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Issue No. 44 – September 19, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
Last week it was shown that price to earnings ratio (PE) only slightly impacts the probability of 1 year stock price performance. This issue investigates the effect of the year ago price to book ratio (PB) on 52 week price performance.
1.1 PB Multiple
The analysis again involved NYSE, NASDAQ and AMEX stocks that had earnings and were priced above $4. The study eliminated Advanced Depository Receipts, Over the Counter Stocks and Exchange Traded Funds. The result was a group of 3230 stocks shown in Figure 1. The chart on the left appears to show an inverse relationship between PB and 52 week price gain.
FIGURE 1
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However, as before, zooming in closer, the chart on the right shows that even for low values of PB, one could have obtained a wide range of possible outcomes.
The 3,230 stocks were sorted into six PB ranges and used to plot 52 week price gain histograms. The data is summarized in Figure 2. Market data for the past year shows that the probability of a price decline indeed increases with PB ratios up to about 10. The lower the PB, the greater the probability of a price gains from 0 to 25%. Approximately 20% of stocks had a gain of 25 to 50% independent of PB. Nearly 15% of stocks had a price gain of 50 to 100% independent of PB.
A pattern that was seen with extreme PE ranges (less than 10 and greater than 50) is also seen with PB. The extreme ranges of PB (less than 1 and greater than 10) contained the predominant number of stocks with price gains of more than 100%.
FIGURE 2
The percentages of stocks in Figure 2 can be treated as probabilities of price gains for PB ranges over the past year only. With PB we see a stronger correlation with 52 week price gains compared to PE. Lower values of PB clearly provided a lower probability of 52 week price declines. The combined effects of PE and PB point to yet another level of analysis. Before getting into greater depth, next weeks newsletter will take a look at the effect of year ago price to sales on 52 week stock price gains.
2.0Market Analysis
On the brink of earnings warning season and the possibility of choppy markets ahead, the markets were mixed most of the week with some mid week selling to end the week on Friday with an up note with high volume. Oil prices declined moderately and inflation appears to be in check. The Fed meets on Tuesday and it is too close to call whether it will hold off on the next rate increase.
Stock price highs and lows are now like the peaks and valleys in a sand box that is being shaken back and forth by the sideways motion of the market. The peaks crumble and the valleys get filled in. It’s becoming flat everywhere. Good trades in either direction are harder to find.
Figure 1 compares index tracking stocks for the major averages with Sector SPDR’s.
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FIGURE 1
Figure 2 compares index tracking stocks with five leading ETF’s for the week.
FIGURE 2
In Table 2A, the broader market edged upward for the week. 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 and consumer spending.
Table 2A
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) |
0.8% |
-0.9% |
1.9% |
1.3% |
-1.4% |
|
DIA (DOW) |
0.5% |
-0.5% |
2.1% |
0.7% |
-1.7% |
|
QQQQ (NASDAQ 100) |
1.5% |
-0.6% |
2.2% |
0.8% |
-0.9% |
|
IWM (Russell 2000) |
2.8% |
-0.7% |
1.8% |
2.6% |
-0.9% |
|
GLD, GOLD |
5.1% |
2.2% |
1.3% |
1.5% |
0.0% |
|
RKH, Banking |
-0.5% |
0.1% |
0.8% |
1.0% |
-2.4% |
|
IYT, Transportation |
-2.2% |
0.5% |
-0.9% |
-0.7% |
-1.1% |
|
SMH, Semiconductors |
1.8% |
-1.2% |
2.4% |
0.5% |
0.1% |
|
BBH, Biotechnology |
4.4% |
-0.8% |
1.7% |
3.7% |
-0.3% |
|
IYR, Real Estate |
3.0% |
-1.0% |
1.4% |
2.2% |
0.4% |
|
OIH, Oil |
5.8% |
-1.5% |
2.7% |
4.7% |
-0.1% |
|
XLE, Energy |
8.5% |
-1.0% |
3.6% |
6.2% |
-0.4% |
|
XLU, Utilities |
6.2% |
0.5% |
1.3% |
2.6% |
1.6% |
|
XLB, Materials |
-1.0% |
-0.6% |
1.8% |
0.8% |
-3.0% |
|
XLI, Industrial |
0.2% |
-0.4% |
1.6% |
0.5% |
-1.4% |
|
XLK, Technology |
1.1% |
-0.3% |
1.5% |
0.7% |
-0.8% |
|
XLV, Healthcare |
1.9% |
-1.3% |
2.5% |
1.9% |
-1.2% |
|
XLF, Financials |
0.7% |
0.3% |
1.3% |
1.2% |
-2.1% |
|
XLP, Consumer Staples |
-0.4% |
-1.2% |
1.2% |
0.6% |
-1.0% |
|
XLY, Consumer Discretionary |
-2.2% |
-2.0% |
2.3% |
-1.2% |
-1.2% |