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 What is Fundamental What is Technical
Analysis? 1. What to Buy 2. Company Management 3. Earnings Quality 4. Price/Earnings Ratio 5. Product Acceptance

1. 2. 3. 4. 5.

Analysis? When to Buy Trend Analysis Relative Strength Momentum When to Sell

© Dorsey, Wright & Associates 2009

FREESTAR BANK WEALTH MANAGEMENT DEPARTMENTS

Investment Center (Raymond James)
– – –

Kevin Moore Blake Karls Deborah Jaso-

Financial Advisor Financial Advisor Associate Operations Manager
Dan Fry, Debbie Lopez Brent Crane, Colleen Slagell

 

Trust Department Farm Department

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
© Dorsey, Wright & Associates 2009

© Dorsey, Wright & Associates 2009

ORIGINAL POINT & FIGURE CHART
64 64 64 63 63 63 63 63 62 62 62 62 62 61 61 61 60 59 58 57 56 55

45 44 43 42 41 41 40 40 40 40 39 39 39 39 39 38 38 38 38 37 37 36 35

40 39 38 37 36

42 41 40 39 39 38 38 37 37 36

45 44 44 43 43 43 43 42 42 42 42 42 42 41 41 41 41 41 41 41 41 40 40 40 40 40 40 40 39 39 39 39 39 38 38

54 53 52 51 50 49 48 48 47 47 47 46 46 46 45 45 45 44 44 44 44 43 43 43 43 42 42 42 42 41 41

53 52 51 50 49 48 47

59 58 57 56 55 54 53 52 51 51 50 50 50 49 49 49 48 48

58 57 56 55 54

© Dorsey, Wright & Associates 2009

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

Chart Source: www.dorseywright.com © Dorsey, Wright & Associates 2009

Citigroup (C)
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 © Dorsey, Wright & Associates 2009

Causes of Price Movement
Market

Sector Stock

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

Stock

Market Sector

© Dorsey, Wright & Associates 2009

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

Step 1: Market Analysis

© Dorsey, Wright & Associates 2009

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

Source: http://www.nytimes.com/interactive/2009/01/06/business/20090106-comeback-graphic.html
© Dorsey, Wright & Associates 2009

3 Legged Stool Approach to “How Offensive or Defensive Should I Be?”
 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

© Dorsey, Wright & Associates 2009

Leg #1:
Measuring Supply & Demand
Double Top
One column of X‘s exceeds a previous column of X‘s. 39 38 37 36 35 34 33 32 31 30 O O O O O O O O O X X X O O O X X X X 39 38 37 36 35 34 33 32 31 30
© Dorsey, Wright & Associates 2009

Double Bottom
One column of O‘s exceeds a previous column of O‘s.

X X X X X X X X X O O O

X X X O O O O

Leg #1: NYSE Bullish Percent
• • • 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.

• •

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Chart Source:

Leg #2 & 3:
Compare One Asset Class to Another

US Stocks

Cash

Fixed Income

Int’l Stocks

Foreign Currencies
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Commodi ties

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.

Relative Strength Calculation

• Daily Calculation:
Cash US Stocks

X 100 = Relative Strength Reading

This reading is plotted on a Point & Figure chart which then tells us whether we want to be in cash or US stocks

Cash or Stocks?

Cash: 2001-2002

Cash: 2008-Present

© Dorsey, Wright & Associates 2009

Chart Source:

Cash or Commodities?

Date Range

Column

Cash Money Market 18.41% 16.87% 0.23%

Continuous Commodity Index 10.11% 115.71% -26.97%
Chart Source: www.dorseywright.com

7/15/98 - 10/15/02 10/15/02 - 8/15/08 8/15/08 - 1/31/09

X - Cash O - Commod. X - Cash

© Dorsey, Wright & Associates 2009

Leg #2 & 3: Asset Class Evaluation

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Reaching Your Destination

X
Int’l Cash

Commodit ies Fixed Income

Equit y

Copyright © 2009
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