Transcript Slide 1

The Death of Buy and Hold, the Rise of Buy and Trade
Presentation to AAII Orlando
January 19, 2011
Eleven Themes for 2011
Market Timing and Stock Picking with ValuEngine and Technical Analysis
How to Buy and Trade
[email protected]
813-929-9702
813-777-3529 Cell
• Chief Market Strategist,
ValuEngine.com
• Georgia Tech, Bachelor of
Industrial Engineering,
1966
• Brooklyn Poly, Master of
Science, Operations
Research, Systems
Analysis, 1970
• Registered Principal and
Investment Advisor
• Commentator/Analyst for
CNBC, Fox Business, BNN
in Canada, Yahoo Tech
Ticker, Seeking Alpha
Themes and Predictions for 2011
• Home Prices will Resume their Decline
Themes and Predictions for 2011
• Community Banks Challenged by $1.43 trillion in Commercial Real
Estate (CRE) Loans
Themes and Predictions for 2011
• Fannie Mae and Freddie Mac Consume More Tax Dollars
The US Treasury provides unlimited lines of credit through 2012. Policy Makers and
Regulators need to unwind the activities of these GSEs. Ginnie Mae should become
the go to agency for new mortgages.
• 9% + Unemployment Rate for all of 2011
Without a housing recovery or a solution to the related banking issues, the labor
market cannot return to normal.
• QE2 is a Failure
The yield on the 10-Year could rise to my annual value level at 3.791-- which is only
22.3 basis points higher than the December 16th level at 3.568. My prediction is that
yields will decline again with the 10-Year yield declining to my annual risky level at
2.690.
Themes and Predictions for 2011
• Comex Gold has Gone Parabolic
There will be a test of my annual value level at $1356.5-- if not lower-- in 2011.
• Nymex Crude Oil is Headed above $100/Barrel
With or without this strength, crude oil will have a weekly close below my semiannual
pivot at $87.52, and will end 2011 lower on the year.
• Euro “PIIGS” Nations Problems will Trump USA’s StateLevel Problems
Due to Euro-denominated issues, that currency will have a weekly close below my
quarterly pivot at 1.3227 resulting in a trend below 1.2972.
• US Stocks Show Strong Technicals
DJIA will show weakness to my semiannual value level at 9,449, after getting a weekly
close below my annual pivot at 11,491. Stocks will close within 2% of the 2010 closes.
• Stocks are NOT Cheap on a Fundamental Basis
ValuEngine’s Valuation Model shows all sectors overvalued. Almost 2/3 of universe
overvalued, @ 1/3 overvalued by 20% or More.
Market Timing and Stock Picking with ValuEngine
• 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. When the price is declining, the technicals
are deteriorating.
The Valuation Model
This model calculates what a stock should trade at based on its fundamental economic data if the
market were completely rational and efficient. The Stock Valuation Model considers many timesensitive variables--such as a stock’s EPS growth, analyst estimates and consensus, and the interest
rate environment. If any of the variables change, the model price changes immediately and the fair value
is re-calculated. By operating in this manner, the model calculates fair value in near real time.
Our Stock Valuation Model considers the variables below:
* Long-run EPS growth rate
* Duration of Business-growth-cycle
* Volatility of EPS growth rate
* Systematic or beta risk of the firm
* Correlation between the firm's EPS and the interest rate environment
* EPS growth volatility
* Dividend payout ratio
* Buffer earnings
* Interest rate (30 year yield) long-run level
* Duration of interest rate cycle
* Interest rate volatility
The Forecast Model
The ValuEngine Forecast model analyzes stock prices from a different perspective. Unlike the Stock
Valuation model--which merely states what a stock’s price should be assuming a totally efficient market,
the Stock Forecast Model predicts what a stock’s price will be at a specified future time period given
current market conditions. The Forecast Model builds upon the output of the Stock Valuation Model by
combining it with econometric and simulation techniques to output target prices for one, three, and sixmonth and one, two, and three-year time horizons, as well as a percentage probability for gains and
losses.
