The Four Year Presidential Cycle

“Regular emails help change your attitude from reactive to proactive. And with our busy lifestyles, having that gentle reminder may help us keep an eye on the prize,” says Rick Hall, RD, who serves on the advisory board for the Arizona Governor’s Council on Health, Physical Fitness, and Sports.

I remember reading about recurring patterns in stock market in the Stan Weinstein’s “Secrets for Profiting in Bull and Bear Markets”. He is saying that most important pattern is “The Four-Year Presidential Cycle”. 2012 is an election year and this is a gentle reminder that based on analysis described in the Mr. Weinstein’s book, the year following the election is usually a disaster, no matter who is elected.

Behavior of Prices on Wall Street

Historically, the probabilities are strong that in the second year the bear market will continue until a bottom is reached around mid-year (as occurred in August 1982). The rest of year two is bullish, and then the third year of the presidential term is the best one of the cycle. The fourth year, which is the election year, is a choppy one, with weakness usually occurring in the first half and strength in the second half.
Over the past 100 years, this four-year cycle has unfolded with such unbelievable regularity that it almost seems as if the politicians are writing a script.

This data analysis was done not too long time ago, but what is going on in the 21st century? Below is a price chart for S&P 500 index for latest 12 years (3 presidential cycles). Well, I would say that two out of three are pretty close to the pattern described by Mr. Weinstein and current year is a “choppy one”. Something to keep in mind…

S&P 500 Historical Prices

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* Chart Publication from Stan Weinstein’s “Secrets for Profiting in Bull and Bear Markets”, originally from NY: Analysis Press, 1984, p. 4.
** Quotes from Stan Weinstein’s “Secrets for Profiting in Bull and Bear Markets”.

Paper Trading Account or S2O Trading Diary

We just started a paper trading account in Investopedia.com (user name is stock2own). By saying “we” I mean a small group of stock2own enthusiasts. The whole purpose of this is to exercise our trading philosophy, test investment ideas and gain some confidence of what we can do and what we cannot. So, ideally, we would like to have it transparent and available for everyone to view, criticize, question and follow if you wish. However, so far I cannot see how to make our trades available for you (if you know how, please, comment in this blog!). So I will post a short description of every trade here, in this blog. We will try to add a reasonably well detailed explanation of how we found a stock, why we think this is a buy or sell and so on.

Before I describe our first trade a few notes about Investopedia and rules we will try to follow:

• Option transactions are limited to simple buy/sell and Scott was really upset about that. We will see what he can do with the limited set of tools.
• By default each new account has $100,000 paper money to invest. So, we will try to keep approximately 5-6 securities in our portfolio at any given time. In other words, each transaction should have total cost of no more than $20,000.
• We are going to use fundamental analysis to select stocks and technical analysis to get in and out. Both types of analysis we are going to do mostly using stock2own.com web site.

I think this is it and here is our first trade.

On December 11th I booked our first paper trade in Investopedia:

Buy CELG (Celgene Corporation) 300 shares @ $64.05 (limited price)

Explanation:

It seems that CELG just crossed up its MA 150 at the beginning of December. It has an average volume, which is not very promising for a long trade, but all other indicators suggest that there is a potential to move up:

• Stock just crossed up MA 30, both long-term Moving Averages (150 and 200 days) are pointed up.
• MACD and Stochastic show positive signs.
• RSI is just crossed level of 50 and pointed up.

CELG Price Chart

I set first order to be executed if the price will go higher than $64.05. Personally, I do not place orders when market is closed, because all those orders will be executed first deal in the next morning and there is always some crazy activity for the first 20-30 minutes of trading day and you never know what is going to be next… But first trade I booked on Sunday night when market was closed. Latest close price is $63.58, based on the current chart it seems that next resistance level is around $66? So, I just added some threshold for the stock, just in case if the price will go down tomorrow morning, so the trade will not be executed and we will have time to review and adjust our strategy.

The next first half of day CELG price was moving down and Scott adjusted the purchase price of our order to $63.70. In a middle of the day price started to move up and out order was filled in with the purchase price of $63.73.

