Week's performance

Good day,

It’s time to take stock of the week’s performance again. Before I measure the performance of the stocks KUTE selected, let’s first look at the markets’ performance. At the beginning of the week, KUTE has predicted that the market will be trading broadly within range with likely downside retraction. DJIA opened at 9,972.33 and closed last night at 9,712.73. The heady gains that followed a better-than-expected GDP headline number in the previous session proved unsustainable as sellers returned to action last night to send stocks sharply lower. Losses were broad-based as nearly 95% of the issues in the S&P 500 logged losses, which contributed to the worst weekly loss in five months for the broad market measure. During the week, DJIA’s high was 10.107.99 and lowest was 9,664.89.

With the macro view, I decided to buy on dip and sell on 10% target for the 2 stocks that had passed through my KUTE criteria. For PTEN, the stock opened at $17.00 and closed last night at $15.58. It went up to the highest at $17.62 and lowest at $15.34 for the week. As mentioned in my blog on Friday morning, I sold 2 positions at $17.30, held on to 2 more positions and bought 1 more last night at $15.79.

CAH opened the week at $28.66 and closed at $28.34. Its’ week range was $28.22 to $29.10. To be honest, I didn’t buy CAH because I was sticking to my 30-20-50 rule and I traded PTEN to the max of 50% of my capital because I wanted to leverage on the stock’s high beta. With the decision from KUTE, I made money even though the markets were down for the week. As a portfolio, I am losing in the stocks I held in Citibank. It closed last night at $4.09. Again I would like to emphasise that Citibank is bought out of the scope of criteria for KUTE system and I have the intention that it will form part of my 30% holding portion. With the world economy recovering, I can only choose to believe I will soon be back in the money for this stock. For my 30-20-50 rules, the time horizon is more than 6 months for 30 and trading within the week for the 50. The 20 portion is for liquidity and there could be situations that the stocks in 50 will be held as part of the 30.

As for the rest of the stocks that were filtered using the fundamental criteria, MLI opened the week at $25.72 and closed the week at $23.66, DRIV opened at $23.74 and closed down at $22.83, WTS opened at $30.81 and closed down at $28.25, EIX opened at $32.64 and closed the week down at $31.83 and BHI opened at $45.36 and closed the week down at $42.07. These are stocks that did not pass through the technical of the KUTE system and was not traded.

Have a great day and see you soon on Monday morning for the new stocks to trade next week.

God bless!

Francies Cheng
BBus MAppliedFinance

Made money again in PTEN

Good morning,
What an interesting night to begin with. The markets were higher after the government said the US economy grew in the third quarter for the first time in more than a year. GDP was up 3.5%, better than expectations of 3.3%. I remembered reading a research article from a very prominent private bank just a few days ago that strongly believes US will underperform and forecasted the GDP to grow less than 3%. I have also mentioned in my previous blog that senior stock analysts always have differing views of the stock forecasted price movements. Who should we really believe?
It is not easy to be successful and make money consistently in stock trading. The only way to be successful is to work hard and do enough home work to analysis the companies of the stocks to buy. It is important to have a set of rules for stocks selection, entry and exit plan, money management policy and apply all these with determination and controlled emotion. Not easy isn’t it?
So my KUTE system is quite right so far for the week. The market did trade within range broadly. When DJIA was up 1.54% in the early trading session, PTEN was up 9.3% at $17.30. At this price, I took profit for 2 open positions for PTEN at 10% returns when the stock hit the limits I pre-ordered when I bought the shares. So I have betted correctly as mentioned yesterday with the macros and traded on PTEN’s beta. I still have 2 more open positions running in the money. The stock closed at $16.74, up 7.17%. CAH closed 1.38% higher to close at $28.69 and EIX up 0.56% to close at $32.12.
Have a good day.
Francies Cheng
BBus MAppliedFinance

Beta is one of my criteria factor

Good morning,

The recent decline of the stock market helps define my KUTE system selection criteria. Over the period that the stock market dipped, companies with good fundamentals also fall along with the market. As mentioned yesterday, the stocks selected have to pass through all the steps required before I decide to trade. But I did lost money on fundamentally good companies when the market fell. I have always emphasis that I only use technical to understand current market behavior and not as a tool to predict the future. Technical only give me an indication of the possible direction of the market taking into consideration the current market data. Cycle Trend helps me to understand market economic and stock cycles, candles tell me the current participants’ inclination and the demand and supply of the buyers and sellers and Bollinger helps me to understand the potential decision of the traders. Combined with fundamentally sound companies and taking into consideration of the macro, the chances of making money should be very high. But I still lost. After much thought, I realized that I have missed out one very important factor that I did not include in my criteria. That is the stock’s beta.

What is beta? In finance, beta of the stock is a number describing the relation of its returns with that of the financial market the stock is listed in. It is also a measure of the level of risk of the stock with that of the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa. Beta can be estimated for individual companies using regression analysis against a stock market index or looking in the internet for the company research which normally will show its’ beta. Beta is also widely used in portfolio construction to equalize correlated risks to form a truly diversified portfolio.

In KUTE system, the first step for stock selection is to understand the current macro and possible market direction using Cycle Trend and Candles. I mentioned yesterday that if the market is trading broadly within range, I will buy on dip and sell on target. I must also mention that my tactical trading style will change along with the macro. If the market is trending up and bullish, I will buy and ride the trend with trailing stop losses. What if the market is declining or trending down? Even if the company is fundamentally good, there is a possibility that the stock will decline along with the market. That’s where beta is important. If KUTE macro is indicating an uptrend or broad range, I will look for companies with beta that is more than 1.5. If the market is declining, should I look for companies with negative beta of less than 1?

US stocks were mired in weakness for virtually the entire session as buyers stepped to the sidelines despite another batch of generally better-than-expected earnings. DJIA closed 1.21% lower at 9,762.69, Nasdaq down 2.67% to close at 2,051 while the broader S&P500 closed at 1042.63, down 1.95%. NYSE has 86% declines and 12% advances while there were 82% declines and 12% advances in S&P500. The market performed to KUTE’s expectation. As for the selected shares, PTEN was down 4.35% at $15.62. I bought again at $15.73. CAH was down 1.53% at $28.30 and EIX was down 1.27% at $31.94. I am expecting PTEN to rebound more than the market and betting to catch the upside of the volatility.

And there’s still 2 more trading sessions for the week.

Have a great day!

Francies Cheng
BBus MAppliedFinance

How stocks are selected

Good morning,

I read the Fortune magazine as part of my weekly routine to keep myself updated for investment ideas. One interesting feature I notice is the Face-Off section in the Investing page. It always features 2 senior research analysts’ review of a selected stock and their forecast of the future direction of the stock price. What interest me is that the 2 featured analysts always have differing views. One will always be bullish and predict the stock to advance and the other will be bearish and predict the stock’s price decline. Interesting isn’t it? Whose advice should you follow?

So where did you find the last five stocks you bought? From your broker, or a good friend, or a web site promising fantastic returns, or a well known news letter? Were these good companies selling at a substantially discounted price? Why were these companies the best available investing candidates? Did they perform as you were led to believe they would? If you cannot answer these questions or are not happy with the answers, then you might want to reconsider your stock selection criteria.

Stock selection is an important step in building a quality portfolio. The selection criterion an investor uses to select stocks for their portfolio is a major factor contributing to their investing success. The KUTE system I use take the best of fundament and technical analysis: Fundamental analysis to find quality companies whose stock is undervalued and technical analysis to time entry and exit points. It first determines the macros of the markets and its’ forecasted direction and having establish the markets’ trading behavior, screens for companies that are good businesses that earn more relative to the price being paid than others. Good businesses have high Return on Capital. Companies that earn more relative to the price being paid have a high Earnings Yield. Company growth rates are another criterion I use in evaluating companies. I aim for mature companies with high, stable growth rates, which is an assumption based on historical analysis, current performance, and cash flows, earnings, sales, dividends, and book values. In addition, we look for companies that have the ability and able to efficiently pay off long term debt and not carry it on their balance sheet for extended time periods.

