|
| Upcoming Events |
Stockscores Trading Club - Toronto
Toronto
The Toronto Stockscores user group will be meeting Thursday, July 29 from 7 till 10 pm. I won't be at this meeting (I hope to come out to Ontario soon) but I am hearing that the meetings are going well and good trading ideas are being shared. The location is:
Humber College
203 Homber College Blvd
Guelph Humber Building
Room GH122 Ground Floor
Enter in Driveway A and park in Lot 3
|
|
Stockscores.com Perspectives
For the week ending July 24, 2004
In this week's issue:
There is a rivalry between those who use Fundamental Analysis to identify opportunities in the stock market and those who utilize Technical Analysis. While both methods are very different in approach, the one common theme is that most people applying either methodology fail in their pursuit to beat the stock market. Both analytical approaches are flawed.
Fundamental analysts take the facts of the business and try to find a fair value for the company. After pushing cash flow, debt levels, growth, revenue and other factors through a spreadsheet, the fundamentalist arrives at a value for the shares of the company. If the stock is trading at a lower price, then the shares should be bought. If the value of the shares is trading at a higher price, the stock should be sold short.
While fundamental analysis makes a lot of sense to most people, technical analysis does not. Technicians consider the past trading prices and volumes of a stock to determine where that stock will go in the future. The idea is that the past repeats itself, and certain patterns or indications can provide a clue on the future direction of the security. Many people have difficult putting faith in this approach, and many also fail to make it work.
At opposition to both approaches is the Efficient Market Hypothesis. This theory argues that markets are efficient at pricing in information, which means that all available information is priced in to a stock, making the profits of an investor random. Therefore, over the long term, investors should only expect to earn the average return of the market.
The facts support this theory well. Even highly educated and trained mutual fund managers are unable to consistently beat the stock market. With that in mind, people who believe in the efficiency of the stock market argue that we should simply put our money in to an index fund and let our return equal that of the market, which over the long term, are pretty good.
This is obviously not an encouraging commentary if you are an investor or trader who aspires to make money from the stock market. My aim is not to depress you, but rather, show you what I believe is the best approach to achieving what academic theorists believe is impossible; to consistently beat the stock market.
There are two assumptions that are the basis of the Efficient Market Hypothesis. First, you have to believe that the spread of information is fair, and second, you have to believe that investors are rational. I believe that both can be proven incorrect.
The truth is, the stock market is not fair. Every day, there are investors who benefit from their access to better information than the general market. To prove this, consider how many stocks behave abnormally before significant fundamental information is made public. Clichés like "Buy on rumor, sell on news" are based on this idea.
Secondly, investors are not always rational. In fact, investors are often emotional in their decision making, and tend to succumb to the whims of fear and greed when making investment decisions.
Therefore, to make money in the stock market, to achieve what Finance professors deem impossible, you must seek out opportunities where market efficiency is breaking down. You have to play stocks with inside information, or take advantage of human emotion and the short term mistakes that it causes in stock pricing.
Market efficiency breaks down through the valuation process of new information before the news, and when investors get emotional because of rapid price appreciation or decline. The best indication that either factor is at work is abnormal price and volume behavior. Private information is often at work in a market when a stock begins to trade abnormally, and this abnormal behavior tends to bring emotion with it. To beat the market, you have to trade abnormal behavior.
What do I mean by abnormal? Using statistical analysis, we can determine what a stock's price and volume ranges should be in the future based on how that stock has traded in the past. If the stock goes outside those ranges, then it is behaving with statistically significant abnormal behavior. This is the analysis that Stockscores does for all North American stocks.
The reason most people do not beat the stock market with either approach is because they apply their preferred analytical methodology with a view of the past, instead of a view toward the future. Forward thinking fundamental analysts (or those with inside information) motivate abnormal market behavior and abnormal market behavior gives some technical analysts clues as to what is going to happen in the future.
When you are analyzing a company, you have to ask, "What are the facts telling me will likely happen in the future? What do the well informed investors know that the rest of the market does not?"
As a trader, I focus on abnormal behavior because that is where market efficiency is usually breaking down, giving me a window of opportunity. I would love to have inside information on every stock out there, but that is a hopeless dream that would be illegal to act on even if it could happen. Instead, I trust that the stock market is not fair, and I follow the trail that the market leaves. While certainly not 100% effective, it does allow me to make a living from the stock market.
Back To Top
I follow 21 Canadian market indexes, including the TSX 60 (IT.TX60) and the Energy Index (IT.TTEN). Of the 21, only six have Sentiment Stockscores of 60 or higher. I looked the charts of those six, and the sectors that I think have the best potential are the Energy (IT.TTEN) and the Consumer Staples (IT.TTCS) sectors. These charts are showing optimism in an otherwise weak market, and the sectors are nearing technical breakouts.
Step two of my analysis this week was to look at stocks that form part of these two sectors, to see if some individual stocks stand out as good opportunities. I used the Gallery View tool with the Sector Watch to quickly inspect the charts of large Energy and Consumer Staples companies, and the following stocks look pretty good for longer term trade potential.
Back To Top
1. T.SHC
T.SHC has been forming an ascending triangle pattern since January, and is now tickling through resistance as the energy sector benefits from high commodity prices. This stock looks to be on the verge of extending an up trend, unless support at $62 is violated.
Back To Top
2. T.IMO
T.IMO has resistance at $64, but the rising bottoms over the last few months indicate optimism among investors, and the low volatility last week indicate that there is consensus on what this company is worth. If the stock can find a catalyst to break the stock through resistance should get an up trend started.
Back To Top
3. T.SBY
T.SBY is finding a little bit of resistance at $30.50, but the recent rising bottoms and a Sentiment Stockscores crossover above 60 last week are indications that investors are taking a liking to this stock, and it could make a break in to an up trend in the weeks to come. Volume was strong on Friday, which tells me there is some accumulation of the stock underway.
Back To Top
4. T.SC
Shoppers must be flocking to Shopper's Drugmart, because the stock has been in a strong up trend for some time. It has spent the last few months consolidation, but a recent break through resistance seems to be indicating that interest is picking up again, and we could see an extension of the uptrend in the weeks and months to come. Support is at $32, a move below that would cause concern.
Back To Top
References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
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.
Back To Top
|
If you wish to unsubscribe from the Stockscores.com Weekly Perspectives or change the format of email you are receiving please visit here. Copyright 2003 Market Perspectives Inc.
|
