The Haiku of Finance for 04/11/15

Headlines drive a stock
Surprise is never priced in
Technicals don't help

The Haiku of Finance for 10/15/14

Use statistics well
Forget technical charting
Earnings matter more

First And Last Hour Trading Is a Stupid Gimmick

Stupid ideas frequently pop up on my radar whenever I troll the depths of the Internet for investment knowledge.  Some ideas just don't belong in the realm of sensible investing.  Trading for advantage in either the first or last hour of an equity market's trading day is one such bad idea.  

Quickly perusing the top articles in a web search of "last hour trading" reveals that the concept relies heavily on folk wisdom, technical analysis, and gut feeling.  None of those forces incorporate any fundamental analysis of a stock's underlying value.  All of them play to emotions that get investors in trouble.  The ETF revolution isn't helping here because day traders just use them as more random playthings.  

Here's an illustration of just how dumb traders can be with hourly trading stats.  The so-called smart money index gained popularity in the 1990s because it supposedly compares morning trades to evening trades.  The index proceeds from a basic construction flaw.  It is impossible to set a normal baseline value for the index because it begins with a previous day's close.  That one flaw is enough to invalidate any claims to validity.  It gets even dumber by assuming evening trades are more rational, as if intraday news doesn't move prices and large institutions with internal crossing networks aren't jamming the close.  Sheesh.  

NASDAQ's Extended Hours Trading data display does the investing public a disservice by feeding traders' appetites for this nonsense.  It formalizes the baseline construction flaw I identified above.  The exchange's Pre-Market Indicator (PMI) and After-Hours Indicator (AHI) offer little proof that they are reliable sentiment estimates.  What's the baseline value for these numbers?  Where's the historical data for each indicator, so we can compare sentiment changes to the NASDAQ's turning points?  What's the date where they start at zero?  This data is absent.  These indicators are just voodoo.  

Advocates of short-term trading in first hours, last hours, after hours, or any other hours bear a burden of proof that their concepts add value.  Day traders should produce an audited portfolio that consistently outperforms market benchmarks over time using these hourly strategies.  Hedge funds running HFT use nanosecond trading strategies and even they can't outperform the market over time, net of fees.  The myth that traders can gain pricing advantages by focusing on hourly trading flows persists with no peer-reviewed data in its favor.  First and last hour traders are losers.  

The Haiku of Finance for 07/22/14

Amateur stock pick

Merely technical focus

Ignoring earnings

The Limerick of Finance for 06/15/14

No chart can say where stocks will go
Random walk turns a high to a low
Investing makes sense
When thinking's intense
Technicals are worth one big zero

Alfidi Capital On Fundamental Factors And Event Arbitrage

I am a fundamental investor, not a technical investor.  I was never really intrigued by technical "chartists" at all.  Perusing investment periodicals where technical traders held forth on magic formulas predicting direction was a source of amusement for me about ten years ago.  I put down those mags once I got to the ads in the back touting trade prediction services.  Folks, if a black box algorithm or crystal ball could predict stock market moves with uncanny accuracy, the author of said program would never let it see the light of day.

Hedge funds are no better than those useless ads and chart touters.  They just have a lot more money to play with than a typical technical investor.  Measuring thousands of signals for degradation is a waste of both human talent and computing power.  Investors in hedge funds may not realize they're paying a premium for a status-conscious product.  Maybe they do realize it and they just don't care.

Fundamentals matter.  Earnings determine whether a company is viable.  Quality of earnings (i.e., consistent operations and conservative accounting practices) determines whether a company will remain viable.  Modest long-term debt loads determine whether a company can survive a bad economic climate without violating any debt covenants.  Positive free cash flow suggests whether a company's capital spending supports its growth.  Market share determines whether a company has a durable competitive advantage that supports its pricing power.  The trailing twelve month P/E ratio tells us whether a stock is priced at a premium or a discount to the rest of the market.  Any P/E ratio over the US economy's long-term average of 14 is probably a premium, and any P/E that's at least 25% below that number is a candidate for deep value analysis.

Events can move stocks in the short term, but fundamentals drive value in the long term.  The market's "random walk" on any given day has nothing to do with candlesticks, moving averages, and trading volume ratios.  Events can move a stock's random walk in any direction.  The closer these events are to the heart of a company's operations, the more the move will matter if it opens an attractive entry point.  Apparently good news, like a one-time gain from an asset sale, can degrade earnings quality.  Bad news (like an earnings miss) can trigger the market's reevaluation of a stock.  A good intuitive analyst can figure out whether those news events reflect some persistent phenomena.  Merger and acquisition announcements open up arbitrage opportunities for those investors bold enough to buy the target and short the acquirer.  I've made some decent money in the options chains of announced merger transactions.  An index change opens another opportunity to find a discounted stock when index funds sell out of stocks dropped from widely followed benchmarks.