The Stock Forecast Model uses a distinct forecasting model for the six forecast time horizons for every
industry. It considers--among other things, short-term price reversals, intermediate-term momentum
continuation, and long-term price reversals. As with our Stock Valuation Model, parameters are updated
in real time. While the dynamic environment of the financial markets precludes forecasting with
absolute certainty, our Forecast Model’s inclusion of micro/macro, short term/long term parameters and
the use of probability statistics, results in forecasts that are robust and actionable. The forecast figures
are especially useful for comparing tickers to each other in order to determine the best investment
targets for a given timeframe.
The Ratings Model
ValuEngine's Ratings Model rates stocks on a 1-5 "engine" scale. The Engine Rating is based on the
Forecast Model’s Long-Term Return Calculations. The model evaluates Forecast Model criteria for each
ticker in our 5500+ stock universe every single day and then assigns a rating.
The ratings are assigned as follows:
•Strong Buy – projected to rally 12% or more over the next twelve months.
•Buy - projected to rally 5% to 12% over the next twelve months.
•Hold - projected to decline by no more than 5% or to rally no more than 5% over the next twelve months.
•Sell - projected to decline 5% to 12% over the next twelve months.
•Strong Sell - projected to decline 12% or more over the next twelve months.
Over time, these ratings have been extensively back tested and tracked going forward both internally
here at ValuEngine and by outside auditors. The results have indicated that the ratings system is both
symmetric and predictive. Portfolios constructed with just the "5-Engine" stocks and then rebalanced
once a month since 2000 have returned an average of more than 20% on an annual basis!
Calling the Bottom: March 5, 2009
ValuEngine’s Valuation Model Showed all Sectors
Extremely Undervalued
ValuEngine’s Fundamentally-Based Valuations Concurred with
Technical Analysis of the Dow’s Monthly Chart
•Up Trend
Following
the Crash of
1987 Tested
•Fibonacci
Retracement
Levels
Testing the
61.8%
Retracement
of the Entire
Rally—Low
of 1987 to
October
2007 High
DJIA Monthly Chart
•In Early March, 2009, Markets were in a Freefall, but ValuEngine’s
Fundamentally-based Sector Valuation Data and my Technically-focused Analysis
Indicated a Market Bottom.
I made my Call and Predicted a 40% to 50% Bear Market Rally.
Calling the Top: April 26, 2010
ValuEngine’s Valuation Model Showed all Eleven Sectors
Overvalued
Again, the Fundamentally-Based Valuations Concurred with my
Technically-Focused Read of the Chart
•Fibonacci
Retracement
Levels from
the October
2007 high to
the March
2009 low.
•The 61.8%
Retracement
Level Tested
on April 26th.
•The Dow
could not
Sustain Gains
above its 200week SMA
DJIA Monthly Chart
•In Late April, 2010, Markets were Roaring Back, but once again ValuEngine’s
Fundamentally-based Sector Valuation Data and my Technically-focused Analysis
Indicated a Turning Point.
I Called a Top.
Current ValuEngine Sector Valuations
Sector
13-Jan-11
Aerospace
8.84% overvalued
Auto-Tires-Trucks
17.61% overvalued
Basic Materials
21.98% overvalued
Business Services
14.63% overvalued
Computer and Technology
11.84% overvalued
Construction
2.02% overvalued
Consumer Discretionary
6.44% overvalued
Consumer Staples
7.30% overvalued
Finance
8.01% overvalued
Industrial Products
13.41% overvalued
Medical
0.89% overvalued
Multi-Sector Conglomerates
15.99% overvalued
Oils-Energy
28.45% overvalued
Retail-Wholesale
8.37% overvalued
Transportation
15.30% overvalued
Utilities
7.03% overvalued
Current ValuEngine Universe Valuations
Date
07/01/10
01/13/11
Stocks Undervalued
75.89%
35.10%
Stocks Overvalued
24.11%
64.90%
Stocks Undervalued by 20%
45.34%
15.28%
Stocks Overvalued by 20%
9.06%
30.23%
sp500
1030.71
1285.96
Why Buy and Trade?
