Stockscores.com Perspectives
For the week ending July 28, 2000
In this week’s issue:
- Commentary: Are You Really an Expert?
- Feature Strategy: Abnormal Behavior
- Tip of the Week: TSE Sector Indices
- How to subscribe to the Stockscores.com Perspectives Daily Edition
***Stockscores.com Commentary***
It is comforting to know what it is you are investing in. We spend hours
reading annual reports, news releases and media articles about a company. We
listen to analysts or company management discuss the merits of their company,
and their stock. Once complete a lengthy process of due diligence, we can take
comfort in the fact that we know what we are buying in to.
You should feel as comfortable as an ant under a magnifying glass on a sunny
day in July.
Here are the things that are going against your process of due diligence.
- You are likely reading, listening or watching information that is
public
knowledge. That means the market knows about it, and has priced it in to the
stock.
- You are likely not an expert on the topic you are considering.
There are
people with more experience who are considering the same information and
applying their greater knowledge to come to a more accurate conclusion.
- You are likely missing some important facts that have an effect on the
value of the company you are studying. Unfortunately, it is usually the
negative information that is hard to find, so chances are you are missing
something that goes against your decision.
- You are spending a lot of time completing your analysis, which
means you
are investing something in your decision. Since we want a return on our
investment, we tend to want our analysis to prove that a stock is a good buy.
It is hard to spend hours doing something only to throw it out.
- Your analysis likely focuses on facts about the company but do not
necessarily factor in macro-economic or market psychology considerations. It is
difficult to quantify the whims of the crowd that makes up the stock market,
and we often forget to consider the overall strength of the economy.
- Your sources for information may be biased, or they may simply lie to
you.
To be a successful fundamental analyst, you have to be good at predicting the
future, and how the market will respond to future events. It is not enough to
know what will happen tomorrow, you must also be able to predict how the market
will perceive and react to tomorrow’s events.
Having inside information is of course helpful, but acting on it is illegal.
Many market participants utilize this edge, but they often find that the market
does not respond to the information in the way that they hoped.
If you are exceptionally good at extrapolating what is important and using the
information to make an educated guess about the future, then you are a talented
individual. There are many people who have these skills, however, few can apply
them across industry groups as they tend to understand particular businesses or
technologies well, but do not have enough expertise in other areas. It is
therefore important that what these analysts understand is also what is in the
market’s favor.
There will always be a group who can predict the future of one stock at a
particular time. Those with accurate and private information or those able to
accurately hypothesize the future make investments in stocks and tend to do it
loudly enough that the rest of us can follow them and figure it out.
This strategy is what Stockscores.com is based upon; utilizing market activity
to measure the inflow of new information and gauge crowd psychology with the
intent of predicting future trends in stocks.
Enough Said.
***Stockscores.com Feature Strategy ***
So what happens when a company is announcing, or about to announce, a
significant bit of news? If the news is important enough and makes a
significant change to the value of the company, we tend to see it make a big
price move accompanied by strong volume.
I once did a study that looked at the market activity of stocks before the
announcement of a significant takeover or merger. I wanted to see if there was
abnormal market behavior before the news. The answer was a resounding yes, with
abnormal market activity prior to a news announcement in over 60% of stocks
that announced a major deal.
Basically, this probably means that there was a leak of the news, that someone
knew about the potential before it happened. Market activity can telegraph
private information.
Because of this phenomenon, the Stockscores.com Market Scan tool is equipped
with two indicators that I developed which test for abnormal activity. Using
basic statistical analysis, we can quantify what is statistically significant
abnormal moves in price or increases in trading volume.
To find stocks behaving abnormally (in the mathematical sense), do the
following scan:
Under Price Indicator Queries, Set Abnormal Activity = Abnormal Day Up
Under Volume Indicator Queries, Set Abnormal Volume = Abnormal Volume
I also set a minimum $ Value Volume requirement of 1000000 as I find that this
strategy works best with relatively liquid stocks.
This scan reveals 7 stocks from Friday’s trading. When inspecting the charts, I
want to focus on stocks that closed near their high and are breaking out of
trading ranges. Trading ranges indicate a higher level of market confidence
about what the company is worth, making a breakout from these areas of
consensus more significant.
NYE:BLC (A.H. Belo Corporation) a bit risky as the breakout is coming off a
bottom, but this chart still looks excellent. I would expect this stock has a
good chance of outperforming the market in the short term.
NDS:CCUR (Concurrent Computer) not a great chart, the abnormal move is not
showing a breakout. This stock is likely bottoming after a few days of
weakness.
NYE:ORI (Old Republic Intl) we’re a day late on this one, as it has made an
abnormal up move with abnormal volume two days in a row. Looks like it can go
higher still, but it is riskier now that it has had a few up days in a row.
NYE:RAL (Ralston Purina) Looks excellent, I think this stock has very good
potential to make a move to the $25 price range in the short term.
TSE:T.IGI (Investor’s Group) not a great chart as it is not breaking out of a
trading range, but this stock has decent potential and deserves to be watched.
NSD:TDFX (3dfx Interactive) looks like it is bottoming but there is still a
downward trend that needs to be broken. The overhead from this downtrend may
slow an upward move.
NSD:TWRS (Crown Castle International) bouncing from a period of pessimism, I
would stay away from this stock as there will be selling pressure from those
that bought the stock at higher prices.
***Stockscores.com Site Tip of the Week***
We chart and score all the indices of the TSE 300. I have not put together a
list of the symbols, but an easy way to see them is to do a Market Scan and
filter for TSE listed stocks with a price greater than 300. The list shows 68
indices, which can be recognized by the symbol IT.xxx. For example, the top
scoring market sector in Canada is the Investment Companies and Funds group
(IT.INV), which has a Stockscores of 89.
***Stockscores.com Perspective Daily Edition***
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with regular updates, helping you understand how to trade these features.
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***References***
To get the Stockscore on any of over 20,000 North American stocks:
stockscores.com
For a background on the theories used by Stockscores:
stockscores.com
For strategies that can help you find new opportunities:
stockscores.com
To scan the market using extensive filter criteria:
stockscores.com
To build a portfolio of stocks and view a slide show of their charts:
stockscores.com
To see which sectors are leading the market, and the stock components:
stockscores.com
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Disclaimer
__________
This is not an investment advisory, and should not be used to make investment
decisions. Information in Stockscores Perspectives is often opinionated and
should be considered for information purposes only. No stock exchange anywhere
has approved or disapproved of the information contained herein. There is no
express or implied solicitation to buy or sell securities. The writers and
editors of Perspectives may have positions in the stocks discussed above and
may trade in the stocks mentioned. Don't consider buying or selling any stock
without conducting your own due diligence |
