1 Simplest market timing
Market
timing depends on charts; the following describes how to use chart information
without creating charts. Most charts will not identify the peaks and bottoms of
the market as they depend on data (i.e. the stock prices). However, it would
reduce further loses. It is simpler than it sounds. Just follow the procedure
below.
The first part of
this technique detects market plunges, and the second part advises you when to
reenter the market. I have modified them.
How to detect market
plunges without charts (a.k.a. Death
Cross)
1.
Bring up Finviz.com.
2.
Enter SPY (or any ETF that simulates the
market).
3.
If SMA-200% is positive, it indicates that the
market plunge has not been detected and you can skip the following steps.
4.
The market is plunging if SMA-50% is more negative
than SMA-200%. To illustrate this condition, SMA-200% is -2% and SMA-50% is
-5%.
5.
Sell most stocks starting with the riskiest ones
first such as the ones with negative earnings, high P/Es and/or high
Debt/Equity. Obtain this info from Finviz.com by entering the symbol of the
stock you own.
6.
Conservative investors should sell only those
over-priced stocks. Aggressive investors should sell all stocks. Extremely
aggressive investors should sell all stocks, buy contra ETFs, and even short
stocks. I do not recommend beginners to be aggressive.
Use
the above in a reversed sense to detect whether the market has been recovering.
However, when the SMA-200% turns positive, I would start buying value stocks
(low P/E but the ‘E’ has to be positive, and/or low Debt/Equity).
1. Bring up Finviz.com.
2. Enter SPY (or any ETF that simulates the market).
3. If SMA-200% is negative, the market is not recovering,
and you can skip the following steps.
4. Sell all contra ETFs and close all shorts if you have
any.
5.
Market recovery
is confirmed when SMA-50% is more positive than SMA-200%. To illustrate this
condition, SMA-200% is 2% and SMA-50% is 5%. Commit a large percent of cash (or
all cash for aggressive investors) to stocks. If you do not know what to buy,
buy SPY or an ETF that simulates the market.
Do the above once a month. When the SPY price is closer
to SMA actions percentage, perform the above once a week. The charts and data
for market timing described in this book are based on SMA-350 (Simple Moving
Average) that is more preferable than this simple procedure, but it requires
some simple charting.
2 Simplest way to evaluate stocks
Beginners should trade ETFs only.
This chapter is for the readers who are ready or getting ready to trade stocks.
Many stock researches have
already been done recently and some are available free of charge. I have no
affiliation with Fidelity except I retired from it. You can open an account
with them with no balance. Their Equity Summary Score is one of the best
indicators; I check out value stocks
with score higher than 8.
Several sources
The popular ones are Morningstar,
Value Line, The Street and Zacks (currently free for rankings of individual
stocks). If they are not free, check out whether they are available from your
local library. I have 3 simple ways to evaluate stocks starting with the
simplest. In addition, read the articles on the selected stocks from Fidelity,
Finviz, Seeking Alpha and many other sources for further evaluation.
Fidelity
Select only stocks that have
Fidelity’s Equity Summary Score 8 or higher. There are tons of information
about a stock.
A modified stock selection based on a magazine article
Most metrics are available from
Finviz.
1. Forward
P/E (expected earnings and not based on the last twelve months). It should
range from 5 to 15 (10 to 25 for high tech stocks).
EV/EBITDA (from
Yahoo!Finance) is a better choice as it includes the debts and cash than P/E;
it would be more effective if it uses forward earnings. If you do not use
EV/EBITDA, ensure Debt/Equity is less than 0.5 except for the debt-intensive
industries.
2. ROE
(Return of Equity) measures how well the company uses the capital. I prefer
stocks with ROE greater than 5%.
3. Volatility.
Conservative investors should select stocks with a beta of less than one (i.e.
less volatile).
4. Insider
Transactions from should be less than 5%.
5. Momentum.
Check out the SMA-50 (actually SMA-50%) and SMA-200. Ideally they should be
positive. It is especially important for stocks you do not want to keep for a
long time.
A simple scoring system using Finviz
Bring up Finviz.com and then enter
the stock symbol.
|
No.
|
Metric
|
Good
|
Bad
|
Score
|
|
1
|
Forward P/E1
|
Between 2.5 and 12.5, Score
= 2
|
> 50 or < 0, Score =
-1
|
|
|
2
|
P/ FCF1
|
< 12, Score
= 1
|
>30 or < 0, Score = -1
|
|
|
3
|
P/S1
|
< 0.8, Score
= 1
|
< 0, Score = -1
|
|
|
4
|
P/ B1
|
< 1, Score
= 1
|
< 0, Score = -1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compare quarter to quarter
of last year
|
|
|
|
|
5
|
Sales Q/Q
|
> 15%, Score = 1
|
< 0, Score = -1
|
|
|
6
|
EPS Q/Q
|
> 20% , Score = 1
|
< 0, Score = -1
|
|
|
|
|
|
|
|
|
|
|
|
Grand Score
|
|
|
|
Stock Symbol Date2
|
Current Price
|
SPY
|
|
Footnote
1
Negative
values for Sales (due to accounting adjustments), Equity and Book are possible
but not likely.
2
The last
row is for your information only. SPY is used to measure whether it will beat
the market by comparing the return of this stock to the return of SPY.
The Score
Score each metric and sum up all
the scores giving the Grand Score. If the Grand Score is 3, the stock passes
this scoring system. Even if it is a 2, it still deserves further analysis if you
have time. You may want to add scores from other vendors. To illustrate on
using Fidelity, add 1 to the score if Fidelity’s Equity Summary score is 8 or
higher. Monitor the performance after every 6 months or so to see whether this
scoring system beats the market.
Very basic advice for beginners
Beginners should stick with U.S.
stocks with Market Cap greater than 800 M (million), Debt/Equity less than .25
(25%) except for debt-intensive industries such as utilities and airlines and
Forward P/E between 5 to 20 (25 for high-tech companies). These metrics are all
available from Finviz.com, which is free.
Do not have more than 20% of your
portfolio in one stock (unless it is an ETF or mutual fund) and do not have
more than 30% of your portfolio in one sector.
For more conservative investors,
buy non-volatile stocks whose beta (available from Yahoo!Finance) is less than
1. Beta of 1 represents the market (the S&P 500 index). For example, a
stock with beta 1.5 statistically fluctuates more than 50% of the market and
hence it is very volatile.
Try paper trading to check out
your strategy and your skill in trading stocks. If your broker does not provide
one, use a spreadsheet to record your trades or check the availability of
simulator.investopedia.com.
# Filler 12 noon is not 12 pm
The Chinese restaurant I went to says they are open at 12
am. Are they wrong or is the world wrong?
The next hour after 11 am is 12 am, NOT 12 pm. The one who set it up did it
totally wrong and no one complains about it until now. If I were born earlier,
I would have corrected it.
