TECHNICAL ANALYSIS

At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis. Dow Theory was not presented as one complete amalgamation, but rather pieced together from the writings of Charles Dow over several years. Of the many theorems put forth by Dow, three stand out:
·         Price Discounts Everything
·         Price Movements Are Not Totally Random
·         "What" Is More Important than "Why"

One very popular form of technical analysis until the mid-1960s was "tape reading". It consisted in reading the market information as price, volume, orders size, speed, conditions, bids for buying and selling, etc.; printed in a paper strip which ran through a machine called a stock ticker. 

Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future performance.  Technical analysts consider the market to be 80% psychological and 20% logical. Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical analysts, fundamental analysts and many others.

Since a market's price reflects all relevant information, their analysis looks at the history of a security's trading pattern rather than external drivers such as economic, fundamental and news events. Therefore, price action would also tend to repeat itself due many investors collectively tend toward patterned behavior – hence technicians' focus on identifiable trends and conditions.

So based on the premise that all relevant information is already reflected by prices, technical analysts believe it is important to understand what investors think of that information, known and perceived.  Technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.  Technicians use various methods and tools, the study of price charts is but one.

Many technicians employ a top-down approach that begins with broad-based macro analysis. The larger parts are then broken down to base the final step on a more focused/micro perspective. Such an analysis might involve three steps:

1. Broad market analysis through the major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite.
2. Sector analysis to identify the strongest and weakest groups within the broader market.
3. Individual stock analysis to identify the strongest and weakest stocks within select groups.

Technical analysis is not limited to charting, but it always considers price trends.  For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment.  Surveys that show overwhelming bullishness, for example, are evidence that an uptrend may reverse; the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.

The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are universally applicable, each of the analysis steps above can be performed using the same theoretical background. You don't need an economics degree to analyze a market index chart. You don't need to be a CPA to analyze a stock chart. Charts are charts. It does not matter if the time frame is 2 days or 2 years. It does not matter if it is a stock, market index or commodity. The technical principles of support, resistance, trend, trading range and other aspects can be applied to any chart.

Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.

Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.

Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in Options (implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.

There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one technique. Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.

Charting Terms and Indicators

Concepts:

• Resistance – a price level that may prompt a net increase of selling activity
• Support – a price level that may prompt a net increase of buying activity
• Breakout – the concept whereby prices forcefully penetrate an area of prior support or resistance, usually, but not always, accompanied by an increase in volume.
• Trending – the phenomenon by which price movement tends to persist in one direction for an extended period of time
• Average true range – averaged daily trading range, adjusted for price gaps
• Chart pattern – distinctive pattern created by the movement of security prices on a chart
• Dead cat bounce – the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement
• Elliott wave principle and the golden ratio to calculate successive price movements and retracements
• Fibonacci ratios – used as a guide to determine support and resistance
• Momentum – the rate of price change
• Point and figure analysis – A priced-based analytical approach employing numerical filters which may incorporate time references, though ignores time entirely in its construction.
• Cycles – time targets for potential change in price action (price only moves up, down, or sideways)

Types of charts:

• Open-high-low-close chart – OHLC charts, also known as bar charts, plot the span between the high and low prices of a trading period as a vertical line segment at the trading time, and the open and close prices with horizontal tick marks on the range line, usually a tick to the left for the open price and a tick to the right for the closing price.
• Candlestick chart – Of Japanese origin and similar to OHLC, candlesticks widen and fill the interval between the open and close prices to emphasize the open/close relationship. In the West, often black or red candle bodies represent a close lower than the open, while white, green or blue candles represent a close higher than the open price.
• Line chart – Connects the closing price values with line segments.
• Point and figure chart – a chart type employing numerical filters with only passing references to time, and which ignores time entirely in its construction.

Overlays:

Overlays are generally superimposed over the main price chart.

