Wiser Trader Stocks and Options Newsletter

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Issue No. 78  May 29, 2006                           Prescott, Arizona                       Systems@WiserTrader.com

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1.0   Trading

     

      Volume lends perspective on recent market moves.

 

1.1 Volume

 

      Recent market declines were accompanied by slightly higher than average volume, as seen in Figure 1A.  One can infer that the S&P 500 may resume a downward move after the recent low volume bounce off its 200-day SMA.  Investors have sought to reduce risk, apparently.  A change in trading volume is critical to understanding the underpinnings of any market move.  Markets tend to be more volatile when volume is low and it is difficult to draw conclusions.  When volume is at least close to the average value, the move has more meaning. 

 

 

FIGURE 1A

 

 

      Various online portals report different volume levels for the NYSE and NASDAQ daily volumes.  For example, Yahoo.com consistently differs from corresponding data at BigCharts.com.  It is less important what absolute number you use to detect changes in volume as long as a consistent measure is used. 

 

      Intraday volume is important, as well.  Often it has occurred that strong volume in the morning  accompanied sharp rises in the major averages to be followed by lower afternoon volume with a sell off.  While it is easy to read off the volume at the end of a trading day, it is not easy to interpret intraday volume without information on how it compares with the average for that time of day.  This information is normally not supplied by online portals in an easy to understand format.

 

 

© 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. 

   

 

     An Excel spreadsheet can supply this kind of information for you.  Below in Figure 1B are two Excel charts.  The one on the left is of intraday percentage price change.  On the right are plotted deviations from average volume for the NYSE and NASDAQ.  The two charts for Friday May 26, 2006 were updated by XLQPlus at 5-minute intervals.  The day began with futures showing a higher open.  Volume ticked up well above average for the first hour.  As the day wore on, volume dropped to average by the end of the second hour and then tailed off for the rest of the day to end at about 25% to 30% below average.  This is probably typical for the Friday before a holiday weekend.

 

 

 

FIGURE 1B

 

 

      As you might have guessed, the volume at each period in the trading day is proportionally compared to its daily average.  The trading day consisting of 6 ½ hours is 390 minutes long.  At each 5-minute interval, the elapsed time in minutes is divided by 390 to arrive at a time fraction for that time of day.  The time fraction at any point in the day is assumed equal to the normal volume percent of daily average for that time of day.  The percent difference between the volume percent of daily average and the time fraction is used to plot the chart.  When the volume percent of daily average is equal to the time fraction, the deviation from average volume is zero. 

 

      An automated chart such as this helps to confirm the importance of a rise or decline at each point in the trading day.  The chart is not yet available as a download.  However, details in the form of a preliminary spreadsheet will be forwarded upon request.

 

 

2.0 Market Analysis

 

      Inflation continues to run slightly above the Fed’s comfort zone but not greatly above expectations.  This leads one to expect another ¼-point rate hike in June.  An inability of the Fed to pause its tightening stance should lead the S&P 500 to migrate lower to its long-term support level below 1,240 before it resumes a sustained rally. 

 

