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BASICS FUNDAMENTALS TECHNICALS ROLLING TC-2000 OPTIONS |
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Greetings, fellow Pro-fundity team members -
This Week's Guidepost
A ”subscriber’s view” of the Pro-fundity Page:
After looking at the maze of numbers below charts for the 10 weekly picks, titled “Stock Analysis,” a novice might gasp “So What?” We are here to answer that gasp! Being tight with the production of the Pro-fundity Page since it inception 3 years ago, it may be tough to be objective and take a subscriber’s view. However, since we designed the page the way we want this kind of help, all I need to do is share that vision with an example page. How does the page answer my questions? How can the data give me better insights to make educated choices and heighten my success? So, with the page dated 12/22/00 (two weeks ago) as the example, this is how I would use the page:
- Since the page is updated Friday evening, after the market close, I have all weekend to study the data and make choices for Monday’s open. I usually spend an hour Saturday morning studying the page, then return as required through the weekend to reconsider issues and prepare any action to take before the market opens on Monday.
- My first step is to click on “The Picks” link. These picks are always backed by solid fundamentals which gives them a better chance of a price increase. I “go directly to Stock Analysis” which bypasses the 10 charts, which I will come back to later. My first task is to see “What” tickers I might be interested in. The charts will help me choose “When” to pull the trigger.
- The first body of information in this matrix is the Short Term Stock Analysis, Price and Volume action. The next two charts show this information on all 10 picks to help our discussion. First, price. Its good to know where the current price is compared to where it has been. The first three rows let us do that within a 90-day time frame. For instance, ABFS had a 90-day high of $20.13, 90-day low of $13.06, and the Friday’s close was $15.63. We also include the 52-week highs and lows for comparison. A body of investors termed “contrarian” will not buy a stock unless it has fallen below 50% of its 52-week high. Their “down-by-half” rule would eliminate all of this week’s picks since all current prices are above 50% of their 52-week highs. That is just a point of interest. What this section tells me is how the 90-day highs and lows are compared to the 52-week values. Why is that important? I like to know what the long term trend is for a ticker, for instance, if the 90-day high is the same as the 52-week high, it suggests we are on the higher end of the last year’s price trend.
- The next section is volume data which is critical for making timely picks. This section is an information feature you will find no-where else on any financial site. Increasing volume is bullish, suggesting strength for price increase. Decreasing volume is the contrary, bearish, suggesting weakening support. The average volume over the last 90 days is a snapshot of the 90-day window. On the other extreme, the last day, or 3-day volume is a smaller snapshot, but much closer to the current action. Look at the volume action above on ABFS. The recent volume is about twice that of the 90 day average. This stock is picking up momentum as evidenced by the volume action. Ticker #9 below, ROAD, also shows volume strength in its progression. Based on what I see in this section of the Analysis, I would outright reject tickers 3, 4, 5, 8 and 10.
- The next two charts display some technical data that help me understand the nature of the selected picks. The ATR (Average True Range) is a measure of volatility. I like to think of it as a measure of the random noise in the variation of price. The ATR more accurately reflects market activity than other statistical measures because it considers gaps in price activity. Some theorists suggest increases occur in the ATR at market bottoms or at market tops. I use it to help determine stop-loss levels. I do not want to set my stops within the ATR range because natural market changes and not a significant price drop could stop me out.
