Wiser Trader Stocks and Options Newsletter

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Issue No. 76  May 17, 2006                           Prescott, Arizona                       Systems@WiserTrader.com

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1.0   Trading

     

·        The newsletter is on a mid-week schedule until some issues are worked out for a primary information source.  It will return to a Monday pre-open schedule soon, perhaps as early as next week.

·        Five free Excel-XLQPlus spreadsheet downloads are available to help track various segments of the market at http://www.wisertrader.com/excel.php.  All have undergone recent updates. 

 

1.1 Pullback

 

      While climbing a wall of worry, the market decided to look down.  In part, it was declining consumer sentiment combined with Fed expectations of a slowing economy.  In addition was the recent rise in treasury yields following a quarter point Fed rate hike to 5.00%.  On Monday, it was a decline in the US dollar when Japan announced it would not hike interest rates at this time.  The market is shown in Figure 1A as of Monday’s close.

 

 

FIGURE 1A

 

 

© 2006 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 Williams %R for each of the five indices is oversold.  On Thursday the 5-index Williams %R, shown in Figure 1B moved downward across the -50 neutral line and proceeded on Friday to narrow its range of component values.  At Monday’s close, the average indicator value was -92 with a range of 30 units.  The 200-day SMA for the indicator is -42. 

 

 

FIGURE 1B

 

1.2 Errata - Directivity

 

       In haste to publish the supplemental issue last Wednesday May 10, 2006, a couple of algebraic signs were misplaced in the directivity formula.  The formula should read,

 

      

 

      This corrected version has been incorporated into the archived newsletter dated 05-10-06 and in the spreadsheet download named Market Momentum. 

 

 

2.0 Market Analysis

 

      Commodities led the market lower on Monday, spurred by a rise in the US dollar after the Japanese central bank announced that it would not raise interest rates.  The average industry loss was -0.4% with 44% of 212 industries gaining.  This performance was better than Thursday and Friday of last week when the average industry loss was, respectively -1.3 and -1.4% with only 4 and 6% of industries gaining. 

 

      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

3.2%

-1.3%

2.1%

0.1%

2.4%

NASDAQ Composite Index

-3.1%

-4.5%

1.7%

-1.2%

1.0%

S & P 500 Index

0.7%

-2.3%

1.5%

-0.2%

1.8%

NYSE Composite Index

1.7%

-2.8%

1.9%

0.3%

2.4%

Russell 2000 Index

-1.6%

-5.6%

2.7%

-0.7%

2.2%

HGX, Phil. Housing Index

-7.9%

-5.1%

0.4%

-3.9%

0.5%

IYR, Real Estate

2.2%

-2.3%

2.6%

-1.4%

3.4%

GLD, GOLD

10.3%

-0.2%

3.7%

5.7%

0.9%

RKH, Banking

4.3%

-1.4%

0.6%

2.9%

2.2%

IYT, Transportation

5.9%

-2.0%

6.3%

-1.7%

3.4%

SMH, Semiconductors

-1.2%

-6.1%

2.3%

0.0%

2.8%

BBH, Biotechnology

-6.2%

-0.2%

2.0%

-5.8%

-2.2%

OIH, Oil Infrastructure

-0.4%

-7.1%

2.3%

0.9%

4.0%

XLE, Energy

-2.3%

-5.2%

0.9%

-1.3%

3.5%

XLU, Utilities

4.1%

-1.5%

2.9%

-1.6%

4.4%

XLB, Materials

0.3%

-4.1%

3.1%

-1.6%

3.1%

XLI, Industrial

3.7%

-2.0%

3.0%

-1.1%

3.9%

XLK, Technology

-3.9%

-4.3%

1.3%

-1.6%

0.8%

XLV, Healthcare

-0.1%

0.2%

0.2%

-1.0%

0.6%

XLF, Financials

3.0%

-1.7%

1.8%

0.9%

2.1%

XLP, Consumer Staples

3.5%

-1.1%

1.6%

1.3%

1.7%

XLY, Consumer Discretionary

2.2%

-1.4%

2.2%

0.7%

0.7%

 

 

 

      The VIX and VXN volatility indexes are listed in Table 2B.