At that point we had to book a stop-loss order with activation price in a range of $60.70 – $60.50. The chart shows support in the range of $60.70. We want to give price a bit of room to move up and down, but do not want to give up more than 5-7%, so price of $60.50 seems right.

All these days since purchase, the volume of the stock is average, which means that “volume does not confirm price move up”. However last few days CELG price is moving up and when it went over most resent resistance line at $64.80, we moved stop-loss a bit up to the level of $63.30 (right under 30 days MA and a bit below most resent resistance line, just to give stock price a bit more room).
As of today we have in our portfolio:

S2O Investopedia Portfolio as of 12/20/11

We are looking for other prospects to buy and will keep you posted.
Any suggestions? Comments?

Is there anything you can’t see?

I just read in a “Blink” by Malcolm Gladwell:

“Some of these new thinkers say if we have better intelligence, if we can see everything, we can’t lose. What my brother always says is, “Hey, say you are looking at a chess board. Is there anything you can’t see? No. But are you guaranteed to win? Not at all, because you can’t see what the other guy is thinking.”

This is quite an interesting book, by the way. And I was thinking about all those tools we have, all these technical indicators… Aren’t they supposed to help you “see everything”? Or maybe we do see everything, but to master the game we need skills to use all these information? And I think one of the skills is ability to filter out only that information that is important, to get rid of the “noise” in order to have a clear picture.

Just a thought.

Trading options in a small account

Lately we have a lot of talk about option strategies in stock2own community. I think I could find one more reason for myself to trade options. The reason is minimizing risk. And I’m not talking about total amount of money invested (options are cheaper than underlying securities); I’m talking about risk in general.

What is the best way to manage risk? Diversify. How can I diversify if my account has only few thousand dollars in it? I mean, how many securities can I invest in? Well for $5000 I can buy only 10 shares of Google or 12 shares of Apple. This is not a diversification.

At the same time, I can buy 1 contract (100 shares) of Google for about $500. And it will take only 10% of my account money. This is exactly what I want – do not invest more than 10-15% of my money into a single security.

I used to find myself in a position where I find a stock I like, I can see that all technical indicators suggest “buy” and I jump in. I paid 60-70% of my account to buy as many shares of this stock as I can. I had to do it simply because the size of my account is too small. And very often in a day or two I could find another stock with even better fundamentals and even stronger technical indicators. And … I had no money left to invest. Trading options should solve this problem. But, where is the catch?
The catch is when you buy a stock and you are right about price direction, you have a good chance to make money. Trading options you have to be right about underlying price moving direction AND time as well! As Mr. Natenberg put it in his book “Option Volatility & Pricing”:

If someone thinks the market is going up, he or she will tend to buy calls. And if it turns out these people are right, and market did go up, they might end up losing money. Why did they lose money? Buying calls is supposed to be a bullish position, and the market went up. But of course what was happening is the market was going up slowly, not sufficiently fast enough to offset the decay in the option.

So, using options you can reduce the risk by diversifying, but you have to be right in both market direction as well as timing. Nothing is free, I guess.

Stock Profile for rue21, Inc. (RUE)

rue21, Inc.

Today we published first stock2own newsletter. This is the first stock2own newsletter with a stock profile inside. We have decided to pick a stock for detailed analysis every month, analyze it from many points of view and publish detailed stock profile.

There were 3 people working on this stock profile. So, this is kind of S2O community stock profile In my mind, it brings even more value to it – different people have different experience, different angles of view… Anyway, if you are interested in a detailed stock profile for any stock, go to Stock2own Newsletter Forum and vote for your stock!

rue21, Inc.

The stock of the month is Rue21 Inc. (symbol US:RUE), a specialty apparel retailer.

rue21, inc. (rue21) is a specialty apparel retailer offering the newest fashion trends for girls and guys. As of January 30, 2010, the Company operated 535 stores in 43 states throughout the United States. The Company’s merchandise is designed to appeal to 11 to 17 year olds who aspire to be 21 and adults who want to look and feel 21. In addition, it offers its own brands, such as rue21 etc!, Carbon, tarea and rueKicks, to create merchandise excitement and differentiation in its stores.