- ARXX and FLEX worry me with such high volatility. If I wind up considering such picks I would have to watch them very closely. Stochastics and RSI are overbought/oversold oscillators. Ideally, best buy conditions occur when the Stochastics is less than 20 and RSI is less than 30. These are good indicators in trading patterns, that is, in the absence of any marked trends. They work less well if the stock is trending up or down. I don’t make these indicators critical factors in my choices, however I may want to view a price chart that shows the oscillator action along-side the price chart. Lastly, on this section of the analysis, Moving Averages take front stage. A moving average of price is simply the midpoint in all the action over the time being considered. If it is a 200 day MA, it is the average price over all 200 days. The important point here is where the current price is relative to the MA. If the current price is Above its MA, it shows strength. That is, is suggests the price is in an upward trend relative to where it has been. We show this measure for 4 different time spans. If the price is above its MA on all four time frames it is very aggressive. This section helps me assess the momentum of price action. ARXX above has been strong but in the last 50 days it has weakened. ABFS is questionable. ROAD below has been weak with the 100 and 200 day MA’s but showed some strength in the 50-day MA. It may be readying for a push up. Although a ticker may be below all of its MA’s, that may mean it is a likely candidate for a rally. I would neither accept or reject a ticker because of the MA action, although it will go into the bucket of considerations as I weigh all factors.
- The last section contains the most important information, in my view, that of the company fundamentals. The first three rows relate to the companies earnings. This is the most fundamental of the company fundamentals. If a company shows a consistent profit, as shown my the earnings indicator, it will be valued by the market in a fair manner. If those earnings are increasing, year to year, its price will increase accordingly. We have said a lot about the importance of news in the valuation of a stock. The market is manic depressive when it comes to a company missing its earnings estimates, those predictions made my analysts about what its earnings should be in the next market cycle. It works both ways, if the earnings exceed expectations, the stock usually increases, and vice versa. In any regard, this information is very valuable in assessing the value of a stock for purchase. I know we are a rolling stock site and the strategy is to find a roller and just set buy and sell limits to capture this price action. Since rollers are not eternal, and all rollers will stop rolling in their current channel, we want the next price action to be UP! We want to go along for that ride and the best way to do that is to pick strong fundamentals stocks that are MORE LIKELY to go up than down. Earnings are the best predictor of that action.
- The ratios are important in the total picture of the health of a stock and should be considered as outlined in our book, section 2.1 Fundamental Analysis. Net Insider Trades (past six months) can be used as a flag when it is obvious insiders are moving their own shares. If the net insider trades are negative, it means there are more sales than buys among the insiders. Insider selling is not really a strong negative indicator since they can sell for a variety of reasons. Insider buying, on the other hand, means one thing; those closest to the action expect something good to happen. The only ticker with significant insider buying is TIER, with five insiders buying. The amount involved is not very high, however, only 0.006 Million ($6,000).
- So what have I learned in this analysis? I have excluded tickers 3, 4, 5, 8 and 10 for volume considerations. I must watch tickers 2 and 6 carefully for volatility considerations. Ticker 4 (CHIC) had the greatest earnings increase (700%), rejected for volume, illustrating the complex bevy of contradictions and compromises in stock selection. I question the 700% for CHIC and would learn what I could about that number before investing any money. After analysis my possibles for an investment this week would include the five that passed the volume hurdle, ABFS, ARXX, FLEX, LIN and ROAD. Of these I like ABFS for its ROE of 28% plus, almost twice the other four. This is a good measure of the management performance of a company, the return on equity. The other four are not bad. I also believe it is important to note which category each ticker is in, relative to its market capitalization. ABFS and ROAD are small-cap companies (under 1$ Billion), with ARXX and LIN mid-cap ($1 Billion to $10 Billion), and FLEX the only large-cap (over $10 Billion). These cap levels are somewhat arbitrary. Companies below $250 Million are often called micro-caps. Why is this important? There is less risk with a larger company, also less chance of dramatic price increases, all part of our considerations.
- Now I return to the price charts of these five tickers and put on my technical analysis hat since my objective is a short term price increase.:
- ABFS: This is not a clean Resistance/Support roller, but it is on an uptrend with its price down to $15.63 from a recent high of over $19. This could be a good buy.
- ARXX: This is a similar pattern, an uptrend moving into a trading range, $26 now from a high of about $35.
- FLEX:: This is the big guy, coming down into a trading range, between $25 and $31. Possible action here.
- LIN: Rolled down to about $24, with an unclear resistance level at $32. I’m not comfortable with where this is going.
- ROAD: Unclear support or resistance levels, kind of wandering around. Not a clear direction.
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