Operating cash flow is also considered as cash flow is a better indicator of a company's financial earnings power than net income. A company can show positive earnings and not be generating cash to pay bills. Operating cash flow provides a better financial measure of financial performance. While stock screeners are very helpful to potential investment candidates, they are no substitute for good old fashioned homework. One other important step KUTE system requires further analysis of the company’s information. Some of the best sources for information on a company is their Securities and Exchange Commission (SEC) filings, especially the 10K (annual report) and 10Q (quarterly report). Their other filings with the SEC can make interesting reading since they must report such actions as changes in executive management, new financing, changes in significant ownership, insider buys and sales, and acquisitions or divestures. It is helpful to know if management has an existing and growing stake in the company through stock and option ownership. If management is positive on the prospects for the company, then investors should be as well.

Once this is done, KUTE system uses Technical analysis to provide the best way to establish these selected stocks’ buying rules. The KUTE’s secret is to use the technical signs on the chart to develop the rules of when and where to buy the chosen stock. After all, you are preparing to commit your hard earned money, so you want to be as sure the trade criteria is the best it can be. So if the technical show strong buying signals for the week, I will buy when the price dip below the week’s opening price, believing that it should close higher at the close of the week. Honestly even if the stock does not close higher than expected, it is still alright to hold since it was first selected because the company is fundamentally sound and the price should rise in the near future.

Finally, the money management rule is established and above all, the success of the trades depends on the trader’s psychology and nerve to strictly follow all the rules for trading. I must be honest that while I am pretty successful so far using KUTE, I am still learning to control my emotion to strictly follow the full rules of KUTE.

So how did the stocks selected by KUTE performed last night? On the macros DJIA rose 14.21, or 0.1 percent, to 9,882.17. The broader Standard & Poor's 500 index fell 3.54, or 0.3 percent, to 1,063.41, while Nasdaq fell 25.76, or 1.2 percent, to 2,116.09, and traded the day within broad range, as expected. PTEN was up 0.18% to close at $16.33 and CAH up 0.1% at $28.74. PTEN has dipped to the low of $15.99 and rose at $16.67 during the trading period. With 2 stocks fell for every 1 that rose on NYSE, the stocks selected did pretty well. The other stock I am monitoring, EIX, closed at $32.35, down -0.09%.

Have a great day ahead.

Francies Cheng

BBus MAppliedFinance

Bad start to the week

Good Morning,

DJIA opened the week with advances in almost every sector bolstered by new signs economies in Asia are well on their way to recovery and investors brace for the government's first reading on the economy in the third quarter later in the week and fresh earnings reports and debt auctions. However, the market dropped in broad-based fashion after they failed to extend an early gain and the U.S. dollar made another strong move off of its yearly low and as stocks stalled, sellers stepped in and undercut the early advance. That caused stocks to drop sharply and spend the rest of the afternoon trading in negative territory. There were 74% declines against 23% advances for the DJIA and 68% declines against 28% advances for the broader based Nasdaq.

PTEN traded below $17.00 in the morning (US time) and as planned to buy on dip, I bought at $17.00 and $16.98 respectively. The stock performed badly and it lost 4.12% to close at $16.30. CAH ranged between $28.62 and $29.04 in the morning. In fact, all the stocks I screened yesterday for the week opened higher last night but failed to hold on to the gains. Only CAH ended positive to close at $28.71 and WTS at $30.85. Since I decided to trade only PTEN and CAH this week, I have started the week in the negative territory and I am glad that I have faithfully applied my 30-20-50 money management rule. I have lost buy it is still early and I am sure the stocks will rebound.

My friend told me yesterday that he attended one of the options class and he was taught to analysis both calls and puts open trades to determine the stock’s direction. He said that if there are more calls than puts, the stock will be bullish, and vice versa. It is interesting as observing open positions in options are also one of my stock selection criteria, though not a main factor I use to choose the stock. However, I don’t quite agree with his options lecturer. I believe most of the trades in options are to hedge against stock traders’ position. I have observed that when there are more calls, the stock is most likely to decline and when there are more puts, the stock is more likely to advance. Why is it so?

As mentioned, if options are used as a tool to hedge against a position in this volatile market, longing a call is to hedge against a stock trader’s short stock position and longing a put is to hedge against his long stock position. So if the stock traders’ stock positions are the reverse of their options positions, I can know the stocks market outlook by analyzing the options open positions. What is your view? I will be very glad if you can share your observations.

Have a great day ahead!

Francies Cheng
BBus MAppliedFinance

Stocks I will be buying this week

Good evening,

It’s another new week and another week of challenges to achieve my trading goals. So what are the stocks I will be trading this week? First let’s take a look at my Cycle Trend forecast for the US market.

As you can see from the chart, it seems that US will continue to trade within broad range with possibility of a decline. The 2 doji formed suggest that we should wait for a clearer confirmation before I change my tactical plan to buy on dip and sell on target. If it forms another doji, it will be the worry tri-star formation and US may start correcting. Since I can see it is trading near the resistant of its Bollinger band, and with the cycle and candle signals, I will not buy any share and hold for the next 1 month. With nearly 3,000 companies publishing their earnings this coming week, economic report of the GDP on Thursday, commerce department new home sales on Wednesday, conference board’s consumer mood (confidence) on Tuesday, it’s going to be an exciting time to make money using the KUTE system. By the way, I will only trade those stocks that are defined by KUTE which includes the stocks’ technical. So if a stock does not qualifies, I will not trade since the price may continue its’ decline over the week and if I buy at dip I may get into trouble. Better be safe and keep my money for stocks with better signals.

The stocks filtered for the week are: PTEN, DRIV, MLI, CAH, WTS, EIX, OSG and BHI. Changes from last week are the inclusion of MLI (Mueller Industries Inc) and BHI. Excluded from the list is GCO.

Since I have covered the fundamentals of the repeated stocks at the beginning of the month, I will only discuss the fundamentals of MLI and study the technical of the other stocks.

I again have to make a choice between PTEN and BHI since both are within my radar for good fundamentals. However when I compare the companies’ technical, both Cycle Trend and Candle appears to favor PTEN.

I have mentioned in my last blog that I was not comfortable with DRIV’s earnings and cash flows although both are positive. Since I have other stocks that have better signals, I will not trade this stock this week. Anyway, looking at both the Cycle Trend and candles, it seems that the stock will reverse and decline this coming week. OSG candle indicates a decline and there isn’t any buy signal from Cycle Trend so I am giving the stock a miss. EIX has no strong buying signals. While Cycle Trend indicated no buy signal, the stock’s candle seems to point to a decline. As for CAH, I am expecting to see a decline in the beginning of the week but the stock should close the week up. I will be looking at opportunity to trade this stock. The charting for WTS doesn’t look too good for me so I am also giving it a miss. In summary I will only be trading PTEN and CAH.

How about MLI? Mueller Industries, Inc. is a company that manufactures copper, brass, plastic, and aluminum products. It operates in two segments, Plumbing and Refrigeration, and Original Equipment Manufacturers. The company’s operating earnings has declined for the last 3 years, and its’ net income applicable to common shares also declined over the years. I do notice that its operating cash flow remains consistent while its earning is declining, and this is very uncomfortable for me.

The Cycle Trend show the stock moving sideways while its candle indicates a potential decline. Not very exciting for this stock, so I am also giving it a miss.

Have a great week ahead!

Francies Cheng
BBus MAppliedFinance

Week's Performance

Good morning,

Last night is the first time I tried an 8 years old Sake fermented in French wine barrel and it was so unbelievable good. The owner of the bistro told us that we were fortunate as he has kept the bottle for years and only thought of drinking last night and we were in the right place at the right time. Timing is important, isn’t it? Isn’t it the same to have a good strategy to time stock’s entry and exit execution?

