Wiser Trader Stocks and Options Newsletter
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Issue No. 103 November 27, 2006 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
Conventional wisdom concerning the effect of major indices on stock prices might need to be updated. The major indices gained an average of 0.2% this week.
|
Index |
Last Week |
This Week |
% Change |
|
DOW |
12342.50 |
12280.17 |
-0.5% |
|
NASDAQ |
2445.86 |
2460.26 |
0.6% |
|
S&P 500 |
1401.20 |
1400.95 |
0.0% |
|
Russell 2K |
788.47 |
792.28 |
0.5% |
|
NYSE |
8897.17 |
8933.43 |
0.4% |
|
Average |
|
|
0.19% |
1.1 Nervousness
The S&P 500 in Figure 1A was flat this week. It was a slow week with little new data but lots of merger activity. The market leaves Thanksgiving with its focus on holiday consumer spending. Traders appear to be looking for an excuse to take profits, such as weal retail activity or any negative news in general. Market breadth began the week low, peaked at mid-week and dropped off on Friday. The average Williams-%R for the above five indices is overbought at -18. The 200-day moving average is -37, significantly high.
FIGURE 1A
The NASDAQ in Figure 1B gained 0.6% for the week, still at a new multiyear high. Materials, gold and oil had gains while the other major sectors were flat to down.
FIGURE 1B
1.2 Correlation with Major Averages
Conventional wisdom has it that 40 to 50% of a stocks movement can be attributed to the major averages. This implies some kind of statistical correlation that should be of the highest interest to short-term, as well as, long term traders. A recent study finds that the degree of correlation between stock price movement and the major averages can change dramatically over a one-month period. More significantly, the correlation between stocks and the major averages over the most recent one-month period is significantly lower than conventional wisdom dictates.
The sample correlation coefficient measures the statistical correspondence between two samples of data. In this case each stock’s Williams-%R is compared with the average Williams-%R for the 5 major indices over the most recent eleven day period. When the two sets of numbers closely correspond, a change in one set of numbers is reflected by a similar change in the other and the percentage correlation is close to 100%, as seen in Figure 1C for PCH. When they are not correlated, the percentage correlation is near 0%, as seen in Figure 1D for CHK. When they are negatively correlated, a change in one set of numbers is reflected by an opposite change in the other and the percentage correlation is near -100%, as seen in Figure 1E for CNI.
FIGURE 1C
FIGURE 1D
FIGURE 1E
Investigation of the average eleven-day correlation over a one-month period has proved interesting. The group of stocks analyzed consisted of optionable stocks listed on the NYSE and NASDAQ exchanges having a price of at least $30. It was found over a one-month period that the correlation between stock price and the major indices varied from 20% to as much as 190%. The average variation was 81.8%. Average one-month correlations between this group of stocks and the major indices are shown in Figure 1F.
FIGURE 1F
|
Avg. % Corr. |
% of Stocks |
# of Stocks |
|
< 0% |
9.9% |
89 |
|
0 to 10% |
15.1% |
136 |
|
10 to 20% |
19.1% |
172 |
|
20 to 30% |
21.1% |
190 |
|
30 to 40% |
17.4% |
157 |
|
40 to 50% |
11.0% |
99 |
|
50 to 60% |
5.5% |
50 |
|
60 to 70% |
0.8% |
7 |
|
70 to 80% |
0.2% |
2 |
|
80 to 90% |
0.0% |
0 |
|
90 to 100% |
0.0% |
0 |
|
Total |
100.0% |
902 |
The average percentage correlation was negative for 10% of the stocks. Another 15% of stocks had an average percentage correlation of less than 10%. Only 17% of the stocks had an average percentage correlation of more than 40%. The vast majority or 57.6% of stocks had an average percentage correlation between 10 and 40%, with two thirds of these having an average percentage correlation of less than 30%. Over the past month, this group of 902 stocks had an average correlation with the major indices of only 22%. In other words, only 22% of a stock’s movement over the past month can be attributed to the major averages. Conventional wisdom breaks down in this case.
