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