A reader, Steven Mac, asked me if I could highlight the key fundamental points in the case studies I post on this blog. I will list his questions (in blue) below and then answer them using the numbers of actual case studies in 2007 (MA, BIDU and EDU will be my focus). Read any of these books to understand in depth what I am looking for with fundamental analysis:

Questions:

1) What is the min number of institutions you want to see holding a stock? What is the max?
2) Shares Held/Previous Period
3) Shares Bought and Sold - total interest of all participants? increasing buy demonstrating demand on expected results? sold indicating institutions are aware of some internal number or news of future performance problems?

Question #1 Answer:
I don’t have a minimum number of institutions that I would like to see holding a stock. I also don’t like to set a maximum threshold. However, I prefer to see a young growth stock have between 50 and 300 institutional investors. This tells me that it has room to grow and more “smart money’ can pour in without saturating the stock’s market.

2/6/07: EDU: 97, 8/23/07: EDU: 159 – 64% increase
4/2/07: MA: 393, 8/23/07: MA: 513 – 30% increase
4/25/07: BIDU: 255, 8/23/07: MA: 238 – a decrease (+18 sellers last period)

*EDU had a 1900% increase in institutional buyers during the case study in february. As you know, the stock moved from $36 to $60 after the case study and sponsorship increased another 64%.

*BIDU moved from $100 to $200 after the case study as institutional investors jumped in but they have been bailing as of late.

Think about this: RIMM has 841 current holders, AAPL has 2,436 and MSFT has 3,746.

Question #2 Answer:
I pinpoint stocks that have had substantial increases in shares held versus shares held previous period. This statistic will directly correlate to the value of shares bought and the value of shares sold. As long as more money is pouring into the stocks, I will keep it on my watch list for a potential buy. The contrary is true if I am looking for reason to sell. Anything above 25% is solid and anything above 100% is substantial (PRXI was my latest case study and the shares held went from 2.8M to 11.7M for a 318% gain).

Question #3 Answer:
Shares bought is very important because it is the true number behind the increase in institutional sponsorship. For example, institutional buyers may increase by 60% but the number of new shares bought may only increase by 10% (not a good sign). But, if the number of new shares bought is a lot stronger than shares sold, we have accumulation.
EDU had 6.3M shares bought and only 22k sold – ACCUMULATION! (286:1 ratio)
MA had 36.2M shares bought and 25.3M shares sold – ACCUMULATION (3:2 ratio)
BIDU has 8.63M shares bought and 4.58M shares sold – ACCUMULATION (2:1 ratio)

Read more »

I received a question about Relative Strength (RS) in the comments of a recent post.

I have spent many hours reading and studying your blogs; best on the web! I am very anxious to see your new site. In the meantime, I have a question about relative strength. I have a mild understanding of relative strength based on my own research but can you explain RS in more detail especially the meaning and importance of RS numbers and how they fit into an investor’s strategy. For me, your post on January 22, 2006 that looks at Coach (COH) and Tower Group (TWGP) would be a good place to begin.

Thank you. Keep up the good work.

Paul Trombley

Paul,
Relative Strength (RS) is calculated by dividing the stock’s price by the value of a specific index (the S&P 500 in the case of IBD). It is also a measure of price trend that indicates how a stock is performing relative to other stocks in its industry.

The RS line is helpful in determining whether a stock is outperforming or lagging the general market and/or it’s industry peers.

A new relative strength high may be an indicator that a stock is prepared to make a new price high and a new relative strength low that precedes a new low in the stock can be a warning sign that a stock is in trouble and possibly going lower. (This is what I detailed in the COH and TWGP posts in early 2006).

*Today’s Top 10 RS Stocks are Listed at the Bottom of the Post (with Charts)*
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Tonight’s chart comes to us from Carl Swenlin, the President at Decision Point

I want to thank Carl for allowing me to upload the chart that shows the 10-day moving average of the Hi Lo Differential. Another thanks to Mike for leaving me the comment to contact Carl.

*click the image for a larger view*
*Note: I added the “1,2,3″ graphics from photoshop*

According to Carl’s data, we must go back to 1998 to find a lower reading than last week’s NH-NL ratio. Even more amazing is the fact that we must then go back 20 to 38 years to find readings in the same vicinity as 1998 and 2007.

Ignoring the spike in 1987, we must visit the 1970’s to find readings below the -400 level on the chart.

*click the image for a larger view*
*Note: Original Chart*

And don’t forget to stop by Carl’s site, Decisionpoint.com

The markets gave us 2,952 new lows last week, surpassing the previous multi-year weekly low of 2,862 set in the final week of July 2007. The NH-NL ratio dropped to its worst level in more than five years with a weekly reading of minus 86.89%.

Last week averaged 41 new highs per day and 590 new lows per day with the ultimate apex coming on Thursday with a daily reading of 33-1,276. I can’t even find a reading of minus 94.96% in my data which stretches back to the post bubble days. Thursday is now the weakest reading my data has ever recorded (keep in mind that I started to store this data in excel back in 2001 so I am sure it is not the worst ever or even the worst reading over the past 10 or 20 years).

See a Historical chart (1968-2007) here for the Lowest Hi-Low Differential in Nine Years

*click the image for a larger view*

The past four weeks have compiled new lows of 2,862, 2,646, 2,095, and 2,952 for a monthly average of 2,639; comparatively, May had an average of 450 or one sixth the number of stocks making new lows over the past month.

