[xi] Lesson 5: stock pick: ETF, stock or basic call option (step 2)

In the previous lesson, we discussed:-

Step 1 – screen for uptrending stocks that meet basic fundamentals

Please refer to Table 2 from Lesson 4. This will be our watchlist.

In this lesson, we will discuss:-

Step 2 – analyze the watch list to qualify for options trading

From Table 2 in Lesson 4, we can check out a few things, namely:-

1. Is there another way to determine these are fundamentally strong companies? Yes, we can use MSN stock scouter to double confirm (see Table 3 below).
2. How to check the option qualifying criteria, especially the open interest,
3. How do we know the chart is technically beautiful?

Note: for more information on qualifying option criteria, check out the explanations in Lesson 1 and also the glossary (click this link to go to glossary: http://trendtrader-kk.blogspot.com/2011/08/summary-of-us-stock-options-glossary.html)

Table 3 (further analysis of watchlist)

No.	Ticker	Company	MSN scouter	option	technical
1	ABX	Barrick Gold Corporation		option	side trend
2	AUY	Yamana Gold, Inc.		option	uptrend
3	EGO	Eldorado Gold Corp.		option	side trend break
4	GFI	Gold Fields Ltd.		option	side trend
5	GG	Goldcorp Inc.		option	uptrend
6	KGC	Kinross Gold Corporation		option	side trend
7	SLW	Silver Wheaton Corp.		option	uptrend rebound
8	KO