• Resistance – a price level that may act as a ceiling above price
• Support – a price level that may act as a floor below price
• Trend line – a sloping line described by at least two peaks or two troughs
• Channel – a pair of parallel trend lines
• Moving average – the last n-bars of price divided by "n" -- where "n" is the number of bars specified by the length of the average. A moving average can be thought of as a kind of dynamic trend-line.
• Bollinger bands – a range of price volatility
• Parabolic SAR – Wilder's trailing stop based on prices tending to stay within a parabolic curve during a strong trend
• Pivot point – derived by calculating the numerical average of a particular currency's or stock's high, low and closing prices
• Ichimoku kinko hyo – a moving average-based system that factors in time and the average point between a candle's high and low

Price-based indicators:

These indicators are generally shown below or above the main price chart.

• Average directional index – a widely used indicator of trend strength
• Commodity Channel Index – identifies cyclical trends
• MACD – moving average convergence/divergence
• Momentum – the rate of price change
• Relative strength index (RSI) – oscillator showing price strength
• Stochastic oscillator – close position within recent trading range
• Trix – an oscillator showing the slope of a triple-smoothed exponential moving average
• %C – denotes current market environment as range expansion or a range contraction, it also forecast when extremes in trend or choppiness are being reached, so the trader can expect change.

Breadth Indicators

These indicators are based on statistics derived from the broad market

• Advance–decline line – a popular indicator of market breadth
• McClellan Oscillator - a popular closed-form indicator of breadth
• McClellan Summation Index - a popular open-form indicator of breadth

Volume-based indicators

• Accumulation/distribution index – based on the close within the day's range
• Money Flow – the amount of stock traded on days the price went up
• On-balance volume – the momentum of buying and selling stocks

 

PORTFOLIO DIVERSIFICATION

Keeping a diverse Stock portfolio means spreading your investments among different industry sectors, so that they work together to build your wealth, while affording you some protection from downturns in any specific industry sector.

Asset allocation is the process of determining what percentage should be placed in cash, and what percentage in each industry sector. Asset allocation may account for the success of your portfolio more than the specific stocks you hold, and even more than the timing of your buy and sell decisions.

Diversification involves dividing your capital across and within a variety of industry sectors. If there is a downturn in any one sector, this practice can help you manage risk.

Each sector offers different types of risks and rewards; each industry is also affected differently by economic events. Investments across different sectors, therefore, gain and lose ground independently. This protects you from losing your entire portfolio should one stock significantly underperform, or even lose all its value. In addition, large fluctuations are often balanced out. For example, if one of your stocks lost significant ground, chances are that in a diversified portfolio you would hold two or three stocks in another sector that would balance the loss with predictable income.

There are two specific types of risk to keep in mind when investing: unsystematic risk and systematic risk.

Unsystematic Risk
Risk that applies only to a specific company. Examples could be as routine as poor sales or as dramatic as an oil refinery explosion. This is one of the reasons why it is unwise to "put all your eggs in one basket;" there is little chance that these events would occur to every company in a diversified portfolio at the same time.

Systematic Risk
This type of risk, however, can affect all the stocks in your portfolio at the same time. Rising interest rates, inflation, wars, and political changes influence the whole economy, not just one sector. It is virtually impossible to avoid these events.

For example, I am speculating over the historically strongest period of November through April rather than day trading in the volatile period May through October.  I am holding 19% full position in AAPL (Technology and Retail), 8% position in LPH (Oil and Gas Refining in China), 8% position in NR (Oil and Gas Services), 8% position in NSU (Gold), and 12% position in XIN (Housing in China and U.S.).

In summary, 19% Retail and Technology, 16% Oil and Gas, 8% Gold, 12% Housing and 45% cash to build positions on dips. I selected the stocks that had the highest rate of growth, strongest fundamentals, and significantly undervalued in each of the sectors.

The only key sector I am underweight in is Banking because I see little growth in the sector into 2013.

