Stockscores.com Perspectives
For the week ending September 22, 2000
In this week's issue:
- Commentary: Where Are the Markets Headed?
- Feature Strategy: Buy the Breakout
- Tip of the Week:
- How to subscribe to the Stockscores.com Perspectives Daily Edition
***Stockscores.com Commentary***
Gloom and doom.
That is what many investors thought Friday morning when news that Intel was
expecting a major short fall in revenues, particularly in Europe, hit the
market hard. Add to the mix high oil prices, a weak Eurodollar, and inflation
concerns, and you have a situation where many investors have spent September
selling stocks. The tradition of a post summer sell off has come true yet
again. So, where are we headed?
To answer the question, we should consider a top down approach starting with
the major market indices:
NASDAQ The Nasdaq Composite Index (COMP)
Despite the September weakness, the NASDAQ composite has not penetrated the low
set in early August. Since recovering from the April Crash, this market index
has not been able to break through resistance at about 4250. On Friday, the
market recovered very well after gapping down on the open, and closed very near
its high for the day. This is a sign that the market is making a bottom, and
since this bottom is higher than the last one, we can say that optimism is
improving as we look toward October.
Therefore, I expect that we will see the NASDAQ market firm up as we go in to
October, and move back toward the 4250 resistance level. Since confidence is
building and optimism beginning to return, I expect to see a break through the
4250 barrier eventually, but it is difficult to know when that will happen. We
may see this resistance level hold up again before Christmas, taking the market
lower on tax loss selling before year-end. However, I do believe that the
influx of capital related to year-end tax shields will take the market through
this level, no later than the first quarter of 2001.
The blue chip tech stocks that make up the NASDAQ composite do deserve
consideration here, as they should make bottoms and begin to move higher. I
expect the move will be gradual at first, until we gather enough momentum to
break through the psychological barrier at 4250. The cream will rise to the top
first.
Toronto Stock Exchange The TSE 300 (IT.TI)
While many of the world's markets have suffered, the TSE 300 has been a stellar
performer since April. The strength has been mostly due to the market's heavy
weighting of Energy stocks, and the robust performance of Nortel Networks, the
leader of the TSE. Alas, I expect that the strength may diminish as we move
through the year-end, with Energy stocks seeing some profit taking and this
market going in to a trading range, or perhaps even a bit of a downtrend.
Looking at the chart, we can see that the market rallied back a bit two weeks
ago, but was unable to make a new high. This leaves us a situation of a falling
top after a lengthy uptrend; a very significant sign of profit taking and
perhaps impending weakness. It may be time to move some money out of the strong
performers of the TSE, with a cautious attitude looking forward. Canadian tech
issues, like the NASDAQ index, should capture some attention.
US Small Cap Stocks The Russell 2000 (RUT)
Many of the Russell's small cap stocks are not really that small, with markets
caps of close to a billion dollars. That said, this market index appears very
similar to the NASDAQ. Like the NASDAQ, it looks like it is bouncing from a
rising bottom, and likely to move back toward resistance at about 550. It
appears somewhat healthier than the bigger-cap NASDAQ index, and more likely to
find strength before year-end. With volatility in large cap stocks diminishing,
it may be that investors seeking excitement are moving back to the more
traditional source small cap stocks. This market should do well from now until
the Spring of 2001.
Canadian Small Cap Stocks The CDNX Index (IV.VSEI)
Canadian investors seeking excitement typically look to the CDNX as their drug.
It is not uncommon to see stocks gain 10 times their value in a relatively
short time period, as promoters push ultra-speculative stories to investors
hoping to cash in at Canada's largest legal casino.
The key to this market is understanding the promotion game, and recognizing
that stock promoting has a season. It begins in October, and gains its greatest
momentum in late Winter and early Spring. To be successful, investors should
play this market with a cynical view; few of the companies listed will ever
become viable businesses. To make money, you have to remember to sell. Don't
fall in love, but enjoy the relationship while it lasts.
This market is showing signs of optimism, and should produce some good gainers
in the short term. Focus on the liquid stocks, as many CDNX stocks don't trade
enough volume to enter and exit easily. Have fun, but remember that this casino
does not serve free drinks.
In Closing .
This essay started with the words gloom and doom, but my outlook for the
markets is pretty optimistic. I don't believe it will be as good as it was last
year and in to the start of this year, but we should have plenty of opportunity
to make money on the buy side. With less potential for a strong market uptrend
this year than last, it will be important to focus on the stocks that make
their own story with exciting new technologies, medical breakthroughs, and
resource discoveries.
We'll update from time to time, but within a week I expect we will see less
gloom and doom and more optimism.
Enough Said.
***Stockscores.com Feature Strategy ***
What is a stock worth?
Financial theory tells us that a stock's price is the present value of future
earnings expectations. The market puts a value on a company's ability to make
money in the future based on all the information it has about the company. This
information includes the company's revenue, costs, growth, potential revenues
or potential costs and things outside a company's control like the state of the
economy, interest rates or potential for war. The market factors anything that
can have an effect on a company's value into its share price.
