Mixing the Oil of Fundamentals with the Water of Technical Analysis to Trade Stocks

Quantitative Work Alliance for Applied Finance, Education and

Wisdom - QWAFAFEW, May 12, 2010

Richard Suttmeier, Chief Market StrategistValuEngine.com & Niagara International Capital Limited

Richard SuttmeierChief Market Strategist, ValuEngine.comChief Market Strategist, Niagara International Capital LimitedGeorgia Tech, Bachelor of Industrial Engineering, 1966Brooklyn Poly, Master of Science, Operations Research, Systems Analysis, 1970Industry Licenses, Registered Principal and Investment AdvisorFrequently seen on financial TV including: CNBC, Fox Business, BNN in Canada, and On the Internet

Sector Valuations - ValuEngine

Sector Valuations - ValuEngine

Mixing Fundamental And Technical Analysis

Mixing fundamental and technical analysis is like trying to mix oil and water.I believe that stock screening of fundamental data and viewing daily and weekly chart patterns are equally important in measuring a stock’s risk / reward.A stock becomes more fundamentally positive when the price of the stock goes down, and less fundamentally positive as the price goes up.When the price of a stock trends higher the technicals are improving, and when the price is declining the technicals are deteriorating.

I Distill this Mix with my own Proprietary Analytics

A value level is a price at which investors should add to a long position on share price weakness, or begin to cover a short position.A risky level is a price at which investors should reduce a long position on share price strength, or add to a short position.A pivot is a price that should be a magnet during the time frame specified. This is a level at which to consider more aggressive positions adjustments. A violated value level and risky level becomes a pivot for the remainder of the time horizon and has an 85% chance of being tested in that time period.These levels are calculated in weekly (W), monthly (M), quarterly (Q), semiannual (S) and annual (A) time horizons, based on the past nine closes in each time horizon. My theory is that the closes over a nine-year period are the summation of all bullish and bearish events for that market or specific stock. These levels are the most important element of my Buy and Trade Strategy.

I Advocate Good Until Cancelled (GTC) Orders

Buy and Trade Guidelines: Investors should consider entering good until cancelled (GTC) orders to adjust positions when/if share prices reach critical technical levels.Buy weakness to a Value Level or sell strength to a Risky Level.If a market opens below a value level the execution is at the open price. If a market opens above a risky level the execution is at the open price.I have new weekly levels on Monday, and new monthly levels on the first of the month, etc.

The ValuEngine Stock Valuation Model

A company's trailing 12-month Earnings-Per-ShareAnalyst consensus estimate of the company's forecasted 12-month EPSThe 30-year Treasury yield. These variables are combined to create a more accurate reflection of a company's Fair Value.

The Bear Market of 2007 - 2009My first warning came prematurely on March 1, 2007.My reasoning was that you cannot have a bull market for stocks with a bear market in Housing and Financials.In October I said that the Dow will not sustain gains above 14,000.I said, “Beware of the Ides of October, as solid gold earnings are factored into Dow 14K”.I Predicted that the next 2000 points would be down not up.

Identifying the March 6, 2009 BottomFundamentally ValuEngine showed all eleven sectors extremely undervalued, by 32% to 44.9%.With stocks in freefall I needed a technical reason to predict a 40% to 50% bear market rally.I found the supports I needed by dissecting the monthly chart for the Dow.

Identifying the March 6, 2009 BottomI looked at the up trend that goes back to the low following the Crash of 1987, and that trend was being tested.I drew the Fibonacci Retracement Levels and it was testing the 61.8% retracement of the entire rally from the 1987 low to the October 2007 high.

Identifying the March 6, 2009 Bottom

Identifying the April 26 Top

Identifying the April 26 TopI drew the Fibonacci Retracement Levels between the October 2007 high and the March 2009 low and the 61.8% retracement was tested on April 26th.The Dow could not sustain gains above its 200-week simple moving average at 11,134.My annual and semiannual risky levels are 11,235 and 11,442 contained the high of 11,258.My Market Call Has Been: Dow 8,500 Before 11,500.

Stock Picking Using ValuEngine.com

The Valuation ModelUsing the Valuation Model a “5” Engine Rating is a Strong Buy – Only 2% of stocks have this rating.On a bell-shaped curve – 15% are rated a “4” Engine or Buy.63% are rated a “3” Engine or Hold.15% are rated a “2” Engine or Sell.5% are rated a “1” Engine or Strong Sell.

Fair ValueWhere a stock should trade in a perfect world.Primarily based upon 12 month trailing EPS, 12 month forward EPS estimates from Wall Street, and the yield on the 30-Year Bond.17 other variables have a smaller influence on a stock’s fair value.An ideal stock pick has a “4” or “5” rating and is undervalued by at least 20%. Only 120 stocks trading above $10 per share meet this criteria.

Forecasting ModelThe predictive variables used in ValuEngine forecasting models include: proprietary and well-established forecasting variables derived from credible financial research studies. ValuEngine uses a distinct forecasting model for 6 time horizons and each of the 11 sectors that ValuEngine covers.I like to see stocks that are projected to gain at least 20% over the next twelve months.Only 37 stocks are rated a “3” or better, are trading above $10 a share and projected to gain at least 20% over the next 12 months.

Mixing In The TechnicalsWouldn’t it be nice to pick stocks that were rated a “4” or “5”, that trade above $10 a share, are 20% undervalued and projected to rise 20% over the next 12 months? And, have a positive weekly chart profile?It’s next to impossible! Only 8 stocks screened with these VE characteristics.None are brand names worth discussing.

The Weekly Chart for Intel Inc (INTC)

Buy and Trade Intel Inc (INTC)On May 7 at $21.31 Fair Value was $27.99 making Intel 23.9% undervalued.The VE Forecasting Model showed 1.3% downside risk over the next 12 months. This suggests a trading range.Intel was added to the ValuEngine ValuTrader Model Portfolio at $19.40 on February 8th when the Dow had value below 9,900.Whether you are long or short the strategy is the same. Reduce a long or increase a short on a GTC order to sell strength to my monthly risky level at $23.57, which was tested on April 14th. The ValuTrader Model Portfolio captured 21.5% for this Buy and Trade Strategy.Intel traded as low as $19.90 on May 6, which was a test of the 200-week simple moving average at $20.20 where a GTC order was an appropriate strategy. My monthly pivot is $21.05, which has been a magnet and this week’s risky level is $23.75.