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