SHIFT STRATEGIES TO FIT THE TAPE

The Market is subject to change with little warning just like the weather on a peninsula like Florida.  Traders experienced a thinly traded tape with low volatility all summer.  This helped identify relative strength for momentum day trades and overnight swing trades on low risk set ups.

Now with so much uncertainty starting with Euro Debt Crisis in the summer, next Presidential Elections early fall, and currently Fiscal Cliff it may be wise to evaluate your past trading plan and incorporate changes to better fit the tape riddled by uncertainty.  In my case, I shifted to Value stocks during “Sell in May and go away” using only around 10% of my capital.

November and December are historically the two best months out of the year along with the last 6 months in the Presidential cycle, so I started scaling in last month increasing my holdings to 55% of my capital for speculation and core positions to trade around into the new year.  I scale in because it is too difficult to time the bottom.

If your trading strategy/plan is no longer working, you may want to remain flexible to shifting your strategy to fit the tape.

CONTRARIAN STRATEGIES

A contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.  It can be a trader’s strategy that goes against prevailing market trends by buying assets that are performing poorly and then selling when they perform well. A contrarian strategy believes that those who say the market is going up do so only when they are fully invested and are out of capital. At this point, the market is at a peak. Likewise, when people predict a downturn, they have already sold out, at which point the market can only go up.  A contrarian strategy can also emphasizes out-of-favor stocks with low P/E ratios.

A contrarian believes that certain crowd behavior among investors can lead to exploitable miss pricings in stock markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Likewise, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don't pan out. Avoiding (or short-selling) investments in over-hyped investments reduces the risk of such drops. These general principles can apply whether an individual stock, an industry sector, or an entire market.

Some contrarians have a permanent bear market view, while the majority of investors bet on the market going up. However, a contrarian does not necessarily have a negative view of the overall stock market, nor does he have to believe that it is always overvalued, or that the conventional wisdom is always wrong. Rather, a contrarian seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced.

Contrarian investing is related to value investing in that the contrarian is also looking for mispriced investments and buying those that appear to be undervalued by the market. One possible distinction is that a value stock, in finance theory, can be identified by financial metrics such as the book value, earning per share (EPS) and/ or P/E ratio. A contrarian investor may look at those metrics, but is also interested in measures of "sentiment" regarding the stock among other investors, such as sell-side analyst coverage and earnings forecasts, trading volume, and media commentary about the company and its business prospects.

Although more dangerous, is shorting overvalued stocks. This requires 'deep pockets' in that an overvalued security may continue to rise, due to over-optimism, for quite some time. Eventually, the short-seller believes, the stock will 'crash and burn'.

Commonly used contrarian indicators for investor sentiment are Volatility Indexes (also referred to as "Fear indexes"), like VIX, which by tracking the prices of financial options, gives a numeric measure of how pessimistic or optimistic market actors at large are. A low number in this index indicates a prevailing optimistic or confident investor outlook for the future, while a high number indicates a pessimistic outlook.

Another contrarian strategy is Dogs of the Dow. When purchasing the stocks in the DJI that have the highest relative dividend yield, an investor is often buying many of the "distressed" companies among those 30 stocks. These "Dogs" have high yields not because dividends were raised, but rather because their share prices fell. The company is experiencing difficulties, or simply is at a low point in their business cycle. By repeatedly buying such stocks, and selling them when they no longer meet the criteria, the "Dogs" investor is systematically buying the least-loved of the Dow 30, and selling them when they become loved again.

Contrarians are attempting to exploit some of the principles of behavioral finance, and there is significant overlap between these fields. For example, studies in behavioral finance have demonstrated that investors as a group tend to overweight recent trends when predicting the future; a poorly-performing stock will remain bad, and a strong performer will remain strong. This lends credence to the contrarian's belief that investments may drop "too low" during periods of negative news, due to incorrect assumptions by other investors, regarding the long-term prospects for the company.

