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Where Do We Go From Here? – Part 2

Friday, September 19, 2014

by Rich Jamison   

People responded to last week’s JFG Insights (read it here) by saying,

“I agree about acting according to what the market is telling me. But how do I interpret what the market is saying? It’s all Greek to me.”

(A quick memory jogger: Don’t even try to predict. Use what’s working; shun what’s not. It’s often expressed as “Let your winners ride and cut your losers” also.)

Let’s rephrase the question into how can we determine “what’s working” and “what’s not” in order to act on that information?

How We Go About This

Suppose a company’s stock becomes questionable. This is the way we approach classifying winners and losers. It will help you understand what we look for in making this determination.

Fundamentals:

This part is rather straightforward. Has anything critical happened to the company?

Technicals:

This part takes a bit more work to pull out the insight within it. We look to our primary indicators for changes.

Our Primary Indicators

We monitor 5 primary indicators; 4 are based on Relative Strength (RS); the 5th is based on the trend. (Remember, you can think of our often discussed, old friend RS as an arm wrestling match between two contenders. It’s a measure of how well one contender is performing versus some other contender.)

This is what they show:

  1. Relative Strength versus the overall market long-term.
  2. Relative Strength versus the overall market intermediate-term.
  3. Relative Strength versus the stock’s peer group long-term.
  4. Relative Strength versus the stocks peer group intermediate-term.
  5. The stock’s trend.

Scoring:

We can rank these 5 tests by giving 1 point for each win and 0 for each loss. Thus we can assign a score of from 0 to 5 for each contender we evaluate.

If a stock scores a 5, it is technically a strong stock, a market leader. If a stock scores 0, it is a weak stock – one that carries more risk. That doesn’t mean its score can’t rise with time, but why take the risk if we can use already strong ones instead?

So What Has the Market Told Us?

Typically, we consider stocks with scores of 3 to 5 to be acceptable to buy or hold. (It is impractical to want every stock you buy to have a 5. Having three or more is sufficient.)

This score is a useful tool for evaluating existing portfolios. First, look for those stocks which have less than 3 of 5 points. Those will be the names you will want to look to weed out of the portfolio first. Then restrict any new buying and positions you currently hold to those stocks which have three or more points. Nothing is guaranteed in this field. What we look to do is keep the odds in our favor.

Do You Have to Learn Greek?

Is it really a foreign language? No, it’s mathematics. More correctly, it’s arithmetic – doesn’t deserve the higher classification. Can anyone learn to speak this form of Greek? I’d say sure, if you have both the desire and the time to devote to it. But it’s more important to understand the underlying principles of it. You can always hire a translator to do the detail work.

Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; www.NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; www.investing.com; www.markit.com; the New York Times; www.standardandpoors.com; www.djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; www.dol.gov; www.fxstreet.com; www.streetinsider.com; www.ycharts.com
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of September 19, 2014 and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

© 2014 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information presented. Commercial use is prohibited.