• Investors Do NOT want to Buy High and Sell Low
When a stock moves lower, the tendency is to sell at or near a bottom. For equity
money managers, they may have to sell to meet redemptions. When a stock moves
higher, many investors try to chase the momentum. For equity money managers, it’s
chasing performance.
• Buy and Trade avoids this Pitfall
A bad reaction to an earnings report typically forces investors to sell a buy-rated
stock. However, with “Buy and Trade” you add to the position at a value level.
Similarly, when investors chase stocks that pop higher on positive earnings reports,
you sell the strength at a risky level and book a nice profit.
• A Successful Strategy Leaves some Money on the Table
How Buy and Trade Works
•Combine ValuEngine’s Fundamentally-Based Ratings System
and Technical Analysis for Individual Equities
•Use ValuEngine Buy/Sell/Hold Calls
•Establish Technical Levels for Each Equity
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.
A Practical Look at Buy and Trade--INTC
•Entered the ValuTrader Model
Portfolio at $19.40 on Feb 8th, sold
at $23.57 on April 14th for a gain of
21.5%.
•Entered again at $20.25 on May
21st, sold at $21.95 on June 3rd
for a gain of 8.4%.
•Entered again at $20.38 on June
7th and added to on July 1st on
weakness to $19.07. Sold at $19.94
on July 7th for a FIFO loss of 1.7%.
The second position was sold at
$22.06 on July 14th for a gain of
15.7%.
•Entered again at $19.17 on August
12th, sold at $21.59 on November
12 for a gain of 12.6%.
•Intel returned on January 3rd at
$20.80.
A Practical Look at Buy and Trade-- ADBE
•Entered the ValuTrader Model
Portfolio at $32.30 on Feb 8th, sold at
$35.96 on April 22nd for a gain of
11.3%.
•Entered again at $31.00 on May 21st,
sold at $33.46 on June 18th for a gain
of 7.9%.
•Entered again at $30.15 on June 24th
and added a second position on
weakness to $28.48 on August 11th,
both were sold at $29.05 on Sept 2nd
for a loss of 3.6% and a gain of 2.0%.
•Entered again at $25.90 on Sept
22nd, sold at $27.89 on October 2nd
for a gain of 7.7%.
•Entered again at $27.80 on Dec 14th,
sold at $30.98 on Dec 21st for a gain
of 11.4%.
•Stock currently rates a BUY at
$32.14, but is projected to gain less
than 7.5% over the next twelve
months.
The ValuTrader Model Portfolio on January 10, 2011
Ticker
Company Name
Entry
Date
Entry
Price
Current
Price
G/L
Value
Level
Pivot
Risky
Level
BA
BOEING CO
10-Nov
$67.69
$69.38
2.50%
58.16 M
68.73 W
72.61 Q
8-Dec
$65.85
$69.38
5.40%
16.86 S
19.69 W
23.81 A
BBY
BEST BUY
20-Dec
$34.02
$35.37
4.00%
CSCO
CISCO SYSTEMS
16-Nov
$19.74
$20.97
6.20%
23-Nov
$19.18
$20.97
9.30%
HPQ
HEWLETT-PACKARD
13-Dec
$41.60
$45.09
8.40%
33.37 M
43.86 W
46.20 S
INTC
INTEL CORP
3-Jan
$20.80
$20.66
-0.70%
17.52 M
20.86 S
21.94 S
LMT
LOCKHEED MARTIN
8-Dec
$69.37
$73.63
6.10%
65.59 W
MMM
3-M COMPANY
8-Dec
$83.23
$86.23
3.60%
77.97 M
85.38 W
95.34 A
RYL
RYLAND GROUP
5-Oct
$16.94
$18.07
6.70%
STI
SUNTRUST BANKS
22-Nov
$23.85
$28.80
20.80%
XOM
EXXON MOBIL
8-Nov
$69.50
$75.59
8.80%
61.21 M
74.08 W
76.02 S
90.50 A
Implementing the Strategy
•ValuEngine Offers a Variety of Newsletters, our Website, a Professional
Institutional Software Package (VEI), and Other Tools for Implementing
a Buy and Trade Strategy
•Money Management Services are also Available via Niagara Capital Management