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Issue No. 54 – November 28, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
This is the 1 year anniversary of the newsletter. Thanks for your participation and helping us grow. Many changes have occurred over the past year, including new trading system tools and advisory services. Several new watchlists have been added with improved organization based on the extent to which stocks are oversold. With this issue it is fitting to comment on the resumption of accepting stock advisory subscriptions and how the stock advisory has changed.
1.1 Holding Period for Value Stocks
Since September of this year, the newsletter has developed value stock filters that provide a higher level of confidence for holding stocks for extended periods. As an options trader, the average holding period for options contracts has averaged less than 10 days, including weekends. Except for a few months, it has worked fairly well over this year, resulting in net capital increases ranging from 28% when trading 10% of risk capital per trade to 98% when trading 20% of risk capital per trade. But this short holding period is by no means optimum. It was more a matter of not having confidence to hold positions longer. Several cases can be identified where longer holding periods would have led to higher profits, not only due to the option’s price appreciation but also due to fewer trades and lower brokerage fees. The lack of confidence to hold positions for a longer period is due to a lack of historical analysis data for the class of growth stocks used in options trading. That will soon be corrected.
In the case of stock trading, lower brokerage fees and a lower frequency of trading becomes more important because the relative price change for a stock over a few weeks is much lower than for its associated options contract. The more modest stock gain can not cover brokerage fees for such a high trading frequency. The first version of the stock advisory documents how easily broker fees can consume stock trading profits for such a high trading frequency. A need to reduce the frequency of trades, more than any other factor, was the motivation for the value stock analysis published in the newsletter over the past few months.
© 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.
It was shown last week how two new value filters allowed one to hold stocks over the past year with more than a 25% average profit. Stop loss settings, of little consequence for the then prevailing market conditions, are continuously being evaluated. With this new level of confidence to hold stocks for longer periods, the value stock portfolio review period has been reduced from weekly to once a month. This will reduce the number of trades and brokerage fees. Other than this change and the move from growth stocks to value stocks, the stock advisory is the same as before.
As promised a couple of weeks ago, the new filters are being used to begin tracking stocks in a watchlist. Value stocks that met the first round of expanded filter criteria are listed in Table 1. Some of these stocks will be added to the value stock portfolio, one at a time, as entry conditions develop. The absolute value filter (the first 7 stocks) and the industry relative filter (the last 4 stocks) are repeated in Table 2. You are invited, at no cost, to find out more about the companies in Table 1 and trade entry conditions used by the value stock advisory beginning with the December bulletin.