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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 |
1.6% |
-0.5% |
1.9% |
1.0% |
-0.9% |
|
NASDAQ Composite Index |
4.7% |
0.6% |
2.3% |
2.5% |
-0.8% |
|
S & P 500 Index |
1.7% |
0.0% |
1.5% |
1.2% |
-0.9% |
|
NYSE Composite Index |
1.7% |
0.4% |
0.8% |
1.3% |
-0.7% |
|
Russell 2000 Index |
3.5% |
0.5% |
2.5% |
2.2% |
-1.7% |
|
HGX, Phil. Housing Index |
3.5% |
0.7% |
5.2% |
0.7% |
-3.0% |
|
IYR, Real Estate |
5.4% |
5.7% |
1.8% |
0.8% |
-2.9% |
|
GLD, GOLD |
6.9% |
2.8% |
-1.1% |
0.3% |
4.9% |
|
RKH, Banking |
-0.1% |
-0.8% |
0.2% |
1.5% |
-1.1% |
|
IYT, Transportation |
2.1% |
-0.1% |
2.4% |
2.7% |
-2.9% |
|
SMH, Semiconductors |
5.5% |
0.2% |
5.0% |
1.9% |
-1.8% |
|
BBH, Biotechnology |
-2.1% |
-1.4% |
1.1% |
-0.2% |
-1.6% |
|
OIH, Oil Infrastructure |
4.1% |
2.5% |
-0.5% |
1.2% |
0.8% |
|
XLE, Energy |
2.4% |
0.8% |
-0.6% |
1.5% |
0.8% |
|
XLU, Utilities |
1.2% |
0.4% |
0.4% |
0.9% |
-0.5% |
|
XLB, Materials |
5.1% |
3.7% |
0.4% |
1.3% |
-0.3% |
|
XLI, Industrial |
3.6% |
0.2% |
2.6% |
1.7% |
-1.0% |
|
XLK, Technology |
4.4% |
0.5% |
2.4% |
2.0% |
-0.6% |
|
XLV, Healthcare |
-1.8% |
-0.6% |
2.2% |
-1.8% |
-1.7% |
|
XLF, Financials |
1.7% |
0.1% |
0.6% |
2.0% |
-1.0% |
|
XLP, Consumer Staples |
-0.9% |
-0.6% |
1.3% |
0.3% |
-1.9% |
|
XLY, Consumer Discretionary |
2.4% |
-0.4% |
2.1% |
2.0% |
-1.2% |
The volatility indexes and put/call ratio are listed in Table 2B.
Table 2B
Sentiment
|
Indicator |
Current |
Last Week |
2 Weeks Ago |
Complacent |
Cautious |
|
VIX ** |
10.7 |
10.1 |
10.8 |
< 20 |
> 50 |
|
VXN *** |
15.6 |
15.3 |
15.5 |
< 30 |
> 70 |
|
CBOE Equity Put/Call Ratio (Contrarian View) |
0.53 |
0.47 |
0.73 |
< 0.55 (Mkt. Top) |
> 0.70 (Mkt. Bottom) |
|
** At 20 day SMA = No short-term signal. *** Below 20 day SMA = Short-term buy signal. |
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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 -0.5% NASDAQ +0.6% S&P500 Index 0.0% Russell 2000 +0.5% NYSE +0.4% 30 Year Bond 4.629% 10 Year Note 4.548% 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 $59.90 Gold for the past 30 days: USD +8.63% CAD +69.42% CHF +3.75% GBP +5.51% EUR +4.38% JPY +5.56% |
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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 |
8.7% |
1.0% |
3.2% |
1.3% |
1.1% |
2.1% |
-1.4% |
|
Cash Rich Companies |
6.2% |
0.0% |
9.4% |
-1.3% |
5.0% |
3.0% |
2.5% |
|
Price to Free Cash Flow |
12.9% |
0.4% |
2.7% |
-0.9% |
3.8% |
0.2% |
-0.2% |
|
Growth Momentum |
10.4% |
0.1% |
|