The Alfidi Capital approach takes the basics of investing very seriously.  The intellectual capital I invest into my analysis will eventually drive whatever financial capital I commit.  My thought process is unique and no other investor can duplicate my thinking.  That's why no one else can invest the way I do.  Any stupid losers out there who think they can imitate me would be wasting their time.  Investors who do their own thinking can outperform the market but they are truly rare.  Just sit back and admire the genetic rarity that is Yours Truly, Anthony J. Alfidi.  

The Haiku of Finance for 06/03/14

Market gyration
Nothing more than random noise
Find fundamentals

The Limerick of Finance for 03/30/14

Day traders are wasting their time
Charting random noise that does not rhyme
Put away all those sticks
Study deep value picks
Stock prices can turn on a dime

Money Flow Index, Money Flows, And Fund Flows Are All Different In Quality

Flows can be fun to watch.  Morons find them boring but geniuses like Yours Truly know what they mean.  It's too bad that some market flows are nonsense while others matter just a little bit.  Today I'm going to sort the wheat from the chaff.

The money flow index (MFI) is one type of flow that I safely ignore.  It is a technical indicator.  Academic studies have proven many times that technical indicators don't count for jack squat.  Investopedia notes that traders use a stock's MFI to indicate a trend reversal.  I say it indicates no such thing.  A simple average of a stock's three key prices during a day's trading range has no more statistical validity than the result of three coin tosses.  Using a random result to spot a trend is really silly.

The Wall Street Journal's Money Flows table is slightly more useful than a technical indicator.  The breakdowns of individual stocks, sectors, and the broad market aren't range-bound like the MFI.  The difference between buying and selling strength is a simple ratio.  It is a much purer supply/demand relationship than the MFI because it accounts for a total dollar volume of transactions and isn't smoothed with internal averaging.  This is meaningful in conjunction with a fundamental analysis that estimates an intrinsic value for a stock.  The ratio indicates whether the market is ignorant of something the intrinsic value reveals.  If I think a stock's intrinsic value is worth less than its market value, but I see strong demand in this money flow data, I'm going to wonder what crazy plant the institutional investors are smoking by bidding up an overvalued stock.  This ratio is also useful in evaluating index funds that track broad averages.  If the economy's P/E is above its long-term average of about 14, and the WSJ money flow ratio for the total market shows strong demand, I will once again wonder why institutions are so desperate to pay a premium.  Birinyi Associates uses a variation of this money flow analysis without my sarcastic flair.

The most useful flows I've discovered are the ICI's statistics on weekly and monthly fund flows.  The weekly estimated long-term mutual fund flows are the most frequently cited series.  Mutual fund data is a barometer for individual investor sentiment because investment companies market actively managed products to retail investors.  I often see Zero Hedge writers go nuts about this data every week.  Lemmings rush into mutual funds when they get greedy in bull markets and stampede out when they're terrified in bear markets.  Market panic is a value investor's gift-bearing friend.

I needed to explain all of these flows because some folks are bound to get them confused when they go looking for stock market sign posts.  The WSJ money flows and ICI data series are probably even less useful than the "Warren Buffett Indicator."   The MFI is not useful at all.  These things are rough guesses at market sentiment but they cannot be the sole decision triggers for any competent investment decision.  That only comes from detailed fundamental analysis.  I exist to clarify and explain complex ideas.  I enjoy showing off my intellect.  Look upon my works and despair, puny mortals.  

The Haiku of Finance for 05/19/12

Technical trader
Watches patterns and signals
Such fancy voodoo

Don't Get Technical With Me

Many investors use technical analysis to determine when to buy or sell a stock. They shouldn't. Here's why. To wit: Academic studies find no evidence for the ability of technical analysis to add excess return (i.e., additional gains over an index benchmark) to a portfolio.

The most convincing reason I need to employ fundamental analysis over technical analysis is offered by the real world success of Warren Buffett. This old article from Fortune explains it all.

He got his first books on the market when he was 8, bought his first stock (Cities Service preferred) at 11, and went on to experiment with all manner of trading methodologies. He was a teenage stock ''chartist'' for a while, and later a market timer.

(snip)

(I)n early 1950, while a senior, he read Benjamin Graham's newly published book, The Intelligent Investor. The book encouraged the reader to pay attention to the intrinsic value of companies and to invest with a ''margin of safety,'' and to Buffett it all made enormous sense.

Warren Buffett did not become the world's greatest investor by overlaying moving averages on top of stochastic oscillators in a point-and-figure chart. He did it by researching the hell out of quality businesses that he understood and sticking with them through good times and bad times.

Unfortunately some people swear by charts to make money. I like these people, because their irrationality and frequent trading eventually lead to the mispricing of quality companies. Give me that volatility-induced discount to intrinsic value, active traders! Come on, I know you want to pull that trigger. I'll be patient while you wait for that Fibonacci retracement. It makes it that much easier for me to make money in the long haul.

Why bring this up now, with all the fun financial activity hitting the wires lately? Because I've covered a lot of those topics already. Because I'd have to debunk technical analysis anyway at some point. Because I don't like doing stupid things with my money. And because it's my blog, and write about what I feel like covering.