MOVING AVERAGES

Commonly used time intervals for Moving Averages (MA) include 1 minute, 5 minute 10 minute, 15 minute, 30 minute, Hourly, Daily, Weekly and Monthly; all rules apply regardless of the time interval but for discussion purposes the Daily Moving Average (DMA) will be referred to.
 

Shorter period (5,10) DMAs are more sensitive and identify new trends earlier, but also give more false alarms. Longer period (50,100,200) DMAs are more reliable but less responsive, only picking up the larger trends.

The simplest MA system generates signals when price crosses the MA:

Go long when price crosses above the MA.

Go short when price crosses below the MA.

A moving average is commonly used with time period series data to smooth out short-term fluctuations and highlight longer-term trends, changes in trend or cycles.  Nothing more.  They do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands, MACD and the McClellan Oscillator.

SMAs and EMAs

The two most popular types of MAs are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These MAs can be used to identify the direction of the trend.

SMA represent a true average of prices for the entire time period. As such, SMAs may be better suited to identify price levels that are in close proximity to the SMA.

EMA applies weighting factors which decrease exponentially. The weighting for each older datum point decreases exponentially, never reaching zero.  EMAs have less lag and are therefore more sensitive to recent prices - and recent price changes. EMAs will turn before SMAs.
 

5 10 20 50 200 or

FIBONACCI SERIES 5 8 13 21 34 55

(commonly used in algorithm based trading systems)

For short term MA may be (5 or 10) DMAs while the slower MA (21,34) is medium or long term MA (50,100 or 200 DMAs). A short term MA (5,10) is faster because it only considers prices over short period of time and is thus more reactive to daily price changes. On the other hand, a long term MA (50,100,200) is deemed slower as it encapsulates prices over a longer period and is more lethargic. However, it tends to smoothen out price noises which are often reflected in short term MAs.

The 200 Day SMA is used to separate bull territory from bear territory. Studies have shown that by focusing on long positions above this line and short positions below this line can give you a slight edge. It is also used as a percentage above or below price for execution. For example, if a stock price trades over 100% above the 200 DMA, the trader is inclined to sell part or all of the stock because it is overbought and due for a pull back.

SUPPORT and RESISTANCE

Contrary to popular belief, stocks do not find support or run into resistance on MAs. Many times you will hear traders say, "it bounced off of the 50 DMA!"

But that is not the case!

A stock will not suddenly bounce off of a line that some chartist put on a stock chart, but it will bounce off of significant price levels that occurred in the past - not a line on a chart.  However, stocks will reverse (up or down) at price levels that are in close proximity to popular MAs but they do not reverse at the line itself. 

A short-term uptrend might find support near the 20 DMA, which is also used in Bollinger Bands. A long-term uptrend might find support near the 200 DMA, which is the most popular long-term MA. If fact, the 200 DMA may offer support or resistance simply because it is so widely used. It is almost like a self-fulfilling prophecy. However, in reality true support or resistance is at price levels that are in close proximity to popular moving averages.

RISING and FALLING SLOPES and STACKING

The rising MA is a technical indicator used in trading. Most commonly found visually, the pattern is spotted with a MA overlay on a stock chart or price series. When the MA has been rising consecutively for a number of days, this is used as a buy signal, to indicate a rising trend forming.

Relative strength is indicated when rising MAs stack above their longer term MAs.  For example, a rising 10 DMA is above a rising 20 DMA, is above a rising 50 DMA is above a rising 200 DMA.

CROSSOVERS

Two MAs can be used together to generate crossover trend change signals in technical analysis.  Double crossovers involve one relatively short MA and one relatively long MA. A system using a 5 Day EMA and 34 Day EMA would be deemed short-term. A system using a 50 Day SMA and 200 Day SMA would be deemed medium-term, perhaps even long-term.

Death and Golden Crosses
·         Death Cross occurs where the 50 DMA falls below the 200 DMA is a bearish technical signal
·         Golden Cross occurs where a short-term DMA breaks above  its long-term DMA is a bullish technical indicator

A crossover can be used to signal a change in trend and can be used to trigger a trade in a Black Box (Algorithm based) trading system.  One of the most common buy trigger is when the 5 Day EMA crosses above the 34 Day EMA.