      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

-0.8%

1.2%

-2.1%

-1.7%

1.9%

NASDAQ Composite Index

-4.8%

0.8%

-2.2%

-4.2%

0.9%

S & P 500 Index

-2.3%

1.0%

-1.9%

-2.6%

1.2%

NYSE Composite Index

-2.7%

0.8%

-2.8%

-2.6%

1.9%

Russell 2000 Index

-4.6%

1.0%

-2.7%

-5.0%

2.3%

HGX, Phil. Housing Index

-8.5%

0.1%

-4.4%

-5.1%

0.7%

IYR, Real Estate

-2.4%

1.7%

-1.5%

-3.2%

0.7%

GLD, GOLD

0.0%

-0.7%

-7.8%

4.6%

4.5%

RKH, Banking

-4.1%

0.7%

-1.9%

-3.4%

0.6%

IYT, Transportation

0.6%

1.1%

-4.2%

-2.4%

6.4%

SMH, Semiconductors

-9.2%

-2.8%

-2.1%

-5.6%

1.1%

BBH, Biotechnology

1.6%

2.3%

0.4%

-1.9%

0.9%

OIH, Oil Infrastructure

-4.7%

2.9%

-7.4%

-4.6%

4.8%

XLE, Energy

-3.6%

2.0%

-4.8%

-3.6%

3.0%

XLU, Utilities

1.0%

1.7%

-0.5%

-2.9%

2.7%

XLB, Materials

-2.8%

1.0%

-4.6%

-2.5%

3.4%

XLI, Industrial

-1.1%

0.3%

-2.5%

-2.1%

3.3%

XLK, Technology

-5.0%

0.8%

-1.8%

-4.3%

0.3%

XLV, Healthcare

-1.4%

0.9%

-0.4%

-1.3%

-0.7%

XLF, Financials

-3.0%

1.0%

-1.8%

-2.8%

0.6%

XLP, Consumer Staples

1.1%

2.0%

-0.2%

-1.6%

1.0%

XLY, Consumer Discretionary

-1.2%

0.0%

-1.2%

-1.5%

1.5%

 

 

 

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

 

 

Table 2B

Volatility

Indicator

Current

Last Week

2 Weeks Ago

Complacent

Cautious

VIX **

14.3

17.2

14.2

< 20

> 50

VXN ***

18.6

21.0

17.1

< 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      1.2%
 NASDAQ        -1.1%
 S&P500 Index   1.0%
 Russell 2000   1.0%
 NYSE           0.8%
 
 30 Year Bond 5.157%
 10 Year Note 5.052%
 
 Leading Industries
 For the Past Week:
 Specialized Consumer Services 
 Automobiles 
 Internet 
 Coal 
 Nonferrous Metals 
 Steel 
 Consumer Electronics 
 Mining 
 Industrial Metals 
 Automobiles & Parts 
 
 Lagging Industries
 For the Past Week:
 Tires 
 Mobile Telecommunications 
 Semiconductors 
 Restaurants & Bars 
 Apparel Retailers 
 Defense 
 Specialty Retailers 
 Recreational Services 
 Travel & Tourism 
 Travel & Leisure 
 Leading Industries
 For the Past Month:
 Hotels 
 Transportation Services 
 Broadcasting & Entertainment 
 Soft Drinks 
 Automobiles 
 Beverages 
 Food & Beverage 
 Food Producers 
 Food Products 
 Media 
 
 Lagging Industries
 For the Past Month:
 Platinum & Precious Metals 
 Home Construction 
 General Mining 
 Recreational Services 
 Toys 
 Forestry 
 Gold Mining 
 Forestry & Paper 
 Software 
 Travel & Tourism 
 
 Crude Oil $71.29
 
 Gold for the past 30 days:
 USD    +2.67%
 CAD    +1.26%
 CHF    +0.05%
 GBP    -0.28%
 EUR    +1.15%
 JPY    +1.44%

 

 

 

 

 

 

 

 

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

3.9%

0.2%

3.6%

4.7%

-2.1%

-0.6%

1.8%

Cash Rich Companies

2.2%

0.0%

-0.7%

-1.6%

-6.3%

2.6%

4.6%

Price to Free Cash Flow

5.0%

-0.3%

1.2%

0.2%

-2.5%

0.7%

3.0%

Growth Momentum

10.4%

1.4%

-2.6%

1.1%

-5.4%

-2.4%

4.4%

Lynch

23.3%

1.0%

-4.3%

-0.4%

-3.1%

-3.4%

2.8%

Buffett

19.9%

0.9%

-3.6%

0.6%

-3.5%

-3.8%

3.2%

Graham

5.8%

0.6%

-1.0%

2.3%

-1.9%

-2.8%

1.5%

Templeton

4.8%

0.2%

-1.6%

0.4%

-1.0%

-1.4%

0.3%

 Zweig

4.7%

0.5%

-2.2%

1.2%

-3.3%

-2.9%

3.1%

Average

8.9%

0.5%

-1.2%

1.0%

-3.2%

-1.5%

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

EQS

04/13/06

0.0%

Equus II Incorporated

Financial

Investment Services

-5.9%

-1.8%

-74

-69

LXU

12/23/05

32.1%

LSB Industries, Inc.

Basic Materials

Chemical Manufacturing

-6.8%

-1.4%

-54

-54

CWEI

05/12/06

0.0%

Clayton Williams Energy, Inc.

Energy

Oil & Gas Operations

0.0%

-1.5%

-56

-54

NAHC

05/12/06

-0.9%

National Atlantic Holdings Corporation

Financial

Insurance (Property & Casualty)

-2.3%

0.5%

-68

-50

ACME

05/12/06