The Death of Buy and Hold, the Rise of Buy and Trade Presentation to AAII Orlando January 19, 2011 Eleven Themes for 2011Market Timing and Stock Pickingwith ValuEngine and Technical AnalysisHow to Buy and Trade email@example.com 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 2011Without 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 State-Level 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 TechnicalsDJIA 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 BasisValuEngine’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 time-sensitive 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 six-month 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 200-week 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.
Why Buy and Trade? • Investors Do NOT want to Buy High and Sell LowWhen 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 PitfallA 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.
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