Fundamental Analysis and Position Trading E-Book

Thomas N. Bulkowski

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch
• Veröffentlichungsjahr: 2012

Seitenzahl: 448

Beschreibung

Comprehensive coverage of the four major trading styles Evolution of a Trader explores the four trading styles that people use when learning to trade or invest in the stock market. Often, beginners enter the stock market by: * Buying and holding onto a stock (value investing). That works well until the trend ends or a bear market begins. Then they try * Position trading. This is the same as buy-and-hold, except the technique sells positions before a significant trend change occurs. * Swing trading follows when traders increase their frequency of trading, trying to catch the short-term up and down swings. Finally, people try * Day trading by completing their trades in a single day. This series provides comprehensive coverage of the four trading styles by offering numerous tips, sharing discoveries, and discussing specific trading setups to help you become a successful trader or investor as you journey through each style. Trading Basics takes an in-depth look at money management, stops, support and resistance, and offers dozens of tips every trader should know. Fundamental Analysis and Position Trading discusses when to sell a buy-and-hold position, uncovers which fundamentals work best, and uses them to find stocks that become 10-baggers--stocks that climb by 10 times their original value. Swing and Day Trading reveals methods to time the market swings, including specific trading setups, but it covers the basics as well, such as setting up a home trading office and how much money you can make day trading.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Preface

EVOLUTION OF A TRADER

CONTENT OVERVIEW

INTENDED AUDIENCE

Acknowledgments

Chapter 1: Introduction to Buy-and-Hold

WHAT IS BUY-AND-HOLD?

WHO SHOULD BUY AND HOLD?

MY NUMBERS: BACKGROUND AND TERMS

NOW WHAT?

Chapter 2: Stock Selection

WHAT COMES AFTER LARGE PRICE MOVES?

MYTH: STOCKS THAT DROP LEAST IN A BEAR MARKET THEN SOAR

STOCK SELECTION THE EASY WAY

TWO TIPS FOR STOCK SELECTION

BUY FALLEN ANGELS

WHAT CHART PATTERNS APPEAR BEFORE MERGERS AND BUYOUTS?

WHAT ARE INSIDERS DOING?

CHAPTER CHECKLIST

Chapter 3: Book Value

BOOK VALUE DEFINED

VALUE ASSETS PROPERLY

INVESTING USING BOOK VALUE

WHEN IS BOOK VALUE IMPORTANT?

THE VALUE OF HIDDEN ASSETS

LIMITS OF BOOK VALUE

BUYBACKS LOWER BOOK VALUE

HISTORICAL RESEARCH

PRICE TO BOOK VALUE: A GOOD MEASURE

SMALL CAPS: BEST CHOICE

LOW STOCK PRICE RULES!

BOOK VALUE AND RETURN ON EQUITY

WHAT IS THE BEST PRICE TO BOOK VALUE?

COMBINATIONS AND PERFORMANCE

TRADING STRATEGY: BEATING THE DOW

THE EIGHT-STOCK SETUP

HOLD TIME FOR BEST RESULTS

CHAPTER CHECKLIST

Chapter 4: Capital Spending

IS DECREASING CAPITAL SPENDING THE HOLY GRAIL?

CAPITAL SPENDING TRENDS VERSUS PERFORMANCE

FREQUENCY DISTRIBUTION

PERFORMANCE BY MARKET CAP

CHAPTER CHECKLIST

Chapter 5: Cash Flow

HISTORICAL RESEARCH REVIEW

COOKING THE BOOKS

THE NUMBERS

IS INCREASING CASH FLOW GOOD?

PERFORMANCE BY MARKET CAP

CHAPTER CHECKLIST

Chapter 6: Dividends

STOCK DIVIDENDS: AN EXPLANATION

HISTORICAL RESEARCH REVIEW

HIGH YIELD, HIGH PERFORMANCE?

TESTING: YIELD AND PAYOUT RATIO

WHICH IS BEST: DIVIDENDS OR NO DIVIDENDS?

SURPRISE: DIVIDEND CUTS WORK!

WHEN DISASTER STRIKES

PERFORMANCE BY MARKET CAP

CHAPTER CHECKLIST

Chapter 7: Long-Term Debt

THE NUMBERS

IS DEBT GOOD?

