Many money managers tend to say that they pay attention to technical information, as well as fundamental and other information.
Certainly momentum-oriented investors look at technical factors more than value investors or income investors, but even they may use technical factors for things like entry point selection. In any event, the component of money flows controlled by or highly influenced by technical factors is too significant to ignore.
Whether or not an investor thinks technical analysis is any more useful than reading chicken bones tossed on the floor, there are enough market participants with enough money to make technical factors a self-fulfilling prophecy to some degree if nothing else.
We use fundamental analysis of historical and current company operations and financials as our base, with thematic and competitive issues on top, but we do pay attention to the technical condition of stocks. That doesn't mean that we always select for positive technicals and always shy away from negative technical factors, but we do try to have a situational awareness of technical factors as we make decisions.
Looking at technical analysis alone, let's see how much technical rating services agree with each other.
Today (2013-12-07) we queried three services, BarChart, StockCharts and Value Line to see how much those three fairly widely used services agree on what is a strong buy.
For BarChart, we required an 80% Buy rating for each of short-term, intermediate-term and long-term, as they define those periods. For StockCharts, we required a 90 rating on a 100 point scale. For Value Line, we required a 1 or 2 on a 5 point scale.
The net is that they don't have a lot of rating overlap.
If you do not do your own technical inspections, be sure you know what criteria the services you rely upon use in their work, and realize that if you ask enough services what they think, you will end up with an huge list of prospects - really too big to be useful.
That means to us that you have three practical choices: (1) do your own technical reviews, (2) find a service whose method makes the most sense to you and stick with it, or (3) find a limited number of services you respect and seek those stocks where there is some rating agreement between the services.
Along the lines of approach #3 (seeking agreement among technical rating services), here is how our filter turned out today, using the criteria mentioned above:
- BarChart turned up 251 stocks
- StockCharts turned up 210 stocks
- Value Line turned up 385 stocks
Between them, there were 638 unique symbols. That's around 10% of all stocks available in US (Fidelity reports 7,607 stocks with any quoted price, 5,942 with a price of at least $1.00, and 4,726 stocks with a price of $5 or more).
While there may in fact be more than 600 stocks in strongly attractive technical condition, it's too large a list for subsequent manual review. Obviously adding fundamental and other criteria would reduce the list to a manageable number. However, sticking with the technical rating theme, there are only 61 of those 638 (about 10% of the 10% - about 1% of the US stocks universe) that were common to the filter results for at least 2 of the 3 services and only 2 stocks were common to all 3 lists.
The two stocks with unanimous favorable technical rating were:
Being equity income biased in our work, we asked how may of the 61 stocks have a yield of at least 2% and a payout ratio less than 100%. There were 6 stocks (10% of the 10% of 10% - about 1/10th percent of the US stocks universe):
- (NYSE:CMC) Commercial Metals
- Harris Corporation
- (NASDAQ:GRMN) Garmin
- (NASDAQ:AAPL) Apple
- (NASDAQ:CPSI) Computer Programs And Systems
- (NASDAQ:ESLT) Elbit Systems
Wanting to know that independent analysts see gains in the year ahead, we asked which ones had at least a 5% expected year ahead price gain as reported by I/B/E/S and have an assigned PEG ratio of less than or equal to 2. There were also 6 stocks that met those criteria (10% of the 10% of 10% - about 1/10th percent of the US stocks universe):
- (TWC) Time Warner Cable
- (NASDAQ:CELG) Celgene
- (NASDAQ:CTSH) Cognizant Technology
- (NYSE:COF) Capital One Financial
- (NASDAQ:ATRO) Astronics Corporation
While Harris Corp is rated technically strong by the 3 services, and has a 2% yield, the Street view of year ahead price change is negative 12%.
The other notable stock is Apple, which is in both the yield and payout ratio list as well as the expected gain and PEG ratio list, with a 2+% yield, a 5% expected price increase and a PEG ratio less than 1.
We own both HRS and AAPL.
Here is the PEG, target price/market price, yield and payout of those 12 stocks. The same data for the 61 stocks with two of three ratings firms giving them a strong technical rating is available at this link on our site for email opt-in visitors.
Here are some technical condition data for each of the 12 stocks in tabular form, followed by a chart for each that you can use for yourself to judge their technical appeal.
(click image to enlarge)
In the charts below the uppermost panel shows how many standard deviations the price is from the 200-day average. The middle upper panel shows the 14-day Money Flow Index. The bottom upper panel shows the 14-day Relative Strength Index. The main panel shows the price bars in black, the 200-day average in gold, the 50-day average in dashed blue, the price level 10% below the 1-year trailing high in dashed red, and the price level 20% below the trailing 1-year high in bold red.
(click images to enlarge)
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Disclosure: QVM has positions in AAPL and HRS as of the creation date of this article (December 9, 2013). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.
General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.