V.13:08 (332-336): Using Value and Technical Analysis by Thom Hartle
There are various ways to select what stocks to trade. Here's a method that combines fundamental value and technical analysis as a way to select a stock, and a real-world trading situation on which it was applied.
Every trader has a limited amount of capital to put to work in a sea of stocks. The trader, much like a fisherman, casts a net over the water, culling for the keepers and discarding the little ones. In trading, the technique is referred to as screening , creating a list of stocks that qualify for further study and then implementing a profitable strategy on those that remain.
I explained such a strategy in my article in the January 1995 STOCKS & COMMODITIES, "Relative dividend yield and technical analysis." To recap: Calculate the ratio of the company's dividend yield relative to the Standard & Poor's 500 yield. Next, look for stocks that currently have a ratio meeting the criteria as described in Relative Dividend Yield by Anthony E. Spare and Nancy C. Tengler and draw up a list of those. Third, look over this list of stocks for those undergoing a technical change in the trend from down to up. Those are the ones to own. In my January 1995 article, I showed a trade I had executed in early 1994 using this strategy.
This strategy appealed to me because there was an overlap of fundamental analysis and technical analysis. The fundamental analysis used a concept of undervalue for a company based on a historically high yield relative to the yield of the S&P 500. Often, these are mature companies, well known to the financial community and the investing public. If I saw positive technical evidence of a change in the trend, I surmised I would see news following that the company had put its problems, be they short or long term in nature, behind them. I concluded that the company in turn would begin to show up on buy lists, bringing in new investors, driving the price of the stock higher as the word spread about the improved outlook for the company.
This concept of using the dividend yield of a company as a proxy for when a stock is low and high struck me as being a useful screen for stocks. Then, in the August 1994 S&C, I interviewed Geraldine Weiss, editor of the stock advisory newsletter Investment Quality Trends (IQT). During the interview, Weiss explained her method of screening stocks and classifying them into one of four categories: ...