You may be asking why I was drinking last night. Shouldn’t I be trading? This brings me to the question why does one trade in the first place. There are many who trade for excitement and enjoy the adrenalin boost when market is volatile. Some could be trading because they are addicted and trading has become part of their life. There are others who trade to speculate and hope to make some easy money, and the list of reasons goes on. I trade smart to make money. To trade to make money, I must know my overall trading strategy, that is, the trading mission. My main goal is to achieve 40% return on my capital per month. To achieve this main goal, my tactical plan is to make 10% per week for the stocks I purchased. Once I achieved my goals I will usually reward myself with a good drink to enjoy my returns.

Since I am sharing my goals, I would like to highlight that my targets are always percentage returns and not dollar returns. Having percentage returns as a target helps me to control my emotion and manage risk. What do I mean? Well, if the stock I bought is $1000 in capital used, a 10% return is $100. This figure is unexciting to many traders and I am sure most will want to make actual dollar return of above $500 from the $1000. That’s an amazing return of more than 50%! We all know that we have to take more risk if we want higher returns so I leave it for you to decide if such returns can be achieved consistently every week. If it can be, I am sure Mr. Warren Buffet will be knocking at the trader’s door soon.

DJIA started the week at 9996.67 and ended at 9972.18, reached high of 10157.94 and low of 9949.36, in line with my forecast that it will trade within range and will trend higher in the longer term.

Of the stocks I recommended, CAH started at $28.75, high of $29.15, low of $28.38 and closed the week at $28.66. PTEN opened at $17.27, high of $18.07, low of $16.63 and closed at $17.00. GCO opened at $26.58, high of $28.71, low of $26.47 and closed at $28.05. Watts Water opened at $30.60, high of $31.82, low of $29.99 and closed at $30.81. EIX opened at $33.50, high of $34.02, low of $32.54 and closed at $32.64. DRIV opened at $24.99, high of $25.50, low of $23.39 and closed at $23.74. OSG opened at $45.09, high of $46.53, low of $40.77 and closed at $41.01. XTO opened at $44.78, high of $46.49, low of $43.49 and closed at $43.88.

Looking back at my October 19th blog, my KUTE system is quite correct to help me identify the stocks to trade. My decision then was to trade only PTEN, GCO and CAH. I held OSG and sold when it reached my target, and made good returns buying these three stocks on dip and sell when they achieved my tactical goals. Even if the 3 stocks were to be bought and held for the week, the returns are not too bad. After all these are fundamentally good companies.

See you next Monday morning for my new stock picks.

Have a great weekend!

Francies Cheng
BBus MAppliedFinance

Currency Crisis?

Good morning,

The US market did well last night. US stock stumbled in the early going, but strength among blue chips and financials helped the broader market to fight its way back to log an impressive gain for the session. AT the closed, there were 64% advances and 34% declines for DJIA and 60% advances and 36% declines for S&P 500. DJIA closed 1.33% higher at 10,081.31 and S&P 500 was up 0.68% at 2,162.29. The impressive end to the session also helped the stocks in my portfolio. PTEN was up 1.72% to close at $17.70; EIX up 0.33% at $33.19, XTO up 0.49% at $45.30, CAH up 1.79% at $29.08, OSG up 1.17% at $43.08 and Watts Water up 1.45% at $31.57. The only stock that went south was Digital River. It closed at $23.70, down -2.19%. Those who follow my blog will know that I was not keen in Digital River even though it appeared in my filtering screen. So did you make money from these stocks I recommended?

After my chat with my friend yesterday morning, I spent the whole night reading articles and blogs about currency crisis, and I was surprised to see so many articles on the subject. Most believe strongly that there will soon be an economy crisis caused by their expected currency crisis. What is currency crisis? There is no exact quantitative definition of a currency crisis, but it generally involves a sudden and rapid fall in the value of one or more currencies. It is more likely to happen in an emerging market economy that has borrowed a lot of money in foreign currency.

Let’s say country A has a high level of foreign currency debt, either in its public or private sector. At some point, for some reason (recession fears, for example), the people holding that debt get worried that the country may not be able to pay off that debt. They start selling stocks and bonds in country A’s currency, and converting their assets back into “hard currency” (dollars, euros, yen, pounds – things that are unlikely to collapse in value). That drives down A’s currency because more people are selling it than buying it – which makes it even harder for country A to pay off its foreign currency debts (since they just went up relative to its’ decline in currency value), which makes other investors panic and sell, and so on and so on. These dynamics can be amplified by the actions of currency speculators, who will sell a currency short if they think it is ripe for a currency crisis, and may therefore trigger the crisis and making themselves a lot of money. Currency crises can do lasting damage to countries suffering them. Loss of foreign investment hurts the real economy, often triggering a recession. Devaluation of the local currency makes imports much more expensive, reducing the standard of living. The policy measures required to boost a currency’s value – increasing interest rates (to attract investors) and reducing deficits (to restore confidence in your ability to repay your debts) – are the opposite of what you ordinarily want to do during a recession.

Many are predicting that the budget deficits and low interest rate will trigger inflation in US. Excessive debt levels point to excessive inflation in the past and suggest that GDP growth, having been over-stimulated, will contract more severely than expected but it has not happen so far. Also, a rapidly expanding Federal Reserve balance sheet and quantitative easing (“money printing”) are directly weakening the US dollar while foreign appetite for US debt is waning. On a global basis, there is a growing shift away from the US dollar both as a reserve currency and as an international medium of exchange, as well as a developing US dollar carry trade threatening to put additional pressure on the dollar. The massive US stimulus spending package, possible inflation and the likely devaluation of US currency have led these nations, notably China and Japan - the two largest holders of US debt, to become very concerned about a huge loss in the value of their assets held in US dollars. These countries are reducing the amount of US dollars they own and converting them to gold and other currencies in order to find alternative ways to hold their assets and maintain the value of their currencies.

At the same time, I am concerned with the huge amount of Europeans’ loan to emerging markets. Western European banks hold almost all the exposure to the emerging market. They account for three-quarters of in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles. As US remains a key outlet for emerging markets, a severe US downturn could have more serious consequences for emerging market economies than expected as domestic demand could be difficult to shore up the growth.

I am no currency expert but I do know that these developments could cause a big decline in the stock market, so I am watching the situation closely and since my Cycletrend and KUTE system has not change its' forecast,I am sticking on to my belief that the markets will continue trading within the broad range and my strategy is to continue to buy at dip and sell at target currently.

Have a good day.

Francies Cheng
BBus MAppliedFinance

China taking the lead?

Good morning,

I had a morning breakfast coffee with an ex-colleague and it was really nice to chat after such a long time since we last talked about the future market. He believes that we will soon see a big dip in the market because of the huge US deficits and potential currency crisis. His suggestion is not to buy and hold stocks long term but to take profits when there are opportunities to do so.

Well, I shared his suggestion. I have mentioned many times in my blog that we will be seeing US markets trading within the broad range and we should buy at dip and sell at target. My concerns are not about US. My concern is about China. The whole world seems to believe that China will take the lead and key driver for economic recovery and till now it seems to be true. However, a research report I read believes that China has reached an impasse in terms of its dependency on capital spending to generate growth and Considering China’s role as a trailblazer and locomotive for the current global recovery efforts, any signs of a Chinese slowdown would have significant global consequences. Not only would it challenge the notion of emerging markets leading the world economy out of its slump, but it would also raise doubts over the sustainability and effectiveness of the various stimulus efforts under way in other countries.

There are three key reasons why they take this view:

China’s expansion cycle surpassing historical precedents: It is widely believed that China is still in an early development phase and therefore in a position to expand capital spending for years to come. However, both in its duration and intensity, China’s capital spending boom is now outstripping previous great transformation periods.