 

DUE DILIGENCE

The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.

For fundamental analysis a reasonable investigation focusing on material historical and future matters via the principles of valuation and shareholder value analysis including recent and previous periods Balance Sheet, Income Statement, Cash Flow Statement and Key statistical ratio analysis.

Keeping it simple for the “non-accountant/finance” audience, focus on the following key areas:

News

Review past 12 months of headlines that impact the financial position of the company.  Review Yahoo message board for “Material” posts. ( don’t laugh, occasionally there is overlooked info)

Income Statement

Review every component in comparison to previous quarters and years for significant growth and disparities for example R&D, non-recurring, discontinued operations and extraordinary items.

Balance Sheets

Review every component in comparison to previous quarters and years for significant growth and disparities for example cash, inventories, plant and equipment, goodwill, intangible assets, and other assets.  Important to note if goodwill and intangibles represent a significant portion of total assets since they have no value in liquidation.  Focus on changes in long term debt, deferred liabilities and retained earnings.

Cash Flows

Look for both positive Operational and Free cash flow for liquidity

 Ratios

Trailing P/E
Forward P/E
Price/Book
ROA (ttm)
ROE (ttm)
Quarterly Revenue Growth (yoy)
EPS (ttm)
Quarterly Earnings growth (yoy)
Total Debt/Equity (mrq)
Current Ratio (mrq)
Book Value per share (mrq)

Notes:

Trailing twelve months (ttm)
Year over year (yoy)
Most recent quarter (mrq)

IT'S THE BRAND STUPID !

When consumers become committed to your brand and make repeat purchases over time. Brand loyalty is a result of consumer behavior and is affected by a person’s preferences. Loyal customers will consistently purchase products from their preferred brands, regardless of convenience or price. Companies will often use different marketing strategies to cultivate loyal customers, be it is through loyalty programs (i.e. rewards programs) or trials and incentives (ex. samples and free gifts).

 

Companies that successfully cultivate loyal customers also develop brand ambassadors – consumers that will market a certain brand and talk positively about it among their friends. This is free word-of-mouth marketing for the company and is often very effective.

 

If a new Harley Davidson cruiser, Honda cruiser, Yamaha cruiser, Kawasaki cruiser, and Suzuki cruiser all park together, onlookers will trip over the other cruisers to look at the new Harley Davidson regardless if it is inferior.

 

Sound familiar with Apple's history?

TIMING THE MARKET

Market timing is the strategy of making buy or sell decisions of stocks by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical and/or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular stock because three out of four stocks follow the market's overall trend.  The most important step toward profits is to identify the Market Trend; this is 50% of the game! Trade in harmony with the trend.

To become a successful trader, you must learn to judge by the action of the market. It is the action of the market which carries the greatest influence with insiders. Dow principle: The action of the market itself is the best indication of its future course.

PREDICTION CONCEPTS FOR MAJOR INDICES:

1^st hour, 1^st Friday, 1^st month

The first hour of the trading session is the rudder for the day that furnishes clues about that day's direction.  The first Friday of the month may furnish us with clues for the month's direction, and the first month of the year may set the trend for the year.

Major Indices Trend lines

A line that is drawn over pivot highs or under pivot lows to show the prevailing direction and speed of price. The use of trend lines in multiple period time frames (Intraday, Daily, Weekly and Monthly) will indicate near term, short term and long term trend clues for future Market direction.

Major Indices Technical Trend Indicators
Moving Averages
Moving Average Convergence Divergence (MACD)
Average True Range (ATR)
Wilder's DMI (ADX)
Price Oscillator (PPO)

Market timing often looks at various moving averages.  Popular are the 50- and 200-day moving averages. Some people consider that if the market has gone above the 50 or 200 day average that should be considered bullish, or below conversely bearish.  Technical analysts consider it significant when one moving average crosses over another. The market timers then predict that the trend will, more likely than not, continue in the future.

