Graham & Dodd meet Edwards & Magee

MTA Education Seminar

May 20th 2005

Larry M. Berman CFA, CMT

Combining Fundamental & Technical Analysis

to Maximize Portfolio Returns

Graham & Dodd meet Edwards & Magee

• Goal beat Mr. Market• Screen fund & quant.• Trade technically

Beat Mr. Market

• Understand bogey• Timeframe• Investor/Trader• Develop toolbox

Characteristics of Market

• P/E high low?• Earnings momentum• Economy• Inflation/Interest rates• Geopolitical• Monetary/fiscal policy

• Bull or Bear?• Oversold/Overbought• Seasonality• Sentiment• Accumulation• Distribution• Breadth

Characteristics of Stock

• BETA• 50-25-25 rule• S&P 500 (60%) of stocks

have beta above 0.9• S&P 400 (66%) of stocks

have beta above 0.9• S&P 600 (83%) of stocks

have beta above 0.9

• V or U tops-bottoms• Volatility• Normal vs. today• False breakouts• Support/resistance• Volume patterns

Growth Characteristics & Tools

• Momentum• Trend• Relative strength

• Multiple expansion• PEG• GARP

Value Characteristics & Tools

• Sentiment• Chart patterns

(bottoms & bases)• Oversold

• Under owned• Market to book value• Extremeness

Market Cycle

• Seasonal patterns• Business cycle

Characteristics of Market:Trend

Timeframe

38.2-61.8%

Higher highs?

Higher lows?

Support holding?

Res. breaking?

Characteristics of Market:Momentum

Timeframe

Quantify OS/OB

m/m 5%

q/q 10%

Divergence

Characteristics of Market:Volume

10-Day Arms

55-Day Arms

Imbalances

Relative

Characteristics of Market:Volume

Imbalances

Accumulation

Distribution

Intensity

Relative

Extreme

Characteristics of Market:Breadth

Adv-Dec Line

Trend

Momentum

Extreme

Relative

Characteristics of Market:Breadth

% > 200-day avg

Trend

Momentum

Extreme 20-80%

Relative

Characteristics of Market:Breadth

Net 52W Hi-Lo

Trend

Momentum

Extreme 2Sig

–400+800

Relative

Characteristics of Market:Breadth

Index specific

%MC Adv/Dec

Wkly 52W Hi-Lo

Wkly Accumulation

Wkly Distribution

Characteristics of Market:Breadth

%MC > 50-Day Avg

%MC > 200-Day Avg

%MC < RSI 30%MC > RSI 70

Characteristics of Market:Sentiment

VIX-VXN

Trend

Momentum

Relative

Extremes

Characteristics

Characteristics of Market:Sentiment

Put/Call volume

Trend

Momentum

Relative

Extremes

Characteristics

Characteristics of Market:Sentiment

AAII

Cons, II, MV

Relative

Extremes

Characteristics

Characteristics of Market: Summary

• P/E = modestly high• Fwd earn mom. <10%• Economy = softer• Inflation = rising• Interest rates = rising• Geopolitical = neg• Fiscal policy = neg

• Late stage bull/early bear

• Oversold

• Seasonality = pos

• Sentiment = pos

• Accumulation = weak

• Distribution = strong

• Breadth = weak

• Volume = weak

Growth Characteristics & Tools

• Momentum• Trend• Relative strength

• Multiple expansion• PEG• GARP

Growth Tools: Momentum

• ROC• MACD• Relative strength

Growth Tools: Momentum

• ROC• MACD• Relative strength

Growth Tools: Momentum

• ROC• MACD• Relative strength

Growth Tools: Trend

Sup/Res holds?

Higher/highs

Lower/lows

Time frame

Value Characteristics & Tools

• Sentiment• Chart patterns

(bottoms & bases)• Oversold

• Under owned• Market to book value• Extremeness

Value Tools: Bottom Patterns (Bases)

Double bottom

Ascending

H & S bottom

Value Tools: Sentiment

Insiders

IPO/Buyback

% Inst Own

Value Tools: OB/OS

Buy 13Wk OS

OB poor entry

Trading Cycles

• Price movements are a series of cycles.

• Accumulation phase• Distribution phase

Trading Cycles

ACCUMULATION

DISTRIBUTION

BEAR BASE

BULL CONS

Trading Cycles

ACCUMULATION

DISTRIBUTION

BEAR BASE

BULL CONS

Trading Cycles

OVERBOUGHT

OVERSOLD OVERSOLD

Trading Cycles

Quantify

Extremes

Accumulation

Distribution

Relative rank

Trading Cycles: S&P 500 Financials

Trading Cycles: S&P 500 Technology

Value: Basing

MSFT breaking out of base pattern

Growth: Momentum

Growth: Momentum

GLW strong momentum, but OB

Graham & Dodd meet Edwards & Magee

• Goal beat Mr. Market• Screen fund & quant.• Trade technically• Timeframe• Investor/Trader• Develop toolbox

Roll The Dice