 

 

Table 2B

Volatility

Indicator

Current

Last Week

2 Weeks Ago

Complacent

Cautious

VIX **

13.6

11.8

11.6

< 20

> 50

VXN ***

18.0

14.9

15.5

< 30

> 70

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

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

 

 

 

      Figure 2A compares the major averages with key ETF’s and Sector SPDR’s.

 

 

FIGURE 2A

 

 

 

 

 

Table 2C

Market Summary

 
Industries are listed according to the Dow Jones Classification System 

 
 

 
 Major Indices 
 For the Past Week:
 Dow Jones      -1.3%
 NASDAQ         -4.5%
 S&P500 Index   -2.3%
 Russell 2000   -5.6%
 NYSE           -2.8%
 
 30 Year Bond 5.298%
 10 Year Note 5.186%
 
 Leading Industries
 For the Past Week:
 Automobiles 
 Aerospace & Defense 
 Nonferrous Metals 
 Broadcasting & Entertainment 
 Media 
 Heavy Construction 
 Automobiles & Parts 
 Personal Products 
 Media Agencies 
 Soft Drinks                     
 
 Lagging Industries
 For the Past Week:
 Paper 
 Travel & Tourism 
 Telecommunications Equipt 
 Home Construction 
 Platinum & Precious Metals 
 Technology Hardware & Equipt 
 Forestry & Paper 
 Semiconductors 
 Computer Hardware 
 Investment Services                
          
 Leading Industries
 For the Past Month:
 Coal 
 Mining 
 Transportation Services 
 Nonferrous Metals 
 Business Training & Employ 
 Hotels 
 Brewers 
 Basic Resources 
 Steel 
 Oil Equipment & Services             
 
 Lagging Industries
 For the Past Month:
 Water 
 Home Construction 
 Toys 
 Leisure Goods 
 Specialized Consumer Services 
 Software 
 Health Care Providers 
 Recreational Products 
 Software & Computer Services 
 Consumer Electronics                            
 
 Crude Oil $68.73
 
 Gold for the past 30 days:
 USD    +14.03%
 CAD    +10.33%
 CHF    + 6.45%
 GBP    + 6.29%
 EUR    + 7.98%
JPY     + 5.97%

 
 
 
 
 

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.  The information is not meant to imply any endorsement or sponsorship by these 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 Monday

1 Month

1 Week Ago

2 weeks Ago

3 Weeks Ago

4 Weeks Ago

Net Insider Buying

5.6%

-0.6%

4.8%

0.9%

0.3%

-1.9%

5.9%

Cash Rich Companies

5.3%

-0.5%

7.9%

2.0%

4.6%

0.5%

0.6%

Price to Free Cash Flow

6.5%

-0.2%

1.3%

-5.0%

0.8%

4.1%

1.7%

Growth Momentum

13.1%

-2.3%

0.4%

-6.0%

5.3%

-1.5%

3.1%

Lynch

21.9%

-1.7%

2.4%

-5.2%

2.7%

1.4%

3.9%

Buffett

23.3%

-1.1%

1.3%

-5.1%

3.2%

0.6%

2.9%

Graham

11.8%

-0.5%

0.6%

-3.9%

1.8%

0.1%

2.7%

Templeton

5.1%

0.2%

1.0%

-1.5%

1.9%

-0.5%

1.0%

 Zweig

3.0%

-1.8%

-0.8%

-4.8%

3.5%

-2.0%

2.7%

Average

10.6%

-1.0%

2.1%

-3.2%

2.7%

0.1%

2.7%

 

 

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

CWEI

05/12/06

0.0%

Clayton Williams Energy, Inc.

Energy

Oil & Gas Operations

-1.3%

0.8%

-49

-90

EQS

04/13/06

0.0%

Equus II Incorporated

Financial

Investment Services

-5.1%

-4.1%

-71

-77

LXU

12/23/05

30.7%

LSB Industries, Inc.

Basic Materials

Chemical Manufacturing

-7.8%

2.7%

-25

-44

SOMX

05/12/06

1.5%

Somaxon Pharmaceuticals, Inc.

Health Care

Biotechnology & Drugs

1.5%

14.7%