Stock Profile contains detailed fundamental and technical analysis as well as price valuation. It has the following sections:

• Business Summary
• Competition Matrix
• Moat & Long Term Financial Numbers
• Management
• Notable Excerpts From 10K & Public News
• Short Term Financial Numbers
• Value Price and MOS
• Technical Analysis & Stock Charts
• Industry Analysis
• Conclusion

You can read the full report in the S2O newsletter here:
http://www.stock2own.com/Stock_Profile_RUE_072611.aspx

Relative Strength Chart

The Relative Strength Index (RSI) should not be confused with Relative Strength.

The Relative Strength Index (RSI) is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

The Relative Strength is a measure of price trend that indicates how a stock is performing relative to other stocks in its industry. It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period. (Definition by Investopedia)

Stock2own.com automatically selects an appropriate index to compare with from 3 major indexes depends on a stock’s country of trade:

• US and Canada: S&P 500 Index
• Asia: Nikkei 225
• Europe: FTSE 100 Index

Calculation

There are many different methods exist to measure relative strength of a stock. In general it is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.

At stock2own.com we calculate the difference between RSI of a stock and RSI of an appropriate index. In the “Relative Strength” section of the stock chart you may see 3 charts: stock RSI, index RSI and Relative Strength of a stock versus Relative Strength of an index.

How to use it

The level of the RSI is a measure of the stock’s recent trading strength. Traditionally, RSI readings greater than the 70 level are considered to be in overbought territory, and RSI readings lower than the 30 level are considered to be in oversold territory. That is why 30 and 70 levels are highlighted on the chart. In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend.

You can see RSI charts for both – your stock and corresponding index. RSI for a stock gives you an understanding of the stock trend, while RSI for an index shows you current trend for the market as a whole.

The third chart – Relative Strength of a stock versus index – shows how good a stock performs comparing to the market. If this line is around level 50 – stock is doing pretty much the same as the market as a whole. If this line is below 50, than stock is not doing well; if this line is above 50, stock is doing better than a market. Please, keep in mind that even when stock is doing better than market, its price still may go down. It is just going down slower than for majority of other stocks.

How to pick stocks with S2O industry analysis

Your probabilities of success are quite low when the market trend is going against you. Secrets for profiting in Bill and Bear Markets by Stan Weinstein

Just as Stan Weinstein put it, the ideal buy candidate is an A+ stock in an A+ group. This is actually a complicated decision to reach and the best way to approach this is work from the large question – how is the overall market – down to the smaller question – which stock looks best to buy. In between those two extremes is the middle part of the equation – which group is acting best technically.

There are several ways to analyze groups, but simplest one is to count number of stocks in bull and bear market and compare those numbers (please, see Industry Analysis post for details). This is “a quick shortcut that produces an excellent “Gallup Poll”.

We implemented this analysis on stock2own.com. Just click on S2O Pro tab and you will see a list of countries with bull or bear image for each for last several weeks. This is the same “quick shortcut”, it is counting number of stocks in bull versus bear condition.

Please, pay attention to the “number of symbols” value presented for each country and group. Stock2own does not have a complete list of all securities all over the world and if number of analyzed stocks is low, this type of analysis cannot be considered accurate. The best coverage is for US market, however stock2own has analyzed a significant number of stocks for some other countries. For instance, as of October 2010, Germany and Great Britain have the best coverage among non US stocks.

Just to be clear, stock considered to be in a bull market if it’s market price is above it’s MA 150 (150 days moving average) AND it’s MA 150 is above it’s MA 200.

Well, knowing how is market as a whole doing does not help much when you want to find a stock to buy. So drill down by simply clicking on the country you are interested in. You will see a list of market sectors with the similar type of analysis.