However, there is a good deal of uncertainty about what information is worth,
so the market also serves as a forum for debate. Those that feel the market has
given a share too high of a price sell the stock, and those that feel the price
is too low, buy. Unlike a political debate, no words are spoken; market
participants simply state their opinion with buy and sell actions. Of course,
psychology and perceptions have a lot to do with how people judge the value of
information, so the market's state of mind also has an effect on price.
It stands to reason, then, that stocks may trade in ranges during periods when
there is no significant new information or no change in market psychology. With
nothing new to discuss, the market has little reason to dramatically change its
assessment of share price. Only uncertainty causes the volatility in the stock
price, but these movements tend to be relatively minor.
Those who use stock charts for analysis call the upper limit of a trading range
Resistance. As a ceiling price, it represents the maximum price market
participants are willing to pay for a company after they consider all available
information about that company's ability to make money in the future. Visually,
you can define resistance as the high that a stock hit during a particular
period. The more times the stock touches this price level; the better defined
the resistance.
The logical conclusion, then, is that stocks that break through well-defined
resistance are doing so either because of new information or a change in market
psychology. While this is an acceptable hypothesis, my experience has taught
that you have to be more stringent in the assessment. While the first filter is
the breakout, we must then evaluate the strength of the resistance to determine
whether the breakout is truly significant and likely representative of an
imminent uptrend, one motivated by a change in the market's perception of share
value.
Using the Stockscores.com Market Scan tool, you can filter the markets for
candidates fitting this strategy. Stocks making breakouts will be in the
results of the scan, but you will still be required to make some visual
assessment to ensure that the opportunity is a good one. We want to focus on
stocks that are breaking through strong resistance, have not already fully
priced in the new information and have sufficient liquidity to make the
market's message trustworthy.
Market Scan Criteria
· Set Rows to Return to 250. In strong markets, this strategy can find
many candidates for visual inspection. Generally, you won't see more than 100.
This is found at the very top of the Stockscores Market Scan tool.
· Set Score >= 90. This is found under the Stockscores Queries
section of
the Stockscore Market Scan tool.
· Set Price to >= 0.50. Users may wish to further define the price
category that they are interested in. This filter is found under the Price
Indicator Queries section of the Stockscores.com Market Scan tool.
· Set Candle equal to Bullish Candle, as we want stocks that closed well
on the day of their breakout. This filter is found under the Price Indicator
Queries section of the Stockscores.com Market Scan tool.
· Set Price of 80 day high to <= 0%. This will filter only the stocks
that
are hitting new 80 day highs, as stocks achieving this show a negative value
for this field. This filter is found under the Price Indicator Queries section
of the Stockscores.com Market Scan tool.
· Set 80 day Resistance to Breakout. This filter is found under the Price
Indicator Queries section of the Stockscores.com Market Scan tool.
· Set Today relative to 20 day volume average to Above. This filter is
found under the Volume Indicator Queries section of the Stockscores.com Market
Scan tool.
· Set Today relative to 150 day volume average to Above. This filter is
found under the Volume Indicator Queries section of the Stockscores.com Market
Scan tool.
· To filter out stocks that have poor liquidity, also set a minimum
volume
requirement. What amount you use depends on what priced stocks you are seeking,
but 25,000 shares is a good minimum to use here. Set $ Value Volume >=
$250,000.
This filter is found under the Volume Indicator Queries section of the
Stockscores.com Market Scan tool.
Visual Assessment
The most important task for this strategy is the visual assessment of the
candidates' stock charts. We want to consider three questions when looking at
the charts:
· Has the opportunity already been priced in, making investment in this
stock too risky?
· Has the market shown some stability before the breakout?
· Was the market showing some optimism before the breakout?
I ran this Market Scan this weekend, and found a few stocks that are showing
good promise. Consider these:
Amerisource Health (NYE:AAS)
Brocade Communicaitons (NSD:BRCD)
Fiserve (NSD:FISV) this was last weekend's feature stock, now up about 9% for
the week
Northrop Grumman (NYE:NOC)
Teva Pharmaceutical (NSD:TEVA)
United Health Group (NYE:UNH)
Take a look at each of these charts and spend some time checking the results of
this scan on a regular basis to learn how to pick the best stocks making
breakouts.
***Stockscores.com Site Tip of the Week***
Want to check the charts of your favorite stocks on a regular basis? Rather
than call up the individual charts one at a time, you can create a portfolio of
stocks and then view them as a slide show. To do so, create your portfolio
using the Portfolio Creator. Then go to the Chart Viewer and select from the
pull down menu the Portfolio you created to proceed through the charts in the
group. These tools are all found under the Charting section of Stockscores.com.
***Stockscores.com Perspective Daily Edition***
Each day, we scan the market for opportunities and reveal only the best to our
Daily Edition subscribers by email. Plus, we provide comments on past features
with regular updates, helping you understand how to trade these features.
A two-week free trial is available for new subscribers. To enroll, simply send
a request to perspectives@stockscores.com. We will have you added within a week
of your request.
One-year subscriptions are available at the following rates:
$100US
$125CDN
Checks can be sent, made out to Perspectives, to:
Perspectives
1919B - 4th Street S.W.
Suite 167
Calgary, AB T2S 1W4
***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
***Change of Email Address or Removal from Email List
Please go to the Registration area of the site, and utilize the Edit tool.
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. |