Policy actions not sustainable into 2010. This year’s burst in economic activity has been inflated by a front-loaded stimulus package and a surge in credit growth. Given China's exceptional and forced nature they believe growth rates in government-driven lending and capital spending will collapse in 2010.

Overcapacity and falling marginal returns on investment: Analysis of industrial capacity, urbanisation and infrastructure development shows that China’s industrialisation and structural modernisation are largely complete. Combine this with falling returns on investment, and it becomes obvious that China’s long-term investment needs are grossly overestimated.

If you are keen to receive the research paper, please drop me a note at fcheng@investshop.net.

In US last night, an aggressive selling effort in the final hour of trade took the stock market from a solid gain to a considerable loss. The downturn was broad based and left many of the major sectors to settle at session lows.

I took profit last night for PTEN and made some good money for this stock I bought 2 nights ago. The short trade made more than 20% returns over 2 days. So far so good for my KUTE trading strategy. With DJIA losing -0.92% with 63% declines and 34% advances, the stocks I chose with KUTE systems held on well. CAH was unchanged at $28.57, PTEN up 1.40% to close at $17.40, which I took profit at $18.05.OSG was down -2.7% to close at $42.58. It had reached a intra-day high of $44.07 and if the KUTE system was implemented well, profits should have been taken at around $43.90. EIX was down -0.18% at $33.08 and XTO down -1.34% at $45.08, from the day’s high at $46.48. Did I take profit for this stock near its day’s high? You bet.

Have a great day!

Francies Cheng
BBus MAppliedFinance

Ps…..using CFD, an investment of $1000 allows me to buy $10,000 worth of US shares. A 1% increase for the $10,000 is $100. The target returns I mentioned in KUTE system is on the actual capital traded, i.e. $1000. So a 10% target is $100 profit from the leveraged position of $10,000. I target returns on capital, not on full stock value.

The Curse of Liverpool

Good morning,

I was at the gym yesterday and a friend of mine shared with me the shares he bought and how he “invests” his money in these shares by trading only the top 30 shares of the day. Interestingly when I asked him if he knows the companies’ earnings, operating profit and cash flows of the shares he bought for the last 3 years, his replied was: “what’s that?” I am sure he is not the only trader who doesn’t do their homework before trading. It is important to understand the financials of the companies of the shares purchased since the value of a company is determined by its’ efficient and productive use of its’ capital, assets to produce free cash flow for its shareholders. The honest truth is that successful stock traders spend most of their time understanding the company rather than the price movements. It has never been a straight linear growth line for the stock price and often most of the stock prices move in range. If the company’s fundamentals are strong, there is no need to panic if the price drops because it will be temporary.

Market always overreacts to news, either good or bad. Traders believing in fundamentals seek out stocks that stumbled, inciting the speculators to rush for the doors, driving the share price far below its real value. But a low stock price is not enough. Fundamentalists will try to pinpoint the quality companies that will recover from their current problems; companies that are going through a rough period but have a solid history of profitability and good cash flows. These are the stocks that will return to their winning ways once they've overcome their difficulties.Even though I designed my KUTE system to come up with stocks that I think would be of interest to for its fundamentals, I would not blindly buy the stocks that turned up in screen. I believe in the value of due diligence, and am passionate about the value of learning everything I can about a company before I buy. That is the reason why I am still calm even though some of the stocks I bought are in the red.

Interestingly there seems to be a consistent correlation between Liverpool and the stock market. Whenever the team lost the stock market ended up in red and red is the color of Liverpool. Stocks closed lower last night despite generally better than expected earnings results, as worse than expected economic data rattled investors. Though housing starts rose, it rose less than the expectations of what the markets are looking for. Of all the stocks I bought, Citibank hurts the portfolio most and it is the only stock that didn’t pass through my filtering system. I should not have allowed my emotion to rule over me, but I am human after all. That is why it’s easier to teach and remind others to be discipline than to apply it myself. Nevertheless, I am glad that I maintained my 30-20-50 money management and trading rules so overall I am not too bad.

Again I bought into PTEN when the stock dipped tonight. I bought at $17.06 and $16.85, adding to the position I bought yesterday at $17.28. It closed at $17.16.

The losers from the recommended stock are XTO, down -0.46% at $45.69; Edison (EIX), down -2.21% at $33.14; OSG down -4.91% to close at $43.76 and CAH, down -1.04% at $28.57. Watts Water was up 0.13% at $31.10 and Genesco up 0.5% at $28.32.

Have a good day today.

Francies Cheng
BBus MAppliedFinance

Sold BHI and bought PTEN

Good morning,

I had a good chat with 2 of my clients and shared with them the ideas and content of the stock trading seminar I will be conducting and immediately they told me they are very keen to participate and wanted me to reserve 2 seats for them. It was a timely booster and I am now quite excited and will soon start marketing my seminar program. I asked them why they are so keen and they brought up an interesting point -- that I have not promise extra ordinary returns, just plain understanding of the market and how to increase wealth and make money consistently. Also because they can do it full time after work since it's only US shares I will be teaching and they will be trading. Full time? Well, US markets open at 9.30pm Singapore time and a disciplined trader can eat a nice dinner after work, take his shower, read the financial pages, relook at the charts of the stocks to buy and still have some time to have a beer. That's the beauty of my KUTE program.

So how did the market performed last night? Broad-based buying helped stocks bounce back from a dip at the open to log fresh highs for 2009, but the S&P 500 met resistance when it hit the 1100 mark, which was last seen just over one year ago. Strong gains in overseas markets helped set a positive tone for participants in the early going, but weakness in the financial sector quickly undercut the broader market's opening gain. So the market has performed to my expectation as mentioned yesterday.

As planned, I sold BHI at $46.96, made some tidy profits and bought into PTEN at $17.28. BHI had closed higher at $47.34, and PTEN closed at $17.44.

The recommended stock did well too. CAH was up 0.66% to close at $28.87, XTO up 2.3% at $45.90, EIX up 1.16% at $33.89, OSG up 2.54% at $46.02, Watts Water up 1.57% at $31.06. Digital River was down -0.93% at $24.56.

The only setback to my portfolio is Citibank which closed at $4.54, down -1.09%. Looking back I should have just stick to my KUTE system for ALL stocks to trade and not let my liking and emotion to over-rule. My only consolation is my money management system and Citibank is my 30% of 30-25-50 so I am not too worried and still believe that I will be soon in the money for this stock.

Have a great day ahead.

Francies Cheng

BBus MAppliedFinance

New Stocks To Buy

Good Morning,

Time flies. It’s almost 2 weeks since the wonderful wedding dinner, and it seems like only yesterday. Anyway, Liverpool lost again on Saturday, and the goal Sunderland scored was funny. The shot by the Sunderland striker apparently struck a balloon on the pitch and deflected into goal. Very funny, that's what most of my friends said.

So did my portfolio performed badly like Liverpool did? Well, I didn’t make money with Citibank. In fact, I am in the red for this stock. So how can my Kute system go wrong? To be very honest, Citibank didn’t come into my screening radar for the past 1 month and as explained, I bought Citibank because I do not believe the company will fail and over time this counter should make money for me. So far I am happy that the stock didn’t crash after the earning reports, and since this stock is part of my 30% of the 30-20-50, I will continue to hold longer.

I did pretty fine with BHI though. The stock went south all the way to $46.25 last Friday. As what I had suggested, I bought at $46.54, and I am in the money now. The stock closed at $47.03. The rest of my recommended stock did well. CAH was up 2.76% to close at $28.68, OSG up 1.06% to close at $44.88, XTO up 0.22% at $44.87, PTEN down -1.77% at $17.19, EIX up 0.15% at $33.50, Forest Lab down 1.72% at $29.66 and BKS down 3.5% at $20.10.