Country – sectors – industries. This is the hierarchy yahoo finance is using. And this is quite useful, because it allows you to narrow down the search. There are only 10 sectors defined for US market and about 100 industries. So moving from sector analysis to industry analysis, allows investor to identify bull industries very quickly.

In general, when you want to go long or looking for a stock to buy, you want to see bull image for the latest weeks for the sector and industry. If you want to go a bit dipper, there is a “Price Rate” value associated with each sector and industry. It is located next to the bull or bear image and shows the rate of bull/bear stocks. Ideally, you want to see this rate goes up week after week, which means that more and more stocks within the industry move to the bull condition, so industry become stronger and stronger.

Please, pay attention to the “number of symbols” value presented for each group. Some group have very few stocks in it. For example, US industry “Conglomerates” contains very small number of symbols (please, go to Yahoo! Industry Center – http://biz.yahoo.com/ic/ – for details). Low number of analyzed stocks does not necessarily mean that you cannot use this type of analysis. Just make sure that number of stocks included into analysis is large enough to cover majority of stocks in the sector, in other words is large enough to be used for statistic analysis.

After you identified the best sector or industry, you can go and select stock within this industry. Just click on industry name and you will be redirected to the Stock Screener, where you can select stocks by sector and/or industry, use different views (trader, investor or mixed), see and filter by fundamental numbers along with technical analysis. On top of that, for every stock you will have access to it’s industry price chart.

This is how I use S2O Pro services today to find an A+ stock in an A+ industry.

Industry Analysis

Many financial advisors recommend investing in sectors in a Bull market condition. More than that, long-term investors want it to be in a bull market for at least 3-4 weeks before they open a long position. It makes sense to me, but the question is how can I decide if an industry is in a good shape?

First of all, I can use corresponding ETF in order to track industry performance. In fact, it is hard to find an industry or market segment that is not represented by one or more ETFs. Observing ETF price trends and comparing returns over shorter and longer time frames, you can see which market segments are rotating into, or out of, favor.

“Stocks do not trade in vacuum. They are influenced by the broad trend of the stock market and the prospects of the economic sector that they are in. Stocks tend to move together in groups all commonly influenced by the economic niche they are in. In fact, sectors and the broad trend of the stock market influence stock prices more than the characteristics of an individual stock do.” Strategic Stock Trading by Michael Swanson.

Another way to analyze industry performance is using industry price. Industry refers to the production of an economic good (either material or a service) within an economy and ultimately it consists of stocks. Very similar to an ETF or a mutual fund, all stocks within industry can be “weighted and summed” which will produce the current price for the industry. This is great, because now I can run pretty much the same type of technical analysis for the whole industry as I do for the single stock. All rules are the same and if I think that single stock is in a bull market if it is traded above its 200 days moving average, I should treat industry price the same way.

Where to find industry price?

Many financial web sites show industry prices. I like finance.yahoo.com because it has a comprehensive list of industries and yahoo shows market price for each one. The best way to browse list of industries is going to industry center where you can find a list of best and worst performing industries along with the complete list of about 100 industries. If you click on industry name you will be able to see a price chart for that industry. Nice and easy to find.

The only problem I have is price chart shows data for the last week (5 days) only. I could not find historical prices either. At first, it does not sound like a big deal, but without historical prices, I cannot calculate moving average and yahoo does not allow adding any type of analysis to the chart.

Industry historical prices are not a problem for the Big Charts from MarketWatch. They also show top 10 best and worst performers, they also allow browsing through the industry list and show up to 5 years of history on their charts. This is great, but I cannot add any kind of technical analysis there. And even more importantly, MarketWatch’s industry list does not match with the list of industries from yahoo, which I like.

How can I analyze industry without calculating its price?

“Each week I calculate the percentage of stocks on the New York Stock Exchange in Stages 1 and 2. A quick shortcut that produces an excellent “Gallup Poll”. Secrets for profiting in Bill and Bear Markets by Stan Weinstein

This approach – calculating and comparing number of stocks in a bull and bear condition – does not weigh stocks within industry and may not be as accurate as previously described methods. However, it can give you a quick look to the industry, sector or even whole country’s economic condition.