SINKING SHIP: TAKING ON DEBT

DEBT BY MARKET CAPITALIZATION

CHAPTER CHECKLIST

Chapter 8: Price-to-Earnings Ratio

HISTORY LESSON

DO LOW P/E STOCKS OUTPERFORM?

P/E TRENDS DOWN: GOOD OR BAD?

PRICE AND EARNINGS COMBINATIONS: YAWN

BUY SMALL CAPS WITH LOW P/E

HIGH P/E: TIME TO SELL?

THREE P/E TIPS

CHAPTER CHECKLIST

Chapter 9: Price-to-Sales Ratio

GOOD BENCHMARK: PSRS BELOW 1.0

PSR TREND: DOWN IS BEST

SMALL CAPS, SMALL PSRS RULE!

CHECKLIST: PSRS BY INDUSTRY

CHAPTER CHECKLIST

Chapter 10: Return on Shareholders' Equity

LOW ROE STOCKS OUTPERFORM: WHY?

ROE TREND OVER TIME: YAWN

ROE PERFORMANCE BY MARKET CAPITALIZATION

CHAPTER CHECKLIST

Chapter 11: Shares Outstanding

PERFORMANCE VERSUS SHARES OUTSTANDING

EVENT PATTERN: DUTCH AUCTION TENDER OFFERS

SHOULD YOU SELL?

SELL AT WHAT PRICE?

EVENT PATTERN: COMMON STOCK OFFERINGS

PERFORMANCE AND MARKET CAPITALIZATION

CHAPTER CHECKLIST

Chapter 12: Fundamental Analysis Summary

PERFORMANCE RANK: ONE-YEAR HOLD

PERFORMANCE RANK: THREE-YEAR HOLD

PERFORMANCE RANK: FIVE-YEAR HOLD

Chapter 13: How to Double Your Money

HOW LONG TO DOUBLE?

WHAT IS THE BEST BUY PRICE?

WHICH MARKET CAPS DO BEST?

FOCUS ON FUNDAMENTALS: WHICH ARE BEST?

WARNING: LOSSES AHEAD. WHAT YOU NEED TO KNOW

TESTING THE SETUP

CHAPTER CHECKLIST

Chapter 14: Finding 10-Baggers

HOW LONG TO 10X?

WHAT IS HIGHEST STARTING PRICE?

WHAT HAPPENS THE FIRST YEAR?

RISING OVER TIME: HOW FAST?

10-BAGGERS BY MARKET CAP

FUNDAMENTAL RATIOS COMMON TO 10-BAGGERS

INDUSTRIES MOST LIKELY TO MAKE 10-BAGGERS

THE MOST POPULAR YEARS FOR 10-BAGGERS

SURPRISING FINDING ABOUT 10-BAGGER LOSSES

BACKWARD TESTING

CHAPTER CHECKLIST

Chapter 15: Trading 10-Baggers

10-BAGGER BIRTH

LIFE OF A 10-BAGGER

10-BAGGER DEATH

CHART PATTERNS IN 10-BAGGERS

CHAPTER CHECKLIST

Chapter 16: Selling Buy and Hold

THE WEINSTEIN SETUP

EXAMPLE: THE SOUTHWEST AIRLINES TRADE

EXAMPLE: SAVIENT PHARMACEUTICALS

1-2-3 TREND CHANGE FOR DOWNTRENDS

1-2-3 TREND CHANGE FOR UPTRENDS

THE CLOUDBANK SETUP

USING TRAILING STOPS TO SELL

TIMELY TREND-LINE EXITS

CAN MOVING AVERAGES HELP?

FOLLOW INSIDER TRANSACTIONS

SELLING: TWO RATIO TIPS

SELLING DOWN FROM A HIGH

CHAPTER CHECKLIST

Chapter 17: Fundamentals: What I Use

TWO BOOK VALUE TIPS

DO NOT GET SINGED BY BURN RATE

DROP CAPITAL SPENDING!

CURRENT RATIO 2.0

PROSPECTING FOR GROWTH USING DIVIDENDS

RISING EARNINGS, NET PROFIT

P/E RATIO VERSUS INDUSTRY

LITIGATION: STOP PISSING PEOPLE OFF!

