Wiser Trader Stocks and Options Newsletter
______________________________________________________________________________
Issue No. 97 October 9, 2006 Prescott, Arizona Systems@WiserTrader.com
______________________________________________________________________________
1.0 Trading
The impressive new high for the DOW in Figure 1A should be placed in perspective.
1.1 THE ALCHEMIST by AL THOMAS
New DOW High is Meaningless
There was dancing in the streets, well, at least on the
floor of the New York Stock Exchange last week when the Dow Jones Industrial
Index closed at an all time high. The many cheerleaders on CNBC-TV were
ecstatic screaming, “I told you so”. But what did it really tell us. The DJIA
or DOW as it is also called is composed of 30 stocks that actually represent about
25% of the value of the NYSE. That is very impressive and one of the main
reasons this index is watched by so many the world over.
FIGURE 1A
Caterpillar Tractor Company was $16 in the year 2000 and closed on October 2, 2006 at $65. The worst was Intel that dropped from $72 to $20. Many fell 50%. So what really happened? Only 9 of the 30 stocks made new highs that day – only 30%. No one on CNBC bothered to mention 21 stocks, 70%, failed to participate.
New highs were entered by American Express +3 points, Boeing +12, Caterpillar +49, Johnson & Johnson +30, Minnesota Mining & Manufacturing (MMM) + 33, Altria +55, Proctor & Gamble + 4, United Technology + 39 and Exxon + 25.
There is no point in listing all the losers. Three lost more than 50% from the 2000 high. How can this make a new meaningful high when the index shows 70% of the stockholders lost money?
Way back when before you were a gleam in Daddy’s eye (1896) when the original average created by Mr. Dow and Mr. Jones first appeared in the Wall Street Journal all you did was add up the price of all the stocks and divide to get the Index.
Stocks went up, dividends were issued, and those darn stock splits played havoc with computing what the average was each day. There is no point in going into the complex details, but let’s look at how they get to the final index number.
Each stock in 1990 was added and multiplied by 2. Today each stock is added and multiplied by 8 to get the DOW number. If you add the closing prices of the DJIA stocks on October 3 it came to 1465.91. With the current multiplier of 8 makes a closing DOW Index of 11,727. A new high. Not really.
Every investor is encouraged to go on the Internet to www.bigcharts.com to look at a 10-year history of each of the 30 stocks. A comparison to the DJIA may be superimposed. It will shock most investors.
Don’t buy stock based on what the DOW is doing. You must do your own research for each issue before parting with your money.
Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.
_____________________
|
© 2006 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. |
1.2 Major Averages
This week, the major averages advanced an average of 1.4%. The S&P 500 in Figure 1B gained 1.0% with healthy volume. This week kicks off earnings season with broad optimism due to scant warnings so far.
|
|
Last Week |
This Week |
% Change |
|
DOW |
11679.10 |
11850.21 |
1.5% |
|
NASDAQ |
2258.43 |
2299.99 |
1.8% |
|
S&P 500 |
1335.85 |
1349.58 |
1.0% |
|
Russell 2K |
725.59 |
739.81 |
2.0% |
|
NYSE |
8469.65 |
8534.32 |
0.8% |
|
Average |
|
|
1.41% |
FIGURE 1B
The market may be a little overly optimistic about the inflation outlook and Fed policy, according to Fed Governs Kohn. Friday’s decline is due to the market being overbought.
The NASDAQ in Figure 1C continued to move above its 200 day SMA, once again gaining 1.8% for the week.
FIGURE 1C
|
Monitor an unlimited variety of market data in a single Excel window.
XLQPlus
Stocks, options and currency data are updated continuously from Yahoo and MSN based on the symbols that you enter. Data can be collected in historic, real time, delayed, and intraday quote formats. XLQPlus Interfaces with the AAII Stock Investor Pro database and is recommended by The Oxford Club, Investment U e-letter and The American Association of Individual Investors. It is simple to install. Download for a 45-day free evaluation. Order License for 1 year of upgrades and personalized support - $114 XLQPlus can be used as a stand-alone tool. However, I use it to import live market data into Microsoft Excel spreadsheets. Data is updated automatically for use in unlimited computations and charts. Several advanced spreadsheets are free to get you started. |
2.0 Market Analysis
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 Housing are respective indicators for the inverse health of the currency (inflation) 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 Industrial Index |
4.0% |
1.5% |
1.5% |
-0.5% |
1.5% |
|
NASDAQ Composite Index |
6.2% |
1.8% |
1.8% |
-0.7% |
3.2% |
|
S & P 500 Index |
3.9% |
1.0% |
1.6% |
-0.4% |
1.6% |
|
NYSE Composite Index |
2.9% |
0.8% |
1.5% |
-0.2% |
0.8% |
|
Russell 2000 Index |
4.4% |
2.0% |
1.0% |
-1.5% |
3.0% |
|
HGX, Phil. Housing Index |
5.0% |
0.8% |
1.2% |
-2.7% |
5.8% |
|
IYR, Real Estate |
3.2% |
1.9% |
-0.6% |
-0.8% |
2.6% |
|
GLD, GOLD |
-6.0% |
-4.2% |
1.7% |
1.9% |
-5.3% |
|
RKH, Banking |
3.5% |
0.8% |
0.6% |
0.1% |
2.0% |
|
IYT, Transportation |
8.9% |
2.6% |
2.9% |
-1.8% |
5.1% |
|
SMH, Semiconductors |
2.0% |
-0.9% |
2.8% |
-2.9% |
3.1% |
|
BBH, Biotechnology |
4.2% |
1.0% |
3.6% |
-0.5% |
0.1% |
|
OIH, Oil Infrastructure |
-4.9% |
-3.7% |
5.3% |
-1.5% |
-4.7% |
|
XLE, Energy |
-2.3% |
-1.4% |
4.1% |
-1.0% |
-3.9% |
|
XLU, Utilities |
-0.4% |
0.7% |
1.3% |
-0.5% |
-1.8% |
|
XLB, Materials |
0.7% |
1.1% |
1.7% |
-0.2% |
-1.8% |
|
XLI, Industrial |
6.2% |
2.7% |
2.9% |
-1.0% |
1.7% |
|
XLK, Technology |
5.7% |
1.4% |
1.9% |
-0.5% |
2.9% |
|
XLV, Healthcare |
1.7% |
0.2% |
0.9% |
-0.8% |
1.3% |
|
XLF, Financials |
5.2% |
1.6% |
1.2% |
0.2% |
2.1% |
|
XLP, Consumer Staples |
-1.1% |
-0.4% |
-0.4% |
-0.4% |
0.2% |
|
XLY, Consumer Discretionary |
7.8% |
2.6% |
1.7% |
-0.2% |
3.5% |
The VIX and VXN volatility indexes are listed in Table 2B.
