Greetings, Pro-fundity team members -
05-23-03

At the bottom of the Guidepost, a full listing of this weeks picks are shown, in addition to the Charts via the Pick-link.

As a benefit of membership, you have access to all Guideposts (including Archived GP's) and Picks. If you miss a week or two for whatever reason, you will be able to go into the Historical Guidepost link to catch up with both the weekly guidepost and the 30 picks made for the week.

Greetings, fellow Pro-fundity team members

1. Last week we mentioned “smart money” in regards to reward/risk ratios and safety-net stop-losses. Let’s take the “smart money” analogy a step further and perhaps see “who” the smart money really is. Begin with a snapshot of two-week Breakout pick performance as shown on 5/23/03:

   
   

   

   Figure 1 - 5/09/03 Breakout Pick performance (2 weeks).

2. We soundly beat the S&P with this list, but look at the best pick, PAX, compared to the worst, QDEL. What profound differences might have caused such a disparity? Look at the price patterns on 5/09/03, the day of the pick, PAX first:

   
   

   

   Figure 2 - Price pattern for PAX on the day of the pick

   
   

   

   Figure 3 - Price pattern for QDEL on the day of the pick

3. Quite similar price patterns, with QDEL even showing a stronger volume pattern in its rise. Now look at both on last Friday’s close:

   
   

   

   Figure 4 - PAX price pattern on 5/23/03

   
   

   Figure 5 - QDEL price pattern on 5/23/03

4. The next chart shows how the 10 breakout picks stacked up in terms of revenue growth for both the latest quarter and the last four quarters:
   

   Figure 6 - Revenue Growth for pick list (fundamental data)

5. Refer back to Figure 1, PAX did outpace QDEL in this category, but look at KOSP. It finished only seventh, with the best combination of revenue stats! This does not represent the smoking gun in our PAX/QDEL disparity.

6. Finally, look at the next chart, which shows six different time frames for an indicator called “Balance of Power,” (BOP) for all 10 breakout picks. The key here is what the indicator has been doing from the longest time (9-month) to the recent 1-day BOP. BOP is a proprietary indicator of Worden Bros., (TC2000/TCNet) which seeks to discover accumulation/distribution patterns in recent price activity. Large numbers mean institutional buying (accumulation), while smaller numbers mean the institutions are unloading (distribution). PAX shows a steady rise, while QDEL rose to a better one-month position that PAX, then collapsed the last two measures. Can you smell the smoke?
   

   Figure 7 - BOP (Balance of Power) Accumulation/Distribtion Data for pick list

7. Before accepting this argument, consider the following. The law of supply and demand is nowhere more evident than in the marketplace. Stocks do not go up randomly, but because of large buying demand. That is how the supply/demand cycle works. If there are more buyers clamoring for a stock than sellers, the sellers are in the drivers seat and can demand higher prices. Most of the demand comes from institutional investors, you know, the guys who have hundreds of thousands of dollars, even millions, to place multiple-contract block orders. They account for more than 75% of buying of high quality stocks. When we consider stock selection, trading-volume is how we measure demand.

8. Now, consider what would happen to the price of a stock if an insurance company decided to place a block order for $500,000. Its price would shoot out of sight and before the company got all its orders placed they would end up paying much more for their block trade than anticipated. Similarly, when the same company tried to liquidate its holdings at the top of the cycle, a whisper of such a large sale would cause the price to plummet leaving the seller with much less than he hoped. So, institutions (those who account for three-fourths of the money in the market) are forced to play games, taking large positions incrementally. This way, it never looks like any one big-guy is making a move. The same is true on the selling end, with small portions placed on the block over some period of time, allowing them to hold the price up and get all the money they can. This is how the game is played.

9. So what? Clever technicians have developed ways to detect these hidden accumulation and distribution plays. Joseph Granville created an on-balance volume technique in 1976, in his classic “New Strategy of Daily Stock Market Timing for Maximum Profits.” His “On-balance Volume” (OBV) has led the way for many other strategies, each assuming the marketplace is divided between “smart money” and “the general public.” Smart money can surreptitiously accumulate stock issues at low prices. It then drives the price up, buying as it goes, until it sells off at the top, again incrementally. The general public does not notice the massive distribution taking place, and the price is not affected until the smart money is out of the market and the general public rushes to sell. Once this distribution has taken place, the price weakens and falls in the absence of large buyers. The general public does not notice this accumulation/distribution tendency and tends to be on the wrong side of the price most of the time.

10. This relation between smart money and the general public is necessary, because the smart money must have someone to buy from and sell to in order to make its profits. That someone is the run-of-the-mill uninformed investor.

11. Granville’s OBV is the attempt to uncover smart money’s hidden accumulation and distribution patterns before the price break happens. These informed technicians are not dazzled by price as the primary indicator of market behavior, but are willing to look at what drives price – volume. The OBV and more recent clones allow its users to take advantage of the “inside knowledge,” held by large concerns and investors. We are able to do this without having the “inside knowledge” ourselves. It is a kind of technical barometer of informed fundamental knowledge and insight. Granville referred to the OBV technicians as a “parasite” of smart money.

12. Now, to the earlier question: It is not important what it is that makes smart money smart, or who the smart money investors are. All that matters is that smart money’s moves (whoever they are) will ultimately determine price, and therefore a technique which reveals these moves is all we need. We use TC2000’s Balance of Power, as the technique of choice. We believe it is that factor that made the big difference between PAX and QDEL during the past two weeks. As with all indicators, none are perfect. Rather, we play them all together, seeking consensus where possible, but ultimately making a choice based on how we feel, in the face of, at times, conflicting evidence.

13. FYI: William O’Neal, of “Investor’s Business Daily” fame, includes his own proprietary indicator for this purpose. Included in the IBD is an Accumulation/Distribution rating for every stock, every day. The Acc/Dist rating tracks the last thirteen weeks of trading volume for a stock and tells you whether it is under accumulation or distribution. This measurement is based on price and volume change and tells if our stock is under accumulation (professional buying) or distribution (professional selling). We’d want to pick “A” or “B” ranked companies and temporarily avoid the “D” and “E” ranked ones. They are being liquidated in the last 3 months.
    05-23-03 Pick Selection:

    Main Picks:
    BGFV,COHU,KROL,NANO,ROIA,SCLN,SCTC,SGA,TVL,VISG
    Breakouts:
    AEN,AMSWA,CETV,DITC,DSCO,IDNX,IPXL,KVHI,MSON,MTLK
    QuickPicks:
    ADIC,CVD,FLSH,GMH,HHS,HLT,INVX,MOSY,RYAN,SEM

    For detail and followup on Pro-fundity Tradescape,
    find the link on "Advanced Trading Tools" on the home page.

    Be Diligent
    Take Action!