AVOID TOO MUCH LONG-TERM DEBT

MARKET CAPITALIZATION: BIG RETURNS BY GOING SMALL

RESEARCH SPENDING

SALES? THINK MONEY

PRICE-TO-SALES RATIO: WHAT ABOUT DEBT?

STOCK PRICE: 5 TO 20

VOLUME: THIN ICE AHEAD!

CHAPTER CHECKLIST

Chapter 18: Introduction to Position Trading

WHAT IS POSITION TRADING?

WHO SHOULD POSITION TRADE AND WHY?

WHAT POSITION TRADING WILL NOT DO

EXAMPLE POSITION TRADE

CHAPTER CHECKLIST

Chapter 19: Getting Started in Position Trading

CHECK THE NEWS OR LOSE!

TREND? WHAT TREND?

TRADE WITH THE PRIMARY TREND

TAKE YOUR PICK: BOTTOM FISHING OR MOMENTUM?

WHAT IS MARKET INFLUENCE ON STOCKS?

WHAT CHART PATTERNS ARE BEST FOR POSITION TRADES?

BUSTED CHART PATTERNS REVISITED

TRADING EXAMPLE: FINDING VALUE IN DISASTER

CHAPTER CHECKLIST

Chapter 20: Ten Factors Make Chart Patterns Work

WHAT IS A DOUBLE BOTTOM?

TEN FACTORS REVEALED

SCORING SYSTEM CHECKLIST

SCORING PERFORMANCE

HIGHER SCORES WORK BEST

CASE STUDY: STILLWATER MINING

CASE STUDY: LSB INDUSTRIES

CASE STUDY: LUMBER LIQUIDATORS

CHAPTER CHECKLIST

Chapter 21: Three Winning Trades and a Funeral

THE INTEL FIASCO

HUDSON HIGHLAND HICCUP

CNO FINANCIAL GROUP

COMPLETE PRODUCTION SERVICES

CHAPTER CHECKLIST

Chapter 22: What Not to Do: Three Botched Trades

MEDIVATION: SELLING TOO LATE

COLDWATER CREEK: SELLING TOO SOON

HOVNANIAN: SELLING AT THE BOTTOM

CHAPTER CHECKLIST

Chapter 23: What We Learned

CHAPTER 2: STOCK SELECTION

CHAPTER 3: BOOK VALUE

CHAPTER 4: CAPITAL SPENDING

CHAPTER 5: CASH FLOW

CHAPTER 6: DIVIDENDS

CHAPTER 7: LONG-TERM DEBT

CHAPTER 8: PRICE-TO-EARNINGS RATIO

CHAPTER 9: PRICE-TO-SALES RATIO

CHAPTER 10: RETURN ON SHAREHOLDERS EQUITY

CHAPTER 11: SHARES OUTSTANDING

CHAPTER 12: FUNDAMENTAL ANALYSIS SUMMARY

CHAPTER 13: HOW TO DOUBLE YOUR MONEY

CHAPTER 14: 10-BAGGERS

CHAPTER 15: TRADING 10-BAGGERS

CHAPTER 16: SELLING BUY AND HOLD

CHAPTER 17: FUNDAMENTALS, WHAT I USE

CHAPTER 18: INTRODUCTION TO POSITION TRADING

CHAPTER 19: GETTING STARTED IN POSITION TRADING

CHAPTER 20: TEN FACTORS MAKE CHART PATTERNS WORK

CHAPTER 21: THREE WINNING TRADES AND A FUNERAL

CHAPTER 22: WHAT NOT TO DO: THREE BOTCHED TRADES

Visual Appendix of Chart Patterns

Bibliography

OTHER SITES OF INTEREST

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

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Cover design: John Wiley & Sons

Copyright © 2013 by Thomas N. Bulkowski. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bulkowski, Thomas N., Fundamental analysis and position trading : evolution of a trader / Thomas N. Bulkowski. pages cm. — (Wiley trading series) Includes bibliographical references and index. ISBN 978-1-118-46420-5 (cloth); ISBN 978-1-118-50874-9 (ebk); ISBN 978-1-118-50875-6 (ebk); ISBN 978-1-118-51695-9 (ebk) 1. Stocks—Prices. 2. Price-earnings ratio. 3. Dividends. I. Title. HG4636.B85 2012 332.63'2042–dc23 2012032676

Preface

Are you like John?