Some had asked me why some stocks skyrocket on a positive earnings surprise while others fall off a cliff? Let me explain. The standard definition of an earnings surprise is when actual earnings come in higher than earnings estimates. But those estimates are the “published” numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations based on sentiment. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease the market’s inflated expectations. This is the most common reason why some stocks fall after a supposed earnings beat. Also, the highest quality earnings come from having robust revenue growth. This means that the company’s products or services are in high demand and should stay that way. However, most of the earnings being reported these days are generated from cost cutting and other accounting gimmick. The problem is that the benefits of these moves don’t last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop. Most importantly, when you buy a stock you are taking an ownership position. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down…and go down fast.

So how will this coming week be like? My screener showed these stocks that qualify within my filtering rules; PTEN, DRIV, GCO, CAH, WTS, EIX, XTO, OSG and MUR. Dropped from my screener this week are BHI, BKS and Forest Lab. Before we go into the stocks, let see how DJIA will be this week;

With earnings season in high gear with about 775 listed companies reporting their earnings and important reports on the economy and from the technical Cycletrend, DJIA should continue trading within the broad range this week with potential upside. So my macro tactical strategy for my stock will again be buying on dip and selling on achieving my targets.

-DRIV, Digital River, Inc. provides e-commerce solutions to a variety of companies in software, consumer electronics, computer games, video games, and other markets. The company has consistent operating income and its' operating cash flow and free cash flow are positive. The stock closed at $24.79 last Friday and most analyst target is about $28.50. However, my Cycletrend program indicated that the stock will be trending down with the price near its' bollinger band resistance, so it's better not to buy now.

-Genesco (GCO), has appeared in my radar for the past few weeks and I had recommended then at $23.52. It closed at $26.48. The company's fundamentals are still strong and Cycletrend indicated an upside movement. With the economy picking up, GCO could be a good buy and I will watch the stock this week to wait for the stock to dip along with the general market to buy.

-Watts Water Technologies, Inc. (Watts) is a supplier of products for use in the water quality, water safety, water flow control and water conservation markets. The company will be announcing its financial results on 27th Oct 2009 and though I like its fundamentals, I am uncomfortable with its shrinking operating income and its gain in cashflows from sale of assets and larger amortization and depreciation accounted. The Cycletrend chart also showed a sharp down cycle and with its price trading near its bollinger resistence, I will give this stock a miss.

-PTEN is a stock I have covered last week and I mentioned that I will choose BHI instead given that they are in the same industry. I was uncomfortable then with its earnings and cashflows. However, along with the improved economy, the operating profits and cashflows should improve. Since BHI is longer in my filtered stock, I will take profit and sell BHI and buy into PTEN this week since the technicals is still showing an up cycle.

-CAH should continue its run and with the confirmation from Cycletrend and candles, I will look into buying this stock. I am still holding on to OSG since the technicals are still strong, and giving XTO a miss as the chart indicated that it will correct from the last week's price. EIX has begin to show some interesting technicals and seems like it will be positive this week.

Have a great week ahead.

Francies Cheng
BBus MAppliedFinance

Yesterday's BAC Cycletrend chart

Stock Guru?

Good morning,

I was reading my newspaper this morning and I came across advertisements for Options and Stock Free Seminars and find it amusing that most gurus claimed to be able to make more than 100% returns within a first few intraday trades. What is so amusing is the most volatile stock would probably be trading within trading range of 6%. Either their students were closely glued to their trading screens getting in and out of the market and paying huge commissions to their brokers, or they took very high risk trading with leverage.

We all know that in finance, risk drives returns and by taking on both market and business risk, we should be expecting higher returns than if we were to buy unit trust since unit trust should diversify away the business risk. If we are expecting higher returns, we should also be ready to accept higher losses. So if these gurus claimed that they can achieve 1000% returns, I am sure there are days where they had 1000% losses. Somehow due to the advertisement costs and limited space in the media, these losses were not made known.

As mentioned for the last few days, I believe the market will be trading broadly within range and over the near future it should trend up. So I was quite correct. The Dow reached another one-year high last night, as rising oil prices and a late-session rally in commodity stocks overshadowed weakness in the bank sector. The bank that I am holding on to, Citibank, reported a quarterly loss, but the loss was narrower than analysts had been expecting. Citigroup had the biggest decline in the Standard & Poor's Index, falling 6.6%. What did I do with this stock? I bought when it dipped down to $4.70. It closed at $4.75, not much gain, but I know that once a company stopped bleeding, it will be on the road to healing and recovering and the bank’s current price is only a small fraction of it’s price when the economy is running well. Isn’t that what the economists are predicting?

BHI was spectacular last night. It went down to $45.08 but recovered to close at $47.67 at 3.16% higher. You bet what I did. Remember that I said I will buy on dip and sell when the stock achieved my expected returns?

CAH was up 2.2% to close at $27.91. I closed off my position at $27.85, achieving my expected returns.

This is where I must clarify. My expected return is for the capital exposed for the stocks I buy and not for the total value of the stocks. I trade with CFDs so my capital exposed will be smaller. My risk management strategy was mentioned in my previous blog so I will not repeat myself again.

Did the rest of my recommended stock do well? PMTC was up 0.07% to close at $14.77, BKS down -0.38% to close at $20.83, OSG up 1.6% to close at $44.41, PTEN up 4.29% at $17.50, XTO up 1.02% at $44.77, EIX up 1.18% at $33.45 and Forest Lab up 1.82% at $30.18.

Now I can really enjoy my day.

Have a great day!

Francies Cheng
BBus MAppliedFinance

10000 is broken!

Good Morning,

Indeed the morning is really good after a great night of stock rally. Strong earnings from a couple of industry bellwethers and a weaker U.S. dollar brought about a concerted buying effort that sent all three major indices to new 2009 highs. With 74% advances versus 24% declines for NYSE and 72% advances versus 24% declines for NASDAQ, DJIA was able to settle above 10,000 for the first time this year.

All my stocks made money with the exception of Forest Lab (-0.24%). OSG had closed a whopping 5.05% higher at $43.71 and BHI 2.62% higher at $46.21. The stock I recommended this week, CAH, closed 1.37% higher at $27.31. So I am a really happy man as my stock portfolio returned more than 30% for the quarter.

Will the stock market continue to rally? I remembered reading an article from Financial Times a few days ago and the article reported that both the head of Tesco – one of the world’s biggest retailers – pronounced firmly that bad times are really over, while the head of HSBC – one of the world’s biggest banks – plumped equally firmly that we are merely setting for the next downturn. What are we to make of all this? I have no simple answer to the basic conundrum. The chief executives of Tesco and HSBC both carry weighty reputations, and each in his different way has access to a mass of detailed information. If they cannot agree, there is no use pretending to clarity.

Using the weekly Cycletrend chart, I think DJIA will continue to trade within the broad range and I will continue to buy the stocks I screened with KUTE system on dip and take profit at 10% target. Is 10% always my fixed target? Not necessary. I apply this target during time of volatility and broad range trading period. This profit target may change according to the market situation. What is most important to remember is to be consistent in applying the trading game plan and strategies regardless of market situation and I am constantly reminding myself to stick to my strategies and not get swayed by the market sentiments. It’s really not easy when market is rallying and friends around you claiming to make more than my returns, but since so many stock trading books and gurus strongly emphasize trader psychology and consistency in applying one’s strategies, I cannot be wrong and I believe I will be better off in the long run.

So here is one more principle I learned in stock trading; i.e. Greed kills and contentment is gain.

Have a good day ahead.

Francies Cheng
BBus MAppliedFinance

Trailing Earnings or Forecasted Earnings?

Good morning,

Third-quarter earnings season is starting to kick into full gear and we will see stocks move in reaction to the earnings reports. The upside is that you will have many opportunities to make short-term profitable trades based on earnings surprises, or remain focus on the position trade based on the company’s fundamentals and entering the trade using Koncept Unique Tactical Entering Strategy.

