______________________________________________________________________________
Issue No. 38 – August 8, 2005
Prescott, Arizona Systems@WiserTrader.com
______________________________________________________________________________
1.0
Trading
Use an
oscillator to help correct a common human fallacy.
1.1 Mean Tendency
A common human fallacy is a
natural attraction to rising prices. It’s normal. However, what’s needed is
to take a closer look at trends and averages. It is a principle of nature that
changing phenomena typically revert to their mean tendencies over an extended
period of time. This goes for stock prices, as well. Prices tend to oscillate
about a mean tendency in a region that is bracketed by extreme points.
Bollinger bands, defined by 2 standard deviations above and below the 20 day
simple moving average (SMA), offer a good way to define a price range. Prices
reaching one side of the band typically move back across the 20 day SMA and hit
the opposite side.
Oscillators such as the
stochastic, RSI and the Williams %R describe this behavior as well. When
oscillators reach extreme points, it is a lower risk bet that the price
tendency will reverse than it is for the price to continue in the same
direction. The best time to enter a long trade is when an oscillator reaches
its lower extreme meaning the stock is in an over sold condition. The best
time to enter a short trade is when an oscillator reaches its high extreme
meaning the stock is in an over bought condition.
Responding to oscillators
in this manner goes against human nature. But if you find that stocks have a
consistent tendency to pull back immediately after you enter a long position,
it is probably because you were attracted to a rising price that has reached an
overbought condition. If this has been happening, you need to step back and
apply an oscillator or two to your analysis. If the stock is overbought, wait
a while and buy the stock after it has reached an oversold condition. Your
patience will be rewarded twofold, first in the money saved by avoiding a
drawdown and second by the money gained when the price reverts toward its mean
tendency.
© 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.
2.0
Market Analysis
Market optimism was
replaced by anticipation of inflation and higher interest rates. Economic and
earnings reports have been good but the market has lost positive momentum and
is resuming a sideways motion. The best performing stock sectors this past
week were energy and software. Interest sensitive stocks such as
homebuilding and REITs were weak, while retail also performed poorly following
the July same store sales data. Figure 1 compares index tracking stocks for
the major averages with Sector SPDR’s.
.
FIGURE 1
Relative strength is given in
Table 2A.
Table 2A
Relative Strength Index
|
|
5 Day RSI
|
|
DOW
|
Neutral
|
|
S&P
500
|
Neutral
|
|
NASDAQ
|
Neutral
|
Market sentiment is shown
in Table 2B. Volatility has increased.
Table 2B
VTO Market Sentiment Indicators
|
Sentiment Indicator
|
Current
|
Last Week
|
2 Weeks Ago
|
Complacent
|
Cautious
|
|
VIX **
|
12.48
|
11.57
|
10.52
|
< 20
|
> 50
|
|
VXN ***
|
15.40
|
13.87
|
12.95
|
< 30
|
> 70
|
|
Put/Call Ratio
|
0.551
|
0.560
|
0.561
|
< 0.6
|
> 0.7
|
|
%Bulls - %Bears
|
34.8%
|
33.3%
|
29.5%
|
> 29%
|
< 20%
|
|
** Above 20 day SMA = Sell signal.
*** Above
20 day SMA = Sell signal.
|
Figure 2 compares index
tracking stocks with five leading ETF’s for the week.
FIGURE 2
Industry leaders in Table 2C
rank from highest to lowest.
Major Indices
For the Past Week:
Dow Jones -0.8%
NASDAQ -0.3%
S&P500 Index -0.6%
Russell 2000 -2.5%
30 Year Bond 4.582%
10 Year Note 4.392%
Industry Leaders
For the Past Week:
Platinum & Precious Metals
Gold Mining
Footwear
Software
Pipelines
Mining
Oil Equipment, Services & Dis
Oil Equipment & Services
Aerospace & Defense
Software & Computer Services
Industry Leaders
For the Past Month:
Platinum & Precious Metals
Steel
Business Training & Employment
Biotechnology
Coal
Tires
Industrial Metals
Water
Railroads
Oil Equipment & Services
Crude Oil $62.31
Gold for the past 30 days:
USD +3.19%
CAD +1.66%
CHF +0.17%
GBP +2.14%
EUR -0.29%
JPY +3.20
In Table 2D, the broader
market was down for the week with the exception of gold and energy.
