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Issue No. 47 –October 10, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
This analysis series began on September 12, 2005 describing the individual effects of year ago measures of stock value on current stock prices one year later. Year ago valuations involved price to earnings ratio (PE), price to book ratio (PB), price to sales ratio (PS) and return on equity (ROE). This week continues with the effect of year ago sales growth.
1.1 Sales Growth
The analysis involved NYSE, NASDAQ and AMEX stocks that had sales data and were priced above $4. Advanced Depository Receipts, Over the Counter Stocks and Exchange Traded Funds were excluded. Information was available for the group of 3244 stocks shown in Figure 1. The chart on the left shows the entire population. The zoomed in chart on the right shows that for typical sales growth, one could have obtained a wide range of possible outcomes.
FIGURE 1
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The 3,244 stocks were sorted into seven sales growth 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 lowest risk occurred for sales growth in the range 10 to 50%. Sales growth outside this range was either more difficult to sustain or was not considered to have sufficient value with an average probability of loss close to 35%.
Probabilities for the lowest price gains of zero to 25% were highest as sales growth decreased. Within the 10 to 50% sales growth range, the higher the value of sales growth, the greater was the probability of price gains of 25% or greater. There was about a 10% probability that price gains of more than 100% would be achieved when sales growth was greater than 30%.
FIGURE 2
The percentages of stocks in Figure 2 can be treated as probabilities of price gains for sales growth ranges over the past year only. How investors evaluate stocks changes from year to year and accounts for annual changes in the character of the market. Once again it is good to keep in mind that long term fundamental measures of value are inappropriate for short term trading.
Next week we will take a look at the effects of year ago EPS growth rates.
2.0 Market Analysis
An already nervous market was spooked by comments from three Fed officials about the need to fight inflation. Much of this commentary might be considered posturing since it is a sure bet that inflation fighting will always be high on the policy agenda no matter who replaces Alan Greenspan. There was nothing really new. Higher energy prices have made it a forgone conclusion that the Fed will continue with rate hikes. Fed statements this week merely removed any doubt. Sentiment is just cautious and negative in the absence of any negative economic data. Comments that the economy is doing well were taken to mean higher inflation pressures and spooked the market even more. Forecasts for third quarter earnings are now around 15%
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 of inflation 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) |
-3.6% |
-2.6% |
1.6% |
-2.0% |
-0.5% |
|
QQQQ (NASDAQ 100) |
-3.2% |
-2.8% |
1.8% |
-1.6% |
-0.6% |
|
SPY (S&P 500) |
-4.0% |
-2.9% |
1.3% |
-1.7% |
-0.9% |
|
IWM (Russell 2000) |
-4.9% |
-3.4% |
1.9% |
-2.6% |
-0.7% |
|
GLD, GOLD |
5.6% |
1.4% |
0.9% |
1.0% |
2.2% |
|
RKH, Banking |
-4.4% |
-0.9% |
-0.9% |
-2.8% |
0.1% |
|
IYT, Transportation |
1.6% |
-1.5% |
3.1% |
-0.5% |
0.5% |
|
SMH, Semiconductors |
-5.1% |
-4.0% |
2.0% |
-1.9% |
-1.2% |
|
BBH, Biotechnology |
-8.0% |
-3.5% |
-0.9% |
-3.0% |
-0.8% |
|
IYR, Real Estate |
-7.1% |
-4.5% |
2.5% |
-4.2% |
-1.0% |
|
OIH, Oil |
-5.9% |
-8.0% |
3.3% |
0.4% |
-1.5% |
|
XLE, Energy |
-6.2% |
-7.8% |
2.1% |
0.5% |
-1.0% |
|
XLU, Utilities |
-3.5% |
-4.1% |
2.8% |
-2.7% |
0.5% |
|
XLB, Materials |
-5.0% |
-3.3% |
1.6% |
-2.7% |
-0.6% |
|
XLI, Industrial |
-1.4% |
-1.2% |
1.4% |
-1.2% |
-0.4% |
|
XLK, Technology |
-4.0% |
-3.3% |
1.6% |
-2.0% |
-0.3% |
|
XLV, Healthcare |
-5.1% |
-1.9% |
-0.4% |
-1.7% |
-1.3% |
|
XLF, Financials |
-2.4% |
-1.5% |
0.6% |
-2.0% |
0.3% |
|
XLP, Consumer Staples |
-2.2% |
-2.1% |
2.4% |
-1.5% |
-1.2% |
|
XLY, Consumer Discretionary |
-6.3% |
-2.6% |
0.6% |
-2.6% |
-2.0% |