Next week begins an analysis of the impact of various stop loss settings for growth stocks that have been screened using Dr. Stephen Cooper’s stock candidate filter.
Table 1
Value Stock Advisory Watch List
|
Stock |
Reference |
% Chg |
Company |
Sector |
Industry |
% from Max |
Weekly % Gain |
|
ASI |
11/21/05 |
1.1% |
American Safety Insurance Holdings, Ltd. |
Financial |
Insurance (Property & Casualty) |
0.3% |
1.1% |
|
BNSO |
11/21/05 |
-2.9% |
Bonso Electronics International Inc. |
Capital Goods |
Misc. Capital Goods |
-3.3% |
-1.6% |
|
CRC |
11/21/05 |
-0.7% |
Chromcraft Revington, Inc. |
Consumer Cyclical |
Furniture & Fixtures |
-0.7% |
-0.7% |
|
CRV |
11/21/05 |
-2.8% |
The Coast Distribution System, Inc. |
Consumer Cyclical |
Auto & Truck Parts |
-2.8% |
-1.5% |
|
LFG |
11/21/05 |
-4.8% |
LandAmerica Financial Grp |
Financial |
Insurance (Property & Casualty) |
-4.8% |
-3.6% |
|
MHJ |
11/21/05 |
2.2% |
Man Sang Holdings, Inc. |
Consumer Cyclical |
Jewelry & Silverware |
-0.8% |
1.6% |
|
RUTX |
11/21/05 |
2.6% |
Republic Companies Group, Inc. |
Financial |
Insurance (Miscellaneous) |
0.6% |
4.1% |
|
BTHS |
11/21/05 |
0.2% |
Benthos, Inc. |
Technology |
Scientific & Technical Instruments |
-0.3% |
0.5% |
|
CAMP |
11/21/05 |
-2.2% |
CalAmp Corp. |
Technology |
Communications Equipment |
-2.2% |
-5.4% |
|
CHAP |
11/21/05 |
-0.2% |
Chaparral Steel Company |
Capital Goods |
Construction - Supplies and Fixtures |
-0.2% |
-2.1% |
|
NCR |
11/21/05 |
5.6% |
NCR Corporation |
Technology |
Computer Services |
5.1% |
8.6% |
Table 2
Valuation Metrics to Minimize the Probability of Loss
|
Valuation Metric |
Stock Value That Reduced Risk of Loss * |
Corresponding Ratio of Stock Value to Industry Value * |
|
Price to Earnings (PE) |
(7) 10 to 15 |
0.5 to 0.75 (1) |
|
Price to Book (PB) |
< 1 |
0.5 to 0.75 (1) |
|
Price to Sales (PS) |
< 0.5 (1) |
0.5 to 0.75 (1) |
|
Return on Equity (ROE) |
10 to 20 |
2 to 3 |
|
Price to Free Cash Flow (P-FCF) |
< 5 (10) |
(0.5) 0.75 to 1 |
|
* Numbers in parenthesis are to extend the range. |
||
2.0 Market Analysis
Bullish sentiment continues for the fifth straight weekly gain for the S&P 500 index. FOMC minutes point to a discussion of nearing the end of rate tightening. This is bullish. All major sectors gained this week across the board.
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 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 Industrials |
5.1% |
1.5% |
0.8% |
1.5% |
1.2% |
|
NASDAQ |
8.3% |
1.6% |
1.1% |
1.5% |
3.8% |
|
S & P 500 |
5.8% |
1.6% |
1.1% |
1.2% |
1.8% |
|
Russell 2000 |
7.6% |
1.7% |
0.8% |
1.3% |
3.6% |
|
GLD, GOLD |
4.7% |
2.0% |
3.5% |
2.8% |
-3.6% |
|
RKH, Banking |
6.0% |
2.4% |
-0.6% |
3.7% |
0.4% |
|
IYT, Transportation |
12.1% |
0.8% |
1.7% |
3.8% |
5.4% |
|
SMH, Semiconductors |
12.5% |
2.7% |
1.4% |
2.0% |
5.9% |
|
BBH, Biotechnology |
10.2% |
-0.3% |
2.0% |
2.3% |
6.0% |
|
IYR, Real Estate |
7.1% |
2.5% |
1.2% |
4.4% |
-1.2% |
|
OIH, Oil |
9.4% |
6.0% |
4.9% |
-4.7% |
3.2% |
|
XLE, Energy |
5.7% |
4.0% |
3.3% |
-4.1% |
2.5% |
|
XLU, Utilities |
2.3% |
1.9% |
1.7% |
-0.8% |
-0.5% |
|
XLB, Materials |
8.1% |
1.4% |
2.4% |
2.7% |
1.3% |
|
XLI, Industrial |
6.6% |
1.0% |
2.5% |
1.5% |
1.5% |
|
XLK, Technology |
8.2% |
1.4% |
1.9% |
1.2% |
3.4% |
|
XLV, Healthcare |
3.3% |
0.0% |
0.6% |
1.4% |
1.3% |
|
XLF, Financials |
7.1% |
2.4% |
0.3% |
3.2% |
1.1% |
|
XLP, Consumer Staples |
2.7% |
1.3% |
-0.4% |
1.4% |
0.4% |
|
XLY, Consumer Discretionary |
7.6% |
1.5% |
0.5% |
1.4% |
3.9% |
