Archive for October, 2008


Moving Averages

Filed Under: Glossary, Technical Analysis by Bill — 2 Comments
October 13, 2008

Moving Averages Follow the Money

Moving averages are a form of technical analysis which averages the price of a stock (or any other security for that matter) to help see the direction or momentum.  Sometimes these averages can be used to set resistance or support for the price of the stock.  Also the use of crossovers of two different moving averages signals momentum and direction.

Simple Moving Average

The simple moving average (SMA) is usually what is referred if just the term moving average is used.  It is calculated by averaging the price over the previous increments of time you determine.  For example, the 50 day moving average is the average of the last 50 days of closing prices.  The 13 minute moving average is the average of the price for the last 13 minutes.  This considerably helps smooth out a bumpy chart.

Exponential Moving Average

The exponential moving average (EMA) is similar to the simple moving average except it gives more weight to recent prices then further back prices.  The 12 and 26 day EMA are the most popular short term averages and the 50 and 100 day EMA are the most popular 100 day EMA.

A Beginning Tool for Trading in the Stock Market
A Beginning Tool for Trading in the Stock Market

 

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Lowes is Too Low

Filed Under: Stock Pick of the Day by Bill — 4 Comments
October 11, 2008

Buying the Stock to Make Money Sounds a Whole Lot Easier than Fixing My House

Lowes at $17.90 appears to be a good buy too me.  Following my recent post on CAGR Lowes has returned its shareholders approximately 17% per year since 1988.  Beats the panst off the S&P 500 yearly returns.  If it just continues this pace then I’m happy I’ll call it a day.  However, this is the lowest return on investment point at any time in the last 20 years!  Do you feel Lowes is at it’s worse point in 20 years or that the market has overvalue Lowes for 20 years?  This seems unlikely to me too.

Lowes has fallen 38% in the last year while the S&P 500 has fallen 42%.  It looks to me it has just been dragged down with the market.

CHICAGO (AP) — Shares of home improvement chain Lowe’s Cos. Inc. slid amid broader market declines Friday as an analyst called the company a “best-in-class” business.
Stifel Nicolaus & Co. analyst David Schick said Lowe’s wasn’t “too bullish” on its existing guidance that projects the company will double its 2008 earnings per share of $1.50 by 2013.

The rest of the article can be found at:
http://biz.yahoo.com/ap/081010/lowe_s_analyst_note.html?.v=1

I believe being called best in class is always good, but combined with talking about improving earnings in such a panicked market is also a great thing.

Technical Analysis:

Lowes Technical Analysis Chart

 

Looking at the chart we see the 50 day moving average has just crossed the 200 day.  This would have been a hugely positive sign if the last week hadn’t been so horrific.  With the volume so high there is potential to make decent gains however with the RSI being in the over sold territory I wouldn’t go shorting Lowes either.  I plan on waiting for the RSI to cross the 50 and the MACD to turn positive.  If the 50 day MA crosses the 200 again or stays above then I’ll be purchasing some Lowes myself.

Conclusion:

Lowes is a great buy in my oppinion for the long term future and a good buy in the immediate future.  With the credit crunch on and mortgage money tight I believe the general public will increase their household restorations to keep their homes enjoyable to live in or prevent themselves from needing to move as their life changes.

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CAGR

Filed Under: Glossary by Bill — 4 Comments
October 11, 2008

My Cash Deposit Earns 5% How Are Your Stocks Doing?

CAGR stands for Compound Annual Growth Rate.  Essentially it’s taking your returns (or losses) and leveling them over a percentage (%) per year much as savings account or credit card does.

How Do I Calculate CAGR?

 

 

 

You could also use this spreadsheet if it helps: CAGR Spreadsheet

How Does the CAGR Help Me Make Money?

The best part of the CAGR is it boils down your stock swings and lets you compare as most people commonly think about returns on investment.  I also like to use it as a primary screen for stocks.  If a companies earnings has been increasing steadily at 8% and yet it’s CAGR is 5% over 15 years there is likely a disconnect. 

One group that does this better then any other I know is a group from The Motley Fool called The BMW Method.  They look for stocks that have statistically too low of a CAGR to invest in.

Is There an Easier Way to View CAGR then Calculating Every Time?

Sort of.  If you graph a stock chart on a logarithmic scale instead of linear you are essentially turning the steep curve of a CAGR into a straight line.  This may be easier for you to recognize.

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Spread

Filed Under: Glossary by Bill — Comments Off
October 10, 2008

How is it That Someone Always Buys Or Sells My Shares of Stock?

If you’ve ever bought or sold stocks or currency you’ve probably noticed a bunch of different prices on the screen or from your broker. 

 

The spread is the difference between what the “market maker” is willing to pay for the stock and what they are willing to sell the stock for.  This is what the market makers do to make their money buying and selling stocks and what we gain is someone always being there to buy or sell are stocks.  This spread is regulated so that it can’t become manipulated and they make too much money for their service.

To figure out what the spread is for any given stock pull up this screen on your chosen broker or free service like google or yahoo.  The bid price is what the maker is willing to pay for a stock.  In the case above it is $329.50 per share.  The ask price is $330.80 per share. This is what the makers are willing to sell the stock for at the exact same moment in time.  In this example the spread would be:

[Ask] – [Bid] = $330.80 – $329.50 = $1.30

When you’re looking at a spread you want to be careful of what percent you are paying to buy or sell the equity not just the overall amount.  In this example it is $1.30 / $330.80 = 0.39% .  If you are long term investor this percentage loss should be very small compared to your expected returns.  However, if you are a trader this is a very important factor to consider in your risk reward analysis.  If your overall goal is 0.5% on the trade and the makers want 0.39% you have a much bigger hurdle to overcome.

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