major averages, as illustrated in Figure 1.  The NASDAQ (N) is a proxy for entrepreneurship and speculation.  The DOW (D) represents blue chips favored by institutional investors, the S&P 500 (S) represents large caps favored by conservative investors and the Russell 2000 (R) represents small caps favored by the retail investor.  The balance between speculator and conservative investor strength, measured by the ratio of NASDAQ gains to S&P 500 gains, has been declining.  This includes last Friday’s up tick on weak volume.  This gauge tells us that investors see tough times ahead.  Another gauge of market outlook is that institutional investors continue to run up blue chips in the DOW 30 causing the ratio of S&P 500 gains to DOW gains to decline.  Finally, the Russell 2000 has been weaker relative to the DOW over the past five or six trading days. 

 

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.

 

      The NASDAQ has remained directionless since mid January, as shown in Figure 2.  The trend lines are based on a two-year chart.  We have gotten used to seeing it move up one day and down the next or up two days and down the next two or something like that.  Until very recently, we have not seen sustained movement in either direction.  Over the past 10 trading days, the NASDAQ moved in the same direction four or five days out of six.  Unfortunately, the direction was down on strong volume.  Although it remains within its short term trading range, its 200-day simple moving average (SMA) is approaching from below.

 

 

FIGURE 2

 

 

 

 

2.0 Market Analysis

 

      Although a strong focus remains on bond yields, the stock market is choosing to ignore it; I believe only to react eventually as if rising yields were new information.  As we enter warnings season with high oil prices, the markets can be expected to remain choppy and mixed.

 

      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 Housing 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%

-0.4%

-0.5%

1.8%

NASDAQ Composite Index

-0.02%

-1.8%

0.7%

0.2%

0.9%

NYSE Composite Index

1.2%

-0.4%

-0.2%

0.2%

1.6%

S & P 500 Index

1.2%

-0.5%

-0.1%

0.4%

1.4%

Russell 2000 Index

1.3%

-1.6%

0.2%

0.8%

1.9%

HGX, Phil. Housing Index

-1.5%

-2.2%

-3.1%

2.4%

1.6%

IYR, Real Estate

6.0%

2.7%

-0.6%

0.6%

3.3%

GLD, GOLD

-1.8%

-4.4%

1.2%

1.2%

0.3%

RKH, Banking

2.6%

0.2%

-1.9%

2.0%

2.3%

IYT, Transportation

3.4%

-1.1%

1.5%

0.9%

2.1%

SMH, Semiconductors

-5.7%

-5.3%

2.7%

-2.5%

-0.6%

BBH, Biotechnology

0.6%

0.5%

-1.4%

0.9%

2.7%

OIH, Oil

-5.9%

-6.1%

2.2%

2.5%

-4.4%

XLE, Energy

-2.2%

-5.1%

0.9%

1.2%

0.9%

XLU, Utilities

-0.2%

-1.8%

-0.7%

0.7%

1.6%

XLB, Materials

1.3%

-1.4%

0.1%

0.2%

2.4%

XLI, Industrial

3.1%

0.3%

0.2%

0.4%

2.1%

XLK, Technology

0.4%

-1.3%

1.4%

-1.0%

1.3%

XLV, Healthcare

1.2%

0.2%

-1.0%

0.0%

2.0%

XLF, Financials

2.3%

0.4%

-1.1%

1.4%

1.6%

XLP, Consumer Staples

4.0%

2.5%

-0.5%

0.2%

1.8%

XLY, Consumer Discretionary

0.3%

-0.4%

0.1%

-0.5%

1.1%

 

 

 

 

 

Volatility

Indicator

Current

Last Week

2 Weeks Ago

Complacent

Cautious

VIX *

11.9

12.0

11.5

< 20

> 50

VXN **

17.6

16.3

15.2

< 30

> 70

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

** Above 20 day SMA = Short-term sell signal.

 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

      Figure 3 compares the major averages with key ETF’s and Sector SPDR’s.