He learned early in life to save his money for a rainy day. Instead of putting it into the bank, he put it into the stock market. He bought Cisco Systems in mid-1999 at 35 and watched the stock soar to 82 in less than a year.

“I'm looking for my first 10-bagger,” he said, and held onto the stock.

In 2001, when the tech bubble burst, the Cisco balloon popped, too, and it plunged back to 35. He was at breakeven after seeing the stock more than double.

“It'll recover,” he said. “It's a $200 stock. You'll see.”

The stock tunneled through 35 then 30, then 20, and bottomed at 15, all in one month. When it hit 10, he sold it for a 70 percent loss.

“I should have sold at the top. Buy-and-hold doesn't work.” But it did work. Cisco more than doubled, but he held too long.

Next, he tried position trading to better time the exit and chose Eastman Chemical. He bought it in 2003 at 14, just pennies from the bear market bottom, and rode it up to 21 before selling. He made 50 percent in a year. Was he happy?

“I sold too soon.” The stock continued rising, hitting 30 in 2005. He disliked seeing profits mount after he sold, and wanted to profit from swings in both directions.

He switched to swing trading in 2005 and tried his old favorite: Cisco. The stock bounced from 17 to 20 to 17 to 22 over the next year, but he always bought too late and exited too early. He made money, but not enough.

He took a vacation from his day job and watched Applied Materials wave to him on the computer screen, inviting him to come day trade it. So he did. He made $400 in just 15 minutes. “If I can make $400 a day for a year, I'll make”—he grabbed his calculator and punched buttons—“$146,000! No, that's not right. How many trading days are there in a year?”

He redid the math and discovered that he could make $100,000 a year by nibbling off just 40 cents a share on 1,000 shares every trading day. “Wow. Count me in.”

After paying $5,000 for a trading course and more for hardware, software, and data feeds, he took the plunge and started day trading full time.

It took a year to blow through his savings. Another three months took out his emergency fund. He moved back in with his parents while he looked for a real job.

Now, he is saving again and putting it to work in the market. “After reading the manuscript for this book,” he said, “I found a trading style that works for me. I'm a swinger—a swing trader. And I'm making money, too.” He handles not only his own money but his parents and siblings as well, providing them with extra income and building a nest egg for their retirement.

EVOLUTION OF A TRADER

John represents an amalgam of traders, a composite of those searching for a trading style that they can call their own. He suffered through many failed trades before finding a trading style that worked for him. I wrote the Evolution of a Trader series to help people like John.

Evolution of a Trader traces my journey from a buy-and-hold investor to position trader to swing trader to day trader as I searched for styles that worked best when markets evolved. However, these are not autobiographical. Rather, it is an exploration of what has worked, what is supposed to work but does not, and what may work in the future.

This series dissects the four trading styles and provides discoveries, trading tips, setups, and tactics to make each style a profitable endeavor. I have done the research so you do not have to. I show what is needed to make each style work.

CONTENT OVERVIEW

The three books in the Evolution of a Trader series provide numerous tips, trading ideas, and setups based on personal experience and that of others.

Easy to understand tests are used to confirm trading folklore and to illustrate ideas and setups, and yet the books are an entertaining read with an engaging style that appeals to the novice.

Each section has bullet items summarizing the importance of the findings. A checklist at chapter's end provides an easy-to-use summary of the contents and reference of where to find more information.

At the end of each book is a topic checklist and reference.

Trading Basics

The first book in the series begins with the basics, creating a solid foundation of terms and techniques. Although you may understand market basics, you will learn from this book.

How do I know? Take this quiz. If you have to guess at the answers, then you need to buy this book. If you get some of them wrong, then imagine what you are missing. Answers are at the end of the quiz.

From Chapter 2: Money Management

1. True or false: Trading a constant position size can have disastrous results.

2. True or false: A market order to cancel a buy can be denied if it is within two minutes of the Nasdaq's open.

3. True or false: Dollar cost averaging underperforms.

From Chapter 3: Do Stops Work?

