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Point & Figure Analysis
A Disciplined Approach to Buying and Selling Stocks, ETF’s, and Mutual Funds
The Company fundamentals looks great. All the analysts love it. So why is the stock going down?
© Point & Figure Coaching and Research GmbH
Fundamental Analysis vs. Technical Analysis
1. What to Buy2. Company Management3. Earnings Quality4. Price/Earnings Ratio5. Product Acceptance
1. When to Buy2. Trend Analysis3. Relative Strength4. Momentum5. When to Sell
What is Fundamental Analysis? What is Technical Analysis?
© Dorsey, Wright & Associates 2009
FREESTAR BANK WEALTH MANAGEMENT DEPARTMENTS
Investment Center (Raymond James)– Kevin Moore Financial Advisor– Blake Karls Financial Advisor Associate– Deborah Jaso- Operations Manager
Trust Department Dan Fry, Debbie Lopez
Farm Department Brent Crane, Colleen Slagell
Supply and Demand
We all understand the basic forces of supply and demand.
The same forces that affect prices in the supermarket also affect prices in the stock market.
Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket.
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
64 64 6463 63 63 63 6362 62 62 62 62
61 61 6160
59 59
58 58 5857 57 5756 56 56
55 55 5554 54 5453 53 53
52 52 5251 51 51 5150 50 50 50 50
49 49 49 49 4948 48 48 48 48
47 47 47 4746 46 46
45 45 45 45 45
44 44 44 44 44 44 4443 43 43 43 43 43 43 43 4342 42 42 42 42 42 42 42 42 42 42 42
41 41 41 41 41 41 41 41 41 41 41 41 4140 40 40 40 40 40 40 40 40 40 40 40 4039 39 39 39 39 39 39 39 39 39 39 39 39
38 38 38 38 38 38 38 38 3837 37 37 37 37
36 36 36
35
ORIGINAL POINT & FIGURE CHARTORIGINAL POINT & FIGURE CHART
Point & Figure Basics
X’s = Price is rising
O’s = Price is falling
Alternate columns of X’s and O’s
Minimum of 3 X’s or O’s in a column
Time = First action in month use number. (1 for January, etc.)
Use daily high & low for charting price action.
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
Citigroup (C)
© Dorsey, Wright & Associates 2009
Did the fundamental analysts learn from the 2000-2002
Technology Bubble?
The following is a quote from the February 9th New York Times
article, “Why Analysts Keep Telling Investors to Buy”
“At the top of the market, they urged investors to buy or hold onto
stocks about 95 percent of the time. When stocks stumbled, they
stayed optimistic. Even in November, when credit froze, the
economy stalled and financial markets tumbled to their lowest
levels in a decade, analysts as a group rarely said sell. “
Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
Causes of Price Movement
Stock
Market
Sector
Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals!
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
© Dorsey, Wright & Associates 2009
Typical Resource Allocation
Most people, however, spend 80% of their time on stock evaluation and only 20% on sector and market evaluation. In other words, they ignore where the greatest amount of risk lies – the market and sector forces.
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
© Dorsey, Wright & Associates 2009
Stock
Market
Sector
The Five-Step Game Plan Step 1: Market Analysis Step 2: Sector Analysis Step 3: Fundamental Analysis Step 4: Technical Research Step 5: Risk management and Follow-up
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
Step 1: Market Analysis
The Buy-and-Hold Myth Buy the “Market” in 1929…
It took 25 years to get back to even.
Buy it in 1973…
It took 7.6 years to get back to even.
Starting in 1987 IBM went down 74%...
It took 10 years to recover.
Cisco Systems (CSCO) was as high as $82 in 2000. It has yet to recover.
Note: Past performance is no guarantee of future success.
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
Source: http://www.nytimes.com/interactive/2009/01/06/business/20090106-comeback-graphic.html
© Dorsey, Wright & Associates 2009
Leg #1: Equity Exposure and Managing the Trade
Leg #2 & #3: Two of the Following Domestic Equities International Equities Commodities Foreign Currencies Fixed Income Cash
3 Legged Stool Approach to “How Offensive or Defensive Should I Be?”
Leg #1: Measuring Supply & Demand
Double Top
One column of X‘s exceeds a previous column of X‘s.
Double Bottom
One column of O‘s exceeds a previous column of O‘s.
39 O
38 O
37 O
36 O
35 O X
34 O X X
33 O X O X
32 O X O X
31 O O
30
39
38 X X
37 X O X O
36 X O X O
35 X O O
34 X O
33 X
32 X
31 X
30 X
© Dorsey, Wright & Associates 2009
Leg #1: NYSE Bullish Percent
© Dorsey, Wright & Associates 2009
• X’s = Offense – Wealth Accumulation
• O’s = Defense – Wealth Preservation
• Two Lines of Demarcation: 30% and 70%
• Measures Risk in the Market
• Does not have to move in tandem with the S&P 500 or the Dow Jones.
Chart Source: www.dorseywright.com
Leg #2 & 3: Compare One Asset Class to Another
© Dorsey, Wright & Associates 2009
US Stocks CashFixed Income
Int’l StocksForeign Currencies Commodities
The Way Investors Invest --
Who Do You Believe is Going to Be a Better Football Team Next Year?
The Way Investors Invest --
Who Do You Believe is Going to Be a Better Football Team Next Year?
• All major sports have a ranking system. The Point & Figure Relative Strength tool is the ranking system we use for ETF’s.
• Daily Calculation:
Cash X 100 = Relative Strength US Stocks Reading
• This reading is plotted on a Point & Figure chart which then tells us whether we want to be in cash or US stocks
Relative Strength CalculationRelative Strength Calculation
Cash or Stocks?
© Dorsey, Wright & Associates 2009
Relative Strength: A Ranking System
• X’s = Cash – Wealth Preservation
• O’s = Stocks – Wealth Accumulation
Cash: 2001-2002
Cash: 2008-Present
Chart Source: www.dorseywright.com
Cash or Commodities?
© Dorsey, Wright & Associates 2009
Relative Strength: A Ranking System
• X’s = Cash – Wealth Preservation
• O’s = Commodities – Wealth Accumulation
Date Range ColumnCash - Money Market
Continuous Commodity
Index
7/15/98 - 10/15/02 X - Cash 18.41% 10.11%
10/15/02 - 8/15/08 O - Commod. 16.87% 115.71%
8/15/08 - 1/31/09 X - Cash 0.23% -26.97%
Chart Source: www.dorseywright.com
Leg #2 & 3: Asset Class Evaluation
© Dorsey, Wright & Associates 2009
XX
Equity
Commodities
Fixed Income
Int’l
Cash
Reaching Your Destination
Copyright © 2009 Copyright © 2009 Dorsey, Wright & Associates, Inc.Dorsey, Wright & Associates, Inc.
Keep in mind that there is no assurance that this or any strategy will ultimately be successful or profitable.
© Point & Figure Coaching and Research GmbH
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