 

 

FIGURE 3

 

 


 

 

Table 2C

Market Summary


 
 
 

 
 Major Indices 
 For the Past Week:
 Dow Jones     +0.5%
 NASDAQ        -1.8%
 S&P500 Index  -0.4%
 Russell 2000  -1.6%
 NYSE          -0.5%
 
 30 Year Bond 4.742%
 10 Year Note 4.755%
 
 Leading Industries
 For the Past Week:
 Forestry 
 Forestry & Paper 
 Paper 
 Brewers 
 Nondurable Household Products 
 Automobiles 
 Mobile Telecommunications 
 Automobiles & Parts 
 Real Estate Investment Trusts 
 Full Line Insurance                  
 
 Lagging Industries
 For the Past Week:
 Platinum & Precious Metals 
 Gold Mining 
 Mining 
 Coal 
 Internet 
 General Mining 
 Water 
 Exploration & Production 
 Oil Equipment & Services 
 Oil Equipment, Services & Dis         
          
 Leading Industries
 For the Past Month:
 Consumer Electronics 
 Recreational Products 
 Mobile Telecommunications 
 Distillers & Vintners 
 Steel 
 Delivery Services 
 Defense 
 Telecommunications 
 Real Estate Investment Trusts 
 Industrial Machinery      
 
 Lagging Industries
 For the Past Month:
 General Mining 
 Gold Mining 
 Nonferrous Metals 
 Tires 
 Mining 
 Internet 
 Oil Equipment & Services 
 Oil Equipment, Services & Dis 
 Exploration & Production 
 Aluminum                      
 
 Crude Oil $59.95
 
 Gold for the past 30 days:
 USD    -1.87%
 CAD    -1.36%
 CHF    -0.80%
 GBP    -0.62%
 EUR    -1.67%
 JPY    -0.70%

 
 
 
 
 

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

5.7%

1.5%

2.5%

-1.6%

2.0%

0.2%

1.6%

Cash Rich Companies

0.1%

1.0%

-7.3%

-2.0%

-2.0%

-0.5%

-2.9%

Price to Free Cash Flow

-5.7%

0.8%

-8.8%

-5.4%

2.9%

-1.3%

-5.0%

Growth Momentum Stocks

11.5%

0.8%

0.7%

-3.8%

0.8%

2.5%

1.4%

Lynch Stocks

22.1%

1.0%

5.5%

1.0%

1.1%

2.7%

0.6%

Buffett Stocks

19.3%

1.7%

2.9%

-0.5%

0.8%

2.1%

0.5%

Graham Stocks

8.8%

0.8%

-0.3%

-1.2%

-1.6%

0.6%

2.1%

Templeton Stocks

3.7%

1.0%

1.4%

-0.2%

-0.9%

1.6%

1.0%

 Zweig Stocks

11.0%

0.6%

3.7%

-1.4%

0.3%

2.3%

2.6%

Average Long Stocks

8.5%

1.0%

0.0%

-1.7%

0.4%

1.1%

0.2%

 

 

 

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

LXU

12/23/05

-1.3%

LSB Industries, Inc.

Basic Materials

Chemical Manufacturing

-6.8%

-6.0%

-63

-87

MMLP

11/25/05

0.0%

Martin Midstream Partners L.P.

Transportation

Water Transportation

-8.5%

0.3%

-70

-66

MBRX

03/10/06

0.0%

Metabasis Therapeutics, Inc.

Health Care

Biotechnology & Drugs

0.0%

-1.6%

-57

-61

TXCC

03/10/06

0.0%

TranSwitch Corporation

Technology

Semiconductors

0.0%

-6.6%

-59

-59

SNSS

12/16/05

24.7%

Sunesis Pharmaceuticals, Inc.

Health Care

Major Drugs

-2.5%

25.5%

-50

-39

VSTA