1. True or false: Fibonacci retracements offer no advantage over any other number as a turning point.

2. True or false: A chandelier stop hangs off the high price.

3. True or false: Stops cut profit more than they limit risk.

From Chapter 4: Support and Resistance

1. True or false: Peaks with below average volume show more resistance.

2. True or false: Support gets stronger over time.

3. True or false: The middle of a tall candle is no more likely to show support or resistance than any other part.

From Chapter 5: 45 Tips Every Trader Should Know

1. True or false: Fibonacci extensions are no more accurate than any other tool for determining where price might reverse.

2a. True or false: Only bullish divergence (in the RSI indicator) works and only in a bull market.

2b. True or false: Bullish divergence (in the RSI indicator) fails to beat the market more often than it works.

3. True or false: Price drops faster than it rises.

From Chapter 6: Finding and Fixing What Is Wrong

1. True or false: The industry trend is more important than the market trend.

2. True or false: Holding a trade too long is worse than selling too early.

3. True or false: Sell in May and go away.

The answer to every statement is true.

Fundamental Analysis and Position Trading

This book explains and describes the test results of various fundamental factors such as book value, price-to-earnings ratio, and so on, to see how important they are to stock selection and performance.

The Fundamental Analysis Summary chapter provides tables of fundamental factors based on hold times of one, three, and five years that shows which factor is most important to use for those anticipated hold times. The tables provide a handy reference for buy-and-hold investors or for other trading styles that wish to own a core portfolio of stocks based on fundamental analysis.

Chapters such as “How to Double Your Money,” “Finding 10-Baggers,” and “Trading 10-Baggers” put the fundamentals to work. The chapter titled “Selling Buy-and-Hold” helps solve the problem of when to sell long-term holdings.

Position Trading The second part explores position trading. It introduces market timing to help remove the risk of buying and holding a stock for years.

Have you heard the phrase, Trade with the trend? How often does a stock follow the market higher or lower? The section in Chapter 19 titled, “What Is Market Influence on Stocks?” provides the answer.

This part of the book looks at how chart patterns can help with position trading. It discloses the 10 most important factors that make chart patterns work and then blends them into a scoring system. That system can help you become a more profitable position trader when using chart patterns.

Six actual trades are discussed to show how position trading works and when it does not. Consider them as roadmaps that warn when the road is bumpy and when the market police are patrolling.

Swing and Day Trading

The last book of the series covers swing and day trading. The first portion of the book highlights swing trading techniques, explains how to use chart patterns to swing trade, swing selling, event patterns (common stock offerings, trading Dutch auction tender offers, earnings releases, rating changes, and so on), and other trading setups.

It tears apart a new tool called the chart pattern indicator. The indicator is not a timing tool, but a sentiment indicator that is great at calling major market turns.

Day Trading Day trading reviews the basics including home office setup, cost of day trading, day trading chart patterns, and the opening range breakout. It discusses research into the major reversal times each day and what time of the day is most likely to set the day's high and low—valuable information to a day trader.

An entire chapter discusses the opening gap setup and why fading the gap is the best way to trade it. Another chapter discusses the opening range breakout setup and questions whether it works.

Ten horror stories from actual traders complete the series. They have been included to give you lasting nightmares.

INTENDED AUDIENCE

The three books in this series were written for people unfamiliar with the inner workings of the stock market, but will curl the toes of professionals, too.

Research is used to prove the ideas discussed, but is presented in an easy to understand and light-hearted manner. You will find the books to be as entertaining as they are informative and packed with moneymaking tips and ideas. Use the ideas presented here to hone your trading style and improve your success.

Whether you are a novice who has never purchased a stock but wants to, or a professional money manager who trades daily, these books are a necessary addition to any market enthusiast's bookshelf.

Acknowledgments

Smany people are involved in bringing a manuscript to life, and I play a small role. To all of those workers at John Wiley & Sons, I say thanks for the help, especially to Evan Burton and Meg Freeborn. They ironed the wrinkles and made the trilogy presentable, even fashionable

CHAPTER 1

Introduction to Buy-and-Hold

I started dabbling in the markets by researching companies using their annual reports. I pored over the numbers and checked the ratios to make sure the company would not fold anytime soon.

In those days, I learned to love cash dividends and stock dividends as well. They added to the bulge in my wallet and slowly increased my net worth one share at a time. During the bull market of the 1980s, I had a win/loss ratio of 63 percent and made an average of 39 percent per trade. I achieved that without knowing what I was doing.