Simplest technques from my book Complete the art of investing

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.

When to return to the market (a.k.a. Golden Cross)

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.