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Greetings, Pro-fundity team members -
12-06-02

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

The past two weeks we’ve been discussing market indexes and how they broadcast market health in different sectors. You may be wondering “So What?” Let’s deal with that in this Guidepost!

1. Finding picks for this week’s page, we studied over 900+ tickers that had met our Price, Volume, Fundamentals criteria, seeking patterns that looked good for short-term trades. The automatic features of our pick-routine narrowed the search down from over 9,000 companies to just over 900. That is a profound edge. However, that is as close as we will ever get to automatic pick selection. We had to then do the dirty work, look at each price pattern to make value judgments, trying to move the chips to our side of the table (to cast a gambling phrase). Getting out of positions (selling, exiting, running for cover…) is the easier side of the trading duo, primarily because we have correctly determined what to do “IF.” However, the “buy” side of the equation defies automation, the black-box into which we enter our variables and then turn the crank to spit out perfect picks. The following note from a “Knight of the Round-table (TCNet)” says it well:
   ”I want to say that I believe your response almost defines what I believe to be the art of stock trading. The point is that trading is not a science. To me, we all eventually learn this, or else we are painfully still trying to figure out what we think is the science of it, how to wire it, how to put it all neatly in a box, so that the market can't hurt you and you can finally make a lot of money.

   The art, however, is in finally being able to instinctually recognize patterns and behaviors of a stock as reflected in a chart and the various indicators that are used to support the reading of the chart. The empowerment comes when you can trust yourself to take action based on what you believe might happen and trust yourself to take a loss when it doesn't happen. The collective experience of personal trading becomes your art form. The ideal is that it becomes as instinctual, as natural, as riding a bike. My attempt at making a science out of stock trading caused me a lot of pain. My letting go of that attempt and learning how to trade out of the box has greatly increased my trading profitability and, even more important to me, my confidence and happiness as a trader.

   Sincerely, Jimmie (Sir Boxer)”

2. That “art” is something we all must develop through experience, be it via paper-trades or real live trading (more likely a combination of both). My art will not be your art, nor yours mine. However, there are many rules-of-the-game we can use to improve our chances, to increase the probabilities of success (moving chips to our side of the table…). We are working toward that end with the use of market indexes!

   Back to our pick routine: We look at a lot of price patterns (this is a default requisite! As Sir Boxer mentions above, “…being able to instinctually recognize patterns and behaviors of a stock as reflected in a chart and the various indicators that are used to support the reading of the chart”). It is through the “looking” that we gain that knee-jerk instinct. Among the 900+ in our data-base, the “look” weeds out over 3/4th’s of the candidates, leaving some 150+ to find the 30 we will post on the week’s offerings. We’ll consider how we use sector (industry group) strength at this point to make the selections.

   Over 200 Media General Industry Groups are included in the TC2000 data base we use to assess sector strength. We sort this data base by “Price Percent Change 26-week,” pushing to the top of the list those industries whose price has increased during the past six months. The following table fell out this Friday:

   

   Fig. 1 Media General Industry Groups, in order by 26-week Price % Change

3. We see the top price–gainer for the 6 months window was [Telecom – Long Distance Carriers]. The chart below confirms the price action of that industry group:
   

   Fig. 2 MG844 – Telecommunications – Long Distance Carriers Industry Group.

4. Now that is a picture of strength! But how do we use this scheme to help our selections? For example, the ticker MTF showed promise as a potential roller. That is, it satisfied pre-requisite criteria and showed an interesting 10% roll at the beginning of December:
   

   Fig. 3 MTF, a possible pick

5. To understand the industry group it is in, we click on the “BANKING – Money Center Banks” to get the following menu.
   

   Fig. 4 Industry Menu

6. Click on “Jump to Industry” to get the following:
   

   Fig. 5 Industry Group MG410 - Banking

7. Now we assess the price pattern for the industry and it looks weak, with little strength since mid-October. This does not give us the comfort we need in industry strength for the pick, so we scrap MTF as a potential pick this week. Another potential pick was ELNK, with the pattern below:
   

   Fig. 6 ELNK – Earthlink Incorporated

8. We liked the pattern, but what of the industry it is in? The following chart shows the industry pattern:
   

   Fig. 7 ELNK’s Industry Group, INTERNET

   The industry pattern showed strength, with the price bounding off its 20-day moving average in November, still well above its 50-day MA on this Friday. ELNK made the cut. It had marginal Fundamental strength so it went in as a Quick Pick. Another possible was CC, with the following price pattern:

   
   

   Fig. 8 Circuit City (CC)

9. The following Industry pattern kicked CC off the list:
   
   

   Fig. 9 RETAIL Industry Group

10. Now a caveat in the use of industry/sector measures. The following industry group had a low Price Percentage Change 26-week rating with a 27 (221st of 239). That’s pretty bad. But look at the price pattern in the next chart:
    
    

    Fig. 10 ELECTRONICS Industry Group

11. The price today is lower than the price six months ago. However, the pattern the past three months shows remarkable strength. In fact, six of the thirty picks for this week are from this sector. Point: There is no package, or program, or method that will let us sit on the porch and avoid looking under each rock for opportunities as we move through the world of finance, investing, and trading. Enjoy looking at charts! If you don’t enjoy looking at charts, look at them until you do. Each chart you study increases your knowledge and intuitive understanding of how this market works. This is what Sir Boxer refers to above. And always use stops…

    2. Pick Performance:

    We've routinely used six tables to highlight pick performance each week. In the spirit of KISS (keep it short & simple) the following chart summarizes all table data, showing pick performance against the market. We use the S&P 500 as a benchmark, the most common proxy for market action. The average of both pick and S&P 500 performance are compared on each date on the chart (average of 7-day and 14-day performance). We hope this will send a clearer message you can consume in a glance.

    
    

    

    Fig. 6 Average pick (blue) vs. market (red) performance (S&P-500)

    The time frame used for the comparison is in line with our swing-trading focus. We generally get in and out of positions during this time. Our picks are chosen with sufficient volatility to suit this purpose.

    Return to the top!

    12/06/02 Main Picks:
    ADM,ADVNB,AFL,BMET,COCO,DCI,ENZN,FNIS,HDWR,PFGC

    Break Outs:
    BPRX,CAI,CMPP,GRTS,ICST,MOSY,NBTY,POWI,SANM,WBSN

    Quick Picks:
    AAPL,BTGC,ELNK,MVSN,PXLW,QSFT,RCL,TPC,WRC,ZRAN

    Take advantage of our daily "Funditties," profound thoughts for each day. This week we will feature ORIGINALITY, something there is too little of in todays market.

    We have arranged with Worden Bros., Inc. to distribute their products (TC2000, TCNet). See how your Pro-fundity subscription can be a fixed, no-cost feature of TCNet. Please send us an e-mail to sales@pro-fundity.com for all the information. In the meantime, always use stops!

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