The similar type of analysis you can find on stock2own.com. We count number of stocks in bull and bear condition within any given industry. Dividing those two numbers we can get a “bull-bear ratio” and if this ratio is below 1, then more stocks are in a bear market or priced below their 200 day MA. Vice versa, if bull-bear ratio or “Price Ratio” is above 1, then more industry stocks are in a bull market condition and therefore we can say that industry as a whole is in a bull market as well.

At stock2own.com you can find “Price Ratio” for each industry within each sector. This analysis presents data for the latest 6 weeks. On top of that, there is an industry price chart with moving averages available for every industry in US market. This functionality is part of S2O Pro Service. I’ll explain the idea behind S2O Pro Service and how to use it in the next post.

New Mike Swanson’s Book

Yesterday I bought a book “Strategic Stock Trading: Master Personal Finance Using Wall street window Stock Investing Strategies with Stock Market Technical Analysis” by Mike Swanson. I have not received it yet, but looking forward to read it.

The funny thing is I started with fundamental analysis and now most of my reading is about technical analysis. I think there are several reasons for that.

Reason one is I probably do not have enough of patience. Those who are true value investors, they perhaps can wait years to realize they gain. I’m still working on it…

Reason two is I have already had the list of wonderful companies with wonderful fundamentals (this is a universal starting point, isn’t it?) and now I need to focus on WHEN to act.

WHEN is a difficult question. If you are a value investor, you probably should not worry about price dynamics or technical stuff. All you have to do is buy when price drops below your Margin of Safety. I think I simply do not have enough stomach to see how low price can go. Especially, if down the road fundamentals suddenly become not that wonderful.

I think I need technical analysis in order to select industry of favor, select a fundamentally and technically wonderful stock in that industry and identify correct timing to buy. Well, it does not sound very funny, but now I feel better – I’ve got an explanation and my next book is about technical analysis.

The long term background check

If you analyze stock’s fundamentals before buying it, you probably know what “Long term” means. Usually, we analyze 5 to 10 years of company’s financial history and this is a long term background check in my mind. The question is shall we do the similar long term check of price history?

“The value of the long-range background chart is that it helps you put current price activity into historical context.”
Secrets for profiting in bull and bear markets by Stan Weinstein.

It also helps to identify important formations and long term highs and lows. For example, if you see that stock made a new high for the past several years, you may consider it as a very favorable situation, as it shows that there is no further resistance overhanging the stock. On the opposite, if you do not do long term check, you may miss previous year high which can work as a resistance level for the stock’ price.

In today’s world the switch between daily and weekly or monthly charts is easy to do in the trading platform like ThinkOrSwim, for example. All you have to do is change chart type in the top menu (see picture below).

Take a look to the following daily and weekly charts for QQQQ. They do not look the same and both serve their own purpose.

QQQQ Daily Chart

The daily chart is the best for short term trading and shows open, high, low and close prices for each day. It shows short term stock activity and usually presents up to 3 months of data.

If you are looking for trends of several years you will find extremely useful weekly and monthly charts. They built on the same rules and the only difference between daily and weekly chart is weekly charts shows the open, high, low and close price for the entire week, Monday trough Friday trading. It also shows the volume for the entire week. Monthly and yearly charts build the same way – each bar on a chart represents trading for the entire month or year.

QQQQ Weekly Chart

It seems that weekly charts are most useful for me. As Stan Weinstein says in his book “Secrets for profiting in bull and bear markets”, there is enough definition to trade, but they are especially valuable in showing the really important moves that matter to intermediate term traders and investors.

Interesting enough that all types of technical analysts, like stochastic, MACD and so on can be applied to charts of all ranges the same way. However, keep in mind that buy/sell signals will depend on the chart range – the longer the range the less signals you will get. The point is a day trader, probably, should not trade on yearly chart signals, but may find it useful to check long term charts to uncover long-term dynamics.