I can remember in my finance graduate class the methods equities are valued. Other then the multiples, one of the most common method advocated by my equities Professor is DCF, i.e. Discounted Cash Flow. DCF uses the required rate of return to discount future free cash flow for equity (FCFE for short) to today’s present value, and dividing this present value with the outstanding number of shares will be the value of each share. The future FCFE is forecasted using complicated regression based on many factors which can influence the company’s top line, which obviously will determine its’ earnings. For many companies, the key factor is still the Gross Domestic Product (GDP) of the country the company operates in, and if the country’s GDP is highly correlated to US GDP, it is important to understand US market.

Which brings to my thought is trailing earnings as reported important to trade the market, or understanding the impact of the factors affecting future FCFE? For intra-day traders, I would presume betting the company’s reported trailing is the tactical strategy. Traders can look for growth companies with majority of the analysts predicting that it will beat the estimated earnings, place a trade and hopefully the share price will gap up once the announcement is made. Well, we can all see that unless you know someone in the company where no one else has, it is very risk if earnings are not as good as estimated. I believe that such short term trades have good potential to make money, but using Options would be a safer bet. Rather than betting with CFDs, buying a call option will enjoy the potential upside gapping while protect the potential downside risk, all for a small premium.

However, I am not a day trader, so I am still buying and selling using my Koncept Unique Tactical System (KUTE). I try to understand the company’s operating cash flows and think very hard about economist forecast of the future economic growth and forecasted GDPs. I buy stocks for their future growth and time my buying using KUTE.

So did my stock do well last night? My Citibank (which I bought months ago and is part of my 30% of the 30-20-50 rules) is doing very well. The stock was up 1.26% to close at $4.83. OSG was down -0.48% to close at $41.61, BHI down -0.73% to close at $45.03, PTEN up 0.12% at $16.66, XTO up 0.62% at $43.76, EIX down -1.91% at $32.83, BKS down -0.73% at $20.47 and CAH down 0.81% at $26.94.

Am I concerned that some of these stocks I bought or recommended are down last night? Not at all, as these are fundamental sound companies and I am a position trader and believe that over the next few days it should be achieving my targeted returns. After all I am still in the money for my overall portfolio.

Have a blessed day.

Francies Cheng
BBus MAppliedFinance

Time to take profit

Good morning,

It was good to start the trading session last night knowing that more than 80% of top economists believe that the recession that started almost two years ago is finally over. However, most don't expect meaningful improvement in jobs, credit or housing for months to come. Stocks begin the night extending recent gains at the start of a busy week of earnings, nudging the Dow Jones industrial average closer to 10,00, but was trading lower towards mid-night Singapore time. The Dow closed up 20.86, or 0.2 percent, at 9,885.80. The Standard & Poor's 500 index rose 4.70, or 0.4 percent, to 1,076.19. Both indexes had their highest close in a year and Nasdaq fell 0.14, or 0.01 percent, to 2,139.14.

This is the week of earnings reporting and the Cycle trend indicates the market will be trending up. However, I believe the market will trade within a broad range of +80 to -80 DJIA points since companies' sales growths are still weak and it was apparent that the earnings will largely be a byproduct of expense cuts, meaning end demand was still quite poor and the market will be sensitive to earning reports. So I decided to take profit for BHI at $45.89 and PMTC at $14.75. Not too bad since it achieved 10% returns over 2 weeks. At the same time I bought into CAH at $27.07 as planned and placed a buy order for BHI at $44.00. CAH closed at $27.16 and BHI was up 1.07% and closed at $45.36.

So did the rest of my stocks I recommended yesterday perform? OSG was up 2.6% to close at $41.81, EIX up 1.12% at $33.47, PTEN up 0.54% at $16.64, XTO up 1.45% at $43.49. Forest Lab closed 0.57% higher at $30.05.

So I was right to buy more BHI instead of PTEN. However, I missed out on EIX as I was too busy with my wedding to place a buy order when the technicals indicated a buy last week.
Nevermind, not losing is as good as making money sometimes.

As for my portfolio, I am happily sitting on my profits as Citibank is still holding on strong to closed at $4.77, up 3.02%, FTO up 2.16% at $24.17, offsetting the losses of BKS which close at $20.62, down -1.1%.

See you tomorrow.

Francies Cheng
BBus MAppliedFinance

A New Week and A New Beginning

Good morning,

I can finally focus on my stocks after a hectic week preparing for my wedding. I am finally married, and I thought most of my guests did enjoyed themelves at the wedding dinner. Afterall, we did 100 bottles of wine, 3 bottles of champagne, 4 bottles of whiskey and 5 bottles of brandy! And that's excluding the extra bottles of post dinner drinks at J Bar. But it was fun. And why not? While enjoying my drinks at the J Bar, BHI achieved my 20% profit target and my limit orders were executed. What a blessing! A big red packet from the stock market! In fact, U.S. stocks climbed on Friday, with the Dow hitting a closing high for 2009, as investors anticipated positive news from next week's key earnings reports and bullish broker comments boosted tech shares so I am still very much in the money for the stocks I am holding.

Well, what are the criteria for the stocks I filtered? Since I am looking for fundamentally sound companies, these are some of my minimum basic requirements for a company to qualify for shortlisting for further analysis; The company's last 5 years average ROE has to be equal of more than 7.5, Price to cashflow ratio equal to or less than 15, the last closing price must be at least equal to or less than 75% of the stock's 5 years average price. Of course these are only 3 of the many other criteria I used, but it should be good enough for the many traders in the market today without any clue which stocks to buy other than trusting their gut feel and punting neighbours. So the companies my filter rules shortlisted this week are:

Patterson-UTI Energy Inc (PTEN), Genesco Inc (GCO), Cardinal Health (CAH), Edison Internation (EIX), Overseas Shipholding Group (OSG), XTO Energy Inc (XTO) and BHI (Baker Hughes). Of these selected stocks, only PTEN, CAH and XTO are new additions. So let's take alook at them.

But first let's see how DJIA will probably be this week. Here's the Cycletrend Chart;

I had written last Monday that DJIA will be trading sideway or negative last week. I was wrong. DJIA actually closed higher. Looking at the Cycle Chart, it seems that DJIA will continue to trade higher before consolidating for the week. There should be potential upside from the candle and since it has not touch the bollinger resistant, I will be slightly optimistic with the market for the short term, and holding on to my belief that US market will be trading sideway for the quarter.

Patterson UTI Energy is a mid-cap growth company in the energy sector and provider of contract drilling business and pumping services to oil and natural gas operators. From the company's financial statements, I am not comfortable with its' operating cashflow and decreasing operating income for the last 3 years. The company has also missed analyst earnings estimates for 2 straight quarters.

Here is the chart for PTEN;

Technically, the stock should continue to trade higher this week but since I am not comfortable with the fundamentals and with more analyst calling for strong sell than strong buy, I will give this stock a miss. However, as oil price stabilized and oil and gas companies anticipating future expected recovery in the economy, I will continue to buy into BHI as BHI is also in the energy sector and has better fundamentals and technical indications.

Of the few selected company, I am optimistic with Cardinal Health Inc (CAH). This company provides products and services to the healthcare industry. Analysts are recommending strong buy for the company, and company's officers are acquiring the company's shares. The stock closed at $27.32 last week and the Cycle Chart shows that it will trend up for the near future. As for the financial fundamentals, the earnings are good after taking into consideration of the spin off of CFN, operating cashflow is consistent even for the increase in the inventories. A little concern for the inventories but overall I believe this company may be a good buy.

So will I be buying this stock? Why not?

See you soon.

Francies Cheng
BBus MAppliedFinance

One more day to my Wedding

Good morning,

It's a brand new day, a day closer to my wedding. In less than 24 hours, I'll have someone to share the joy and sadness of my life, and if footballers claimed that they live for football and football is their life, than my wife-to-be will be sharing my joy of making money and her sadness of having to share my losses. Ha, for football is to the footballers and stock trading is to me!