Table 2D
Index Tracking Stocks, Key
Industry ETF’s and Sector SPDR’s
|
|
1 month
|
1 wk ago
|
2 wks ago
|
3 wks ago
|
4 wks ago
|
|
SPY (S&P 500)
|
1.3%
|
-0.7%
|
0.2%
|
0.6%
|
1.3%
|
|
DIA (DOW)
|
1.0%
|
-0.9%
|
0.1%
|
0.2%
|
1.7%
|
|
QQQQ (NASDAQ 100)
|
4.5%
|
-0.3%
|
0.4%
|
1.4%
|
3.0%
|
|
IWM (Russell 2000)
|
0.0%
|
-2.8%
|
0.8%
|
2.0%
|
0.0%
|
|
GLD, GOLD
|
3.2%
|
1.8%
|
0.9%
|
1.0%
|
-0.5%
|
|
RKH, Banking
|
0.1%
|
-1.3%
|
-0.9%
|
-0.8%
|
3.1%
|
|
IYT, Transportation
|
3.9%
|
-1.8%
|
0.5%
|
3.4%
|
1.9%
|
|
SMH, Semiconductors
|
3.9%
|
-0.5%
|
0.4%
|
0.6%
|
4.1%
|
|
BBH, Biotechnology
|
7.7%
|
-0.3%
|
1.1%
|
2.0%
|
4.8%
|
|
IYR, Real Estate
|
-1.7%
|
-4.7%
|
2.4%
|
1.4%
|
-0.7%
|
|
OIH, Oil
|
11.2%
|
2.3%
|
1.5%
|
8.8%
|
-1.7%
|
|
XLE,
Energy
|
4.6%
|
2.4%
|
0.4%
|
4.5%
|
-1.9%
|
|
XLU,
Utilities
|
-0.3%
|
-1.1%
|
1.5%
|
-0.7%
|
0.1%
|
|
XLB,
Materials
|
3.3%
|
-0.2%
|
-0.5%
|
3.1%
|
0.8%
|
|
XLI,
Industrial
|
0.7%
|
-1.6%
|
0.0%
|
1.6%
|
0.7%
|
|
XLK,
Technology
|
3.5%
|
0.5%
|
0.4%
|
-0.3%
|
2.8%
|
|
XLV,
Healthcare
|
0.9%
|
-0.6%
|
1.1%
|
-0.3%
|
0.8%
|
|
XLF,
Financials
|
-0.8%
|
-1.0%
|
-0.7%
|
-0.7%
|
1.6%
|
|
XLP,
Consumer Staples
|
0.6%
|
-1.4%
|
0.9%
|
-0.3%
|
1.6%
|
|
XLY,
Consumer Discretionary
|
1.9%
|
-1.5%
|
0.2%
|
1.3%
|
1.9%
|
Key industry ETF’s 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 and the
economy in general.
3.0 Procedure
The following watch lists contain
stock candidates for consideration. They are not necessarily trades. The “Reference”
is the date that a stock passed the indicated filter and was 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. 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. More information on filters
is available on the web site. Send an email
if you need more details.
Key
A performance summary of
filtering techniques for check lists and master traders we follow 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
|
12.3%
|
-1.4%
|
12.2%
|
-0.2%
|
4.3%
|
3.7%
|
4.1%
|
|
Cash Rich Companies
|
-0.4%
|
-0.8%
|
-5.7%
|
-2.4%
|
-2.5%
|
1.1%
|
-2.0%
|
|
Growth Momentum Stocks
|
7.7%
|
-2.6%
|
0.1%
|
-2.7%
|
0.8%
|
1.9%
|
0.3%
|
|
Lynch Stocks
|
8.9%
|
-1.1%
|
3.8%
|
0.5%
|
-0.1%
|
2.0%
|
1.4%
|
|
Buffett Stocks
|
15.7%
|
-1.2%
|
0.5%
|
-2.4%
|
-1.2%
|
3.0%
|
1.2%
|
|
Graham Stocks
|
10.3%
|
-1.6%
|
0.7%
|
-1.1%
|
1.1%
|
0.7%
|
-0.1%
|
|
Templeton Stocks
|
6.7%
|
-1.3%
|
1.2%
|
-2.5%
|
0.7%
|
1.4%
|
1.7%
|
|
Zweig Stocks
|
8.3%
|
-2.6%
|
3.5%
|
-2.4%
|
2.5%
|
2.9%
|
0.4%
|
|
Average
|
8.7%
|
-1.6%
|
2.0%
|
-1.7%
|
0.7%
|
2.1%
|
0.9%
|
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. CRTX was removed because it declined more than 10% from its
initial listing price. FVRL declined more than 15% from its high. Data was
difficult to retrieve for AUXL, CRYO and HEM.
Table 3B
Net Insider Buying Check List
|
Stock
|
Reference
|
% Chg
|
Company
|
Sector
|
Industry
|
% from Max
|
|
ACAD
|
04/29/05
|
21.8%
|
ACADIA
Pharmaceuticals Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
-6.0%
|
|
AFT
|
05/20/05
|
-6.3%
|
Axesstel,
Inc.
|
Technology
|
Communications
Equipment
|
-10.0%
|
|
ASPV
|
05/27/05
|
12.0%
|
Aspreva
Pharmaceuticals Corporation
|
Health
Care
|
Biotechnology
& Drugs
|
-4.2%
|
|
ATPL
|
07/01/05
|
5.2%
|
Atlantis
Plastics, Inc.
|
Basic
Materials
|
Fabricated
Plastic & Rubber
|
-5.4%
|
|
FTD
|
04/08/05
|
-1.7%
|
FTD Group,
Inc.
|
Services
|
Retail
(Catalog & Mail Order)
|
-1.9%
|
|
IRN
|
08/05/05
|
0.0%
|
Rewards
Network Inc.
|
Services
|
Business
Services
|
0.0%
|
|
ITMN
|
08/05/05
|
0.0%
|
InterMune,
Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
0.0%
|
|
KIRK
|
05/27/05
|
-5.8%
|
Kirkland's, Inc.
|
Services
|
Retail
(Specialty Non-Apparel)
|
-10.1%
|
|
MERCS
|
05/20/05
|
-2.8%
|
Mercer
International Inc.
|
Basic
Materials
|
Paper
& Paper Products
|
-2.8%
|
|
PCTY
|
07/08/05
|
3.5%
|
Party City
Corporation
|
Services
|
Retail
(Specialty Non-Apparel)
|
-5.3%
|
|
|