We recorded our first reading of more than 1,000 new lows on Monday August 6, 2007 after writing this very popular post:
A Negative New High - New Low Ratio (NH-NL)

The NH-NL Ratio remained in negative territory for nine of thirteen weeks in the spring and summer of 2006 while the NASDAQ corrected from 2,300 to 2,000. If that is any indication of what the market wants to do now, be prepared to watch the market tread sideways to slightly lower over the next few months. Yes, the Fed is screwing with the natural progression of the market by bailing out Wall Street’s mistakes but all things reach their equilibrium sooner or later.

So what does this all mean?
As I said in my last NH-NL Ratio post:

It means that the market should be ready to correct by “another” 10% based on the history of my NH-NL studies.

In addition to watching the NH-NL Ratio, I keep an ongoing database with the movements of the 197 industry groups tracked by Investor’s Business Daily. Unfortunately, I can’t reproduce that proprietary information here as they will be sending me e-mails warning me to take it down as it is for subscribers only (it has happened before). However, I can list the general industries that are gaining and losing steam over the past couple of weeks as this information can be compiled anywhere on the web.

The industries on the move happen to be retailers with emphasis on:

• Consumer Electronics
• Drug Stores
• Super Markets
• Wholesale Food

Aside from Retailers, Banks are also on the rise since the Fed made their move.

Read more »

This week’s recap starts with Cramer’s less than stellar stock picking performance on Mad Money versus the major market indexes. I mixed in a couple links about the Fed decision on Friday from Bonddad and Bloomberg. Madstocks has a post about interesting stocks that perform better than average when hurricanes start to develop and cause havoc in the Gulf of Mexico. StockBee highlights characteristics of stocks that typically outperform the market after a correction or pullback. I touched on this subject earlier in the week with a short list of my own. I rounded out my weekly top 10 links with posts from solid perennial stock bloggers such as Brett Steenbarger, Roger Nusbaum and Bill Rempel. Enjoy and don’t forget to read them ALL!

• The Cramer Effect and Defect:
  By Bill Alpert via Barrons Online

  “But a comprehensive and careful review of his stock picks by Barron’s finds that his picks haven’t beaten the market. Over the past two years, viewers holding Cramer’s stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star’s Buy recommendations compiled by YourMoneyWatch.com, a Website run by a retired stock analyst and loyal Cramer-watcher.”

• Friday’s Markets: via The Bonddad Blog
  

  “Bernanke has continued the the “Greenspan put” tradition. When financial markets screw-up and make a ton of bad loans, the Federal Reserve will bail them out.”

• Fed Cuts Discount Rate to 5.75% to Ease Credit Crunch: via Bloomberg
  

  “Today’s move also shows how Bernanke, like his predecessor, is prepared to temporarily abandon Fed growth forecasts and inflation objectives to offset the risk of a credit crunch. Former Chairman Alan Greenspan was known for his tendency to give financial market conditions a primary role in policy, and he came to the rescue on several occasions when turmoil struck.”

• Mood, Emotion, and Trading: via Brett Steenbarger at TraderFeed
  

  “We have a lot of volatility at the moment, but we have more fear than we have seen in a very long time. As the markets have rallied during the course of the day, the VIX to SDS ratio has remained stubbornly higher, suggesting that the fear component of the VIX may now be the tail wagging the volatility dog.”

• Hurricane Plays: via Madstocks
  

  “I have traded hurricanes many times, this is a list of stocks that made huge moves when a hurricane was present in the Gulf of Mexico:”

• Creating and Managing a Trading Journal: via Toni Hansen
  

  “One of the most common, and least helpful, forms of a trading journal that people use is the spreadsheet. I despise spreadsheets… We are talking a level much higher than simply disliking them. If I ask a client to bring me their trading journal and they show up with a spreadsheet showing things like stock symbol, entry time and price, exit time and price, amount gained or lost and that is all, then I just want to take that spreadsheet and throttle them with it… ”

• Search For Stocks With Fattest Profit Growth: via Pradeep Bonde at Stockbee
  

  “Today Investor’s Business Daily has a piece on stock selection and importance of earnings and earnings acceleration in stock selection process. Market corrections like the one we are currently witnessing are good time to focus on such stocks. These stocks withstand such corrections. Even if they pullback, they do it reluctantly.”

• Financial Sector: via Roger Nusbaum at Random Roger’s Big Picture
  

  “One thing we all need to think about is that at some point the financial sector carnage will end. When it does it will make sense to go heavier into financials… The sector is in trouble, the trouble will end, and once it does makes sense that the more volatile names within will provide leadership. As a general idea increasing volatility at the start of a new cycle and then letting up on that volatility as the cycle matures has been a reliable pattern in the past.”

• From One Perception to Another: via David Kneupper at The dk Report
  

  “So far, this correction has a bizarre, unpredictable quality to it that’s about de-leveraging, illiquidity and other serious matters. However, there’s no evidence that the weakness is about an economy tipping into recession. As a result, it’s worth repeating that remarkable opportunities are being created through the mis-pricing of equities. High quality watchlists will come in handy soon enough.”

• Irony, Possible Bottoms, and Scaling In: via Bill Rempel, a.k.a. NO DooDahs!
  

  “No one is consistently on time, even though it’s a fact that someone always buys right at the bottom or right at the top, because, you know, there was a tick there… I still see nothing to change the thesis that this was a forced-selling panic, and I expect these buys to be profitable before long, probably before most of the demagogues even recognize a bottoming has occurred.”