So how did the market goes after 1am last night, after I took profit in OSG at $38.75?

The major indices started markedly higher as the previous session's gains were extended amid news that by Australia's Reserve Bank hiked its key lending rate by 25 basis points to 3.25%. Though the rate hike may strike some as an unlikely impetus for higher stock prices, global participants were encouraged by the symbolism of the act, since it suggests that the global economy has strengthened. That consideration helped drive the Dow Jones World Index to a 1.9% gain, which is its best percentage gain in two months.

Weakness in the U.S. dollar continues to bode well for stocks, especially for shares of multinationals. The Dollar Index dropped 0.5% this session, but it is still trading above its 2009 lows.

After I went to bed, despite a downward drift in afternoon action, stocks were able to march considerably higher in broad-based fashion for the second straight session as overseas gains and a weaker U.S. dollar kept buyers in the market.

So it was a great night where NYSE had 77% advances versus 21% decline and NASDAQ 72% advances versus 24% declines. My stocks did very well last night, OSG closed at $39.14, a massive 7.23% higher, BKS up 4.75% to close at 4.75%, PMTC up 0.51% to close at $13.80, Citibank unchanged at $4.67, Forest Lab up 1.84% to close at $29.39. The stock that I am monitoring, EIX, closed 1.83% at $33.47. Despite the bull run for the last few days, I personally do not believe we have entered a multi-year cyclical bull market for developed equities. I think equities remain in a broad range trading environment and the latest Morgan Standley research seems to support my ideas (please see my previous blog for US market charting). Anyway, I can sleep easy knowing these are fundamentally good companies and my 30-20-50 rules still holds.

Since I am targetting 10% returns to sell within a month, I still stay neutral for EIX although the stock has moved up about 4% since I last recommended, as I believe it will drift lower over the next few session. I am still waiting for the stock correction to buy. For the rest of my stocks, I am still holding for the 10% target to take profits.

With that, I am looking forward to enjoy my wedding dinner and better returns from my stocks. See you guys next Monday.

Francies Cheng

BBus MAppliedFinance

Blessed week

Good morning,

This will be my last 2 blog for this week. Am I giving up writing this blog? No my friends. I will be getting married this Thursday and with all the preparation to give up my freedom, I could hardly find enough time to write. But not to worry if you are following faithfully to my blog. I will be back next Monday with the usual stock recommendations.

Well, at least US is blessing my stock portfolio with a positive closing last night. A strong advance by the financial sector and a weaker U.S. dollar helped give the stock market its first gain in five sessions. We see 80% advances versus 18% declines in the NYSE and 70% advances and 26% declines in the Nasdaq. DJIA was up 112.08 pts to close 1.18% higher.

That's some good news for all of us after all the beatings we had last week. Well, my stock portfolio recovered, and I am happy that I do not have any stop-losses in these stocks I hold. If you are asking me why I have not placed any stop-losses, you can read my previous blog about my money management strategy of 30-20-50 last Saturday.

Last night Citbank was up 3.32% to close at $4.67, PMTC up 2.54% to close at $13.73, BKS up 5.08% to close at $22.74, OSG up $2.56% to lose at $36.50, BHI up 2.71% at $41.76, Forest Lab up 1.3% to close at $28.86, and I am still holding on to these stocks as it has not achieved my required target returns. Remember, I am a position trader, not intraday scalper.

The stock I recommended yesterday closed $32.87, up 1.08%. Well, I didn't buy. I am still waiting to confirm if there is a real buying signals from my Cycletrend and candle charting. The stock had probably rebounded off it's bollinger band resistant level amid the general market improvement, but since I need to see more signals to enter, I am still neutral and will continue to monitor this stock.

Have a great day!

Francies Cheng
BBus MAppliedFinance

New Stock

Dear Friends,

It is an early Monday morning and I have just finished my stockscreening and basic fundamental research for any new stocks that I will monitor for buying and also cycletrend chartings for my exisiting holdings, to make sure that the reasons for holding my stocks has not changed.

Interestingly the filtered stocks include all my current holdings, with only one new entry, EIX (Edison International), an electrical utility company. The others are GCO, FRX, OSG and BHI which I have discussed previously. For these stocks, the fundamentals has not changed and cycletrend and technicals for position play are still on track for growth. So I will discuss about EIX here.

Before we discuss EIX, let's take alook at the DJIA latest cycletrend and technical candles. As you can see from the chart below, Cycle Trig shows that DJIA will have more downside this week before moving up. The doji in candle formation indicates that market particpants are looking for direction. With the price in the middle of the bollinger band and combining the cycle and candle, I would expect the market to stay sideway or negative this week.

Now, about EIX. Here is an extract from yahoo.

Edison International, through its subsidiaries, engages in the supply of electric energy in central, coastal, and southern California. As of December 31, 2008, the company served approximately 432 cities and communities, and a population of approximately 13 million people. It also involves in the development, acquisition, ownership, leasing, operation, and sale of energy and capacity from independent power production facilities, as well as conducts hedging and energy trading activities in power markets. In addition, the company invests in energy and infrastructure projects, including power generation, electric transmission and distribution, transportation, and telecommunications, as well as in housing projects in the United States. Edison International offers its services to commercial, residential, agricultural, and industrial customers, as well as public authorities. The company was founded in 1886 and is based in Rosemead, California.

From my findings, the company's revenue is consistent, with positive operating cashflows for the last 5 years. Other fundamentals, ie., PE, PEG etc were part of my stock screening and the company has met all other fundamentals I required. So it looks good so far.

Let's look at the cycletrend and candles. As we can see below, the stock's cycle trig,candle and bollinger band shows no buy signal in the near future.

Well, though the fundamentals are good, I will give the stock a miss till the charts show improvement.

Have a good day.

Francies Cheng
BBus MAppliedFinance

Time for a break

Good morning folks,

My head is stll pounding. Not from the bleeding of the stock market, but from having too much sake last night. I must admit that sake kept me away from the stock market and only this morning did I realise that stocks bounced back after falling sharply in response to a disappointing jobs report. Well, I am happy to know that it has stop hemorrhaging like it did yesterday despite of news that private employers slashed 263,000 jobs from payrolls during September struck stocks with weakness. Economists, on average, had expected job losses to total just 175,000. The worse-than-expected jobs number caused the unemployment rate to increase to 9.8% from 9.7%, but that was expected. Are economists God? Sometime I wonder why their expectations are used as the benchmark. What if thier formulas for calculation are wrong?

We were talking about the stock market and a question was asked if there's going to be a W recovery. I really don't know. I am quite sure that there will be analysts who believe so and many others who oppose their opinions. Since we can only do a calculated guess, it is important to have the right strategies when investing in the stock market.

What is my stock trading and money management strategy?

I have mentioned in my last blog entry my trading strategy, so I will not repeat again. I will share alittle about my money management strategy here. Money management is the most important part of the overall stock trading strategies and all investors and traders should have theirs planned before trading the market.

My strategy supports my trading style, and I apply the following rules: 30-20-50. Looks like a football strategy, isn't it? Well, the 30-20-50 rule implies that I invest 30% of my money long term, maintain 20% liquidity for margin calls and 50% trading the market. Let's first talk about the 50% trading portion.

I am a position trader using CFD so it is a must to maintain liquidity in the event there is a margin call and I still believe I should hold on to the stock. There are concerns that CFD is a highly leveraged instrument for stock trading and leveraged trading is very risky. Well it can be risky, but if we manage leverage correctly, CFD is the most wonderful invention for traders like me. What do I mean?

Most CFD allows leverage up to 10 times the amount deposited, ie., if you deposit $10,000, you can have the buying power of $100,000. That is if a trader deposits $10,000 and buy into stocks worth the market value of $100,000. Unless the trader has excess cash reserves for margin calls, he will be better off if he placed stop losses at the same time he entered his purchases. As you can see, without CFD, the maximum value of shares the trader can buy is $10,000 and he need not worry about margin calls.