Table 2B
Volatility
|
Indicator |
Current |
Last Week |
2 Weeks Ago |
Complacent |
Cautious |
|
VIX ** |
11.6 |
12.0 |
12.6 |
< 20 |
> 50 |
|
VXN *** |
18.0 |
17.7 |
18.2 |
< 30 |
> 70 |
|
** Below 20 day SMA = Short-term buy signal. *** Below 20 day SMA = Short-term buy signal. |
|||||
Figure 2A compares the major averages with key ETF’s and Sector SPDR’s.
FIGURE 2A
Table 2C
Market Summary
Industry performance is based on the Yahoo Industry Classification System
Major Indices For the Past Week: Dow Jones +1.5% NASDAQ +1.8% S&P500 Index +1.0% Russell 2000 +2.0% NYSE +0.8% 30 Year Bond 4.837% 10 Year Note 4.696% FOMC Rate 5.250% Leading Industries For the Past Week: Lagging Industries For the Past Week: |
Leading Industries For the Past Month: Lagging Industries For the Past Month: Crude Oil $59.82 Gold for the past 30 days: USD -7.43% CAD -6.13% CHF -5.97% GBP -7.10% EUR -6.34% JPY -5.43% |
_________________________________________________________________________
_________________________________________________________________________
3.0 Procedure
The following watch lists contain stock candidates for consideration. They are not necessarily trades. Categories include checklists for insider buying and cash rich companies, as well as, filters that employ stock picking methods used by master traders. The information is not meant to imply any endorsement or sponsorship by these master traders.
Current stock rankings are based on the degree to which stocks are overbought or over sold based on the 28-period Williams %R for the past two trading days. Two columns are labeled “%R1” and “%R2” with “%R2” indicating the Williams %R for the most recent trading day. Of course, values more negative than -80 are oversold and those less negative than -20 are overbought.
One should keep in mind that oversold stocks are not necessarily ready to move upward. They could very well be in a condition of continuous decline. The lists are meant to serve as a starting point for further due diligence.
A column labeled “Monthly % Gain” was added to show the inverse relationship between price action over the past month and the Williams %R. The change from a 10-period Williams %R with a weekly percent change to a 28-period Williams %R with a monthly percent change was done to reflect a longer term view.
Watchlist performance is based on weekly closing prices on Friday. The “Reference” is the date that a stock passed the indicated filter and was first 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 for a period of about two months. 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 for two months. More information on filters is available on the web site.
A performance summary of filtering techniques for checklists and master trader selection methods 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 |
7.6% |
0.4% |
9.2% |
3.1% |
2.2% |
1.3% |
2.6% |
|
Cash Rich Companies |
0.0% |
0.2% |
-18.8% |
-3.3% |
-1.9% |
-15.9% |
1.2% |
|
Price to Free Cash Flow |
8.1% |
-0.2% |
-1.8% |
2.0% |
-0.6% |
-1.2% |
-1.8% |
|
Growth Momentum |
5.6% |
-0.1% |
6.8% |
2.2% |
2.4% |
0.9% |
1.1% |
|
Lynch |
22.3% |
-1.1% |
2.0% |
-0.2% |
-0.9% |
1.2% |
2.0% |
|
Buffett |
7.0% |
-0.8% |
5.5% |
1.1% |
1.7% |
-0.6% |
3.3% |
|
Graham |
13.6% |
-0.5% |
1.3% |
0.7% |
1.7% |
-1.3% |
0.2% |
|
Templeton |
11.3% |
-0.7% |
7.4% |
2.5% |
1.0% |
-0.5% |
4.3% |
|
Zweig |
11.8% |
-0.4% |
7.2% |
2.6% |
1.9% |
0.4% |