Halloween Indicator

The Halloween indicator is a variant of the stock market adage "Sell in May and go away," the belief that the period from November to April inclusive has significantly stronger growth on average than the other months.  In such strategies, stocks are sold at the start of May and the proceeds held in cash and are bought again in the autumn, typically around Halloween.

January Effect

The January effect is a calendar-related market anomaly in the market where stock prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.  Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.

Four year Presidential Cycle

The first year following the election year is usually a disaster (2013), and with the market bottoming around August of the second year (2014) and the rest of the year is bullish (2014), the third year is the best (2015), and the fourth year, the first half of the election year is choppy due to uncertainty and the second half is up (2016).

Annual Seasonality

Trader's Almanac shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher.

End of December
In order to claim capital losses, many investors sell stocks that have declined in value throughout the year during the last trading days of the year.

Turn of the Month
Turn of the month is a term that refers to the tendency of stocks to rise at the turn of a month and fall in the middle of a month. This tendency is mostly related to periodic new money flows directed toward mutual funds at a beginning of every month.

Window Dressing
Many mutual fund managers attempt to make their balance sheets look pretty at the end of each quarter by buying stocks that have done well during a particular quarter. For many of these managers, hanging on to their jobs is more important to them than the best interest of their mutual fund's unit holders.

Pre-Holiday Rally
Due to general optimism, stock markets tend to rise ahead of three-day holidays in the United States such as Independence Day, Thanksgiving, Christmas, etc.

Monday Effect
For decades, the stock market has had a tendency to drop on Mondays, on average. Some studies have attributed this to a large amount of bad news being released over the weekend. Others point to investors' gloomy mood, which is especially evident during the early hours of Monday trading. If you're planning on buying stocks, you're better off doing it on a Monday than any other day of the week. If you're an experienced trader, and are interested in selling short, then Friday is the best day to take a short position (because stocks tend to be priced higher on a Friday), and Monday is the best day to cover your short.

FUNDAMENTAL ANALYSIS - FINANCIAL STATEMENTS

INCOME STATEMENT:

William O’Neil’s CAN SLIM investment strategy screens for corporations with strong fundamentals. 

The first three of the seven parts of the CANSLIM mnemonic are as follows:

• C stands for Current earnings per share; current earnings should be up 25% or more.   Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign.

• A stands for Annual earnings, which should be up 25% or more in each of the last three years. Annual returns on equity (ROE) should be 17% or more.

• N stands for New product or service, which refers to the idea that a company should have a new basic idea that fuels the earnings growth seen in the first two parts of the mnemonic. This product is what allows the stock to emerge from a proper chart pattern of its past earnings to allow it to continue to grow and achieve a new high for pricing. A notable example of this is Apple Computer’s Mini iPad which can be listed by product line on an Income Statement.

Income statement (also referred to as profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as Net Profit or the "bottom line").
 
It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.  Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.

The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.

 

BALANCE SHEET:

A balance sheet is often described as a "snapshot of a company's financial condition".   Of the basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.

A corporate balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt.  Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The corporation's equity is the difference between total assets and total liabilities.

^{Ideally, a balance sheet would include large amounts of cash and or cash equivalents like investments and minimal debt to prevent the surprise of a secondary offering diluting the share price.}

CASH FLOW STATEMENT:

                
The (total) net cash flow of a company over a period (typically a quarter or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow is the sum of cash flows that are classified in the below areas:

• Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
• Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
• Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.
•  Net Free Cash Flows: Operation Cash flow – Capital Expenses to keep current level of operation – dividends – Current Portion of long term debt – Depreciation 

Free Cash Flow (FCF) is cash flow available for distribution among all the securities holders of an organization.

• Ideally,  investors seek both positive Operational and Free Cash flow.