Now this is how I do it differently. If I want to own $10,000 market value of the shares I screened, I will use CFD to buy the $10,000 market value of the shares. I will not use the $10,000 to buy $100,000. My margin incurred will ne $1,000 and I will have the same exposure if the shares are purchased in the traditional exchange, but I have excess cash liquidity of $9,000. Since the shares I bought have to go through my Unique Stock Selection screening process, the chances of the shares falling more than 30% value is quite remote, and I will allow some swings periodically in the stock price till it achieve my pre-set target returns. The excess liquidity acts as the cushion for such swings and allows my stock trading strategy to work over the expected time.

That's why I can afford to drink last night. My shares didn't do well last night, but I am not worried. They are the right shares for me and I have my money management strategy in place. The only problem is my head is still pounding while writing this blog and it will not happen if I were to clued myself to the screen watching every single movement of the stock market. But I am sure most of us would prefer to enjoy Friday night drinks rather than watching the US markets. Well at least my strategies allow me to do so.

See you soon next Monday.

Francies Cheng

BBus MAppliedFinance

Sea of red

Good morning,

It's a sea of reds. No, it's not Liverpool or Man United. It's the US stock markets. The Dow closed down 203 points, or 2.1%, to 9,509. The Standard & Poor's 500 Index was down 27 points, or 2.6%, to 1,030, and the Nasdaq Composite Index was down 65 points, or 3.1% to 2,057.

It was the biggest point loss for the Dow since July 2, the biggest decline for the S&P 500 since June 22 and the largest point loss for the Nasdaq since December. And the worry is the market could get worse, perhaps as early as Friday when the Labor Department reports on unemployment and nonfarm payrolls for September. The consensus estimate is that nonfarm payrolls fell by about 200,000 from August. Fears, however, grew today that the number might be larger and contributed to the market decline.

All 30 DJIA stocks were lower, and NYSE has 0nly 17% advances verus 81% declines, Nasdaq 17% advances versus 79% declines. Report from IMF raising it's forecast of the world economy growth has no real impact, and the market was focused on several other reports, including another disappointing jobless claims tally. Initial claims climbed 17,000 to 551,000, which is a higher count than had been expected and The ISM Manufacturing Index for September came in at 52.6, which is below what was expected, but the figure still indicates growth in the manufacturing sector. There were some positives though. Personal income and spending for August were up 0.2% and 1.3%, respectively with exceeded expectations, while core personal consumption climbed a mere 0.1%, as expected, and construction spending during August made a surprise 0.8% increase, while pending home sales for August surprised some by increasing 6.4% in August.

So how did my portfolio perform? Well, to be honest, none of them headed north when almost the whole market headed south. Citibank was down -6.4% to $4.53, PMTC was down -2.32% to $13.5, BKS was down -2.75% to $21.61, OSG was down -3.69% to $35.99, BHI was down -2.37% to $41.65 and Forest Lab down -2.24% to $28.78.

I am pretty sure there will be critics out there waiting to skin me if they have followed my blog and bought the shares I analysed. And probably others wanting to know what I had done last night to limit my losses and my strategies after the beatings. Well, let's take a look at the cycletrend charting again.



I was quite correct to predict yesterday that there will be a retraction in Oct/Nov using the Cycle Trig chart (as in the box below candle chart). The candle was telling us that the market was undecisive and looking for direction and we would need the next bar for confirmation. Only I didn't know that it came in the first day of the month! Well, today's candle chart is telling me that there were more sellers than buyers and there were no bull to push up the market. The red candle without the head shadow shows DJIA closed lower at the day's highest. Technically since the retraction occurs so early in the cycle trig, the market should still be retracting for a little longer, but should start heading north sometime in mid October or early November.

My stocks? I held on to them. Why? First, let me show you one chart, BHI (Bakers Hughes).



Technically I don't see any bearish signals for the next one month. The stcok seems to be trading within range and is not near the resistance of the bollinger band. Fundamentals are still good, and with IMF recent forecast of improved world economy, I do not see any reason why I should not add on to my position in this counter. I will sticked on to my buy on retraction decision for BHI.

Which leads me to the question of what strategy and style is my trading? To answer this question I need to emphasize that to trade in the stock market, you need to belong to either one of these group of belief system. Either you are a fundamentalist who believes stocks are mispriced, techinician who trusted in serial and auto correlation (ie you can predict next period using past data), market is efficient (that is no point predicting and looking for mis-priced, the price is all that it is) or you are just a punter. I am a believer of efficient market. I choose company based on their good fundamentals, that is, the balance sheet and cash flows must be fundamentally sound, and to clarify, I am not looking for mis-pricing. I buy to ride on the potential growth, and I only use charting to have a general feel of the market and the stock I purchase and try to understand the current participants' behaviour. I buy when the charts tell me so and unless I see a major correction, I will normally hold on to the stock because of its good fundamentals. In fact most of the time I buy when the market is selling if the company is good. I do not intent to beat the market every day, I try to beat it on the longer term.

So I am holding on, and actually bought into OSG again last night.

See you soon.

Francies Cheng
BBus MAppliedFinance

Volatile or sideway US markets?

Good morning,

What a start to the US DJIA last night! I was sipping my wine in Vie Bar and reading pre-market reports that US Futures market was trading up because a Commerce Department report showing the recession abated more than originally estimated in the second quarter. I thought I could be wrong with my analysis that US market will be trading sideway and I was tempted to buy into high beta shares to take advantage of the possible upside swing.

Perhaps I was enjoying too much chardonnays and I didn't, and I am glad I did not allow my trading emotion to overtake my belief of the trading program I faithfully implement as an early selling effort dropped stocks from an initial gain to a loss of more than 1%! What caused the -70 degree drop? Well, it was the Institute for Supply Management-Chicago's business barometer report which came in after the Commerce Department report unexpectedly fell to 46.1 in September, a level that indicates contraction in the regional economy. Well, US markets gradually made their way back to positive ground before falling under a second wave of selling pressure. Although they finished the session with a loss, stocks still logged impressive gains for the month. At the market close, The Dow Jones industrial average slipped only 29.92 points, or 0.31 percent, to 9,712.28. The Standard & Poor's 500 Index fell 3.53 points, or 0.33 percent, to 1,057.08. The Nasdaq Composite Index shed 1.62 points, or 0.08 percent, to 2,122.42.

So my prediction was right that US markets will trade sideway for the near future. While drinking my third glass of chardonnay, a friend of mine drinking his brandy in the bar and who has interest in US stocks came over for a toast and suggested that I was wrong in predicting the US market. His broker had advised him that it will be volatile and intra-day data seemed to contradict my analysis. Am I wrong?

Which brings me to an important lesson I learned, and that is to match my trading style with the timeframe of the stock movements. If I am trading intra-day, I will use minute-by-minute data feed for my charting programs for trading signals and I am quite sure the graphs will be volatile. However, since I pick stocks for their fundamentals and trade to generate alphas from timing to buy at cycle low and sell at target returns, I use monthly timeframe to determine the market's future forecasted movements. The cycletrend chart for DJIA 30th Sept 2009 end of day data indicates that it will still be sideway with a possible slight retraction in October/November this year. Again since it is not a -45 degree cycle trend, I do not think it will be a major retraction. The candle doji sign tells me that the market is looking for a clear direction, and unless there are unexpected tail-end event, US market should be growing steadily rather than shooting for the sky.

So I am still right, and overall I am still in the money. I lost -0.86% in BHI (closed at $42.66) but still in the money. BKS was up 1.97% to $22.22, OSG down -2.61% to $37.37, Citibank up 2.98% to $4.84 and Forest Lab down 0.91% to $29.44. I have also increase my interest in OSG and BHI laast night for its fundamentals, the stocks' correlation with the market and the nice signals from charting.

See you tomorrow.

Francies Cheng
BBus MAplliedFinance