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Issue No. 45 – September 26, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
For the past couple of weeks charts were presented showing the individual effects of year ago price to earnings ratio (PE) and year ago price to book ratio (PB) on current stock prices one year later. This issue looks at the effect of year ago price to sales ratio (PS) on one year price performance. Also look for a more valid stock ranking based on the Williams %R in Section 3.
1.1 PS 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 PS and 52 week price gain.
FIGURE 1
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The zoomed in chart on the right hints at an inverse relationship, as well. However, as before, even for low values of PS, one could have obtained a wide range of possible outcomes.
The 3,230 stocks were sorted into seven PS 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 is about 20 to 30% and varies only slightly with the price to sales ratio. The lower the PS, the greater the probability of price gains from 25 to over 100%.
Unlike the pattern that was seen with extreme PE ranges (less than 10 and greater than 50) and extreme ranges of PB (less than 1 and greater than 10), stocks that had PS values less than 0.5 contained the predominant number of stocks with price gains of 50 to more than 100%.
FIGURE 2
The percentages of stocks in Figure 2 can be treated as probabilities of price gains for PS ranges over the past year only. With PS we see an even stronger correlation with 52 week price gains compared to PE and PB. Values of PS below 0.5 provided a slightly lower probability of 52 week price declines but a noticeably higher probability of price gains from 25 to over 100%.
We have consistently been discussing measures of value, mostly a long term affair. Short term traders should not make the mistake of using long term measures of value to make short term trading decisions. The combined effects of PE, PB and PS point to yet another level of analysis. Also there is the question of quarter by quarter price performance as compared with the 52 week price performance described so far. We have still not looked at return on equity and growth rates for EPS and sales. The intent is to cover each of these areas if a clear and concise way can be found to present the results.
2.0Market Analysis
The market was absorbed by the Fed raising interest rates another quarter point and the prospect of lost Gulf refinery production. Refinery damage was less than expected although about 20 refiners remain off line at present. Before Rita hit, 16 refineries in Texas accounting for 2.3 million barrels per day of capacity shut down and evacuated crews. Four refineries in Louisiana and Mississippi whose output had been more than 800,000 barrels per day remain closed almost a month after Hurricane Katrina, and a significant amount of oil and natural gas output has not returned. As of Saturday, more than 31 million barrels of oil production and 147 billion cubic feet of natural gas production have been lost since Katrina. Oil prices sold off in Sunday NYMEX trading while gasoline price are expected to rise in the near term due to a temporary loss of refinery production. The sell off in oil could cause the market to rise.
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 |
|
DIA (DOW) |
0.2% |
-2.0% |
-0.5% |
2.1% |
0.7% |
|
QQQQ (NASDAQ 100) |
0.8% |
-1.6% |
-0.6% |
2.2% |
0.8% |
|
SPY (S&P 500) |
0.6% |
-1.7% |
-0.9% |
1.9% |
1.3% |
|
IWM (Russell 2000) |
1.1% |
-2.6% |
-0.7% |
1.8% |
2.6% |
|
GLD, GOLD |
6.1% |
1.0% |
2.2% |
1.3% |
1.5% |
|
RKH, Banking |
-1.0% |
-2.8% |
0.1% |
0.8% |
1.0% |
|
IYT, Transportation |
-1.6% |
-0.5% |
0.5% |
-0.9% |
-0.7% |
|
SMH, Semiconductors |
-0.2% |
-1.9% |
-1.2% |
2.4% |
0.5% |
|
BBH, Biotechnology |
1.5% |
-3.0% |
-0.8% |
1.7% |
3.7% |
|
IYR, Real Estate |
-1.7% |
-4.2% |
-1.0% |
1.4% |
2.2% |
|
OIH, Oil |
6.3% |
0.4% |
-1.5% |
2.7% |
4.7% |
|
XLE, Energy |
9.5% |
0.5% |
-1.0% |
3.6% |
6.2% |
|
XLU, Utilities |
1.6% |
-2.7% |
0.5% |
1.3% |
2.6% |
|
XLB, Materials |
-0.7% |
-2.7% |
-0.6% |
1.8% |
0.8% |
|
XLI, Industrial |
0.4% |
-1.2% |
-0.4% |
1.6% |
0.5% |
|
XLK, Technology |
-0.1% |
-2.0% |
-0.3% |
1.5% |
0.7% |
|
XLV, Healthcare |
1.4% |
-1.7% |
-1.3% |
2.5% |
1.9% |
|
XLF, Financials |
0.7% |
-2.0% |
0.3% |
1.3% |
1.2% |
|
XLP, Consumer Staples |
-1.0% |
-1.5% |
-1.2% |
1.2% |
0.6% |
|
XLY, Consumer Discretionary |
-3.5% |
-2.6% |
-2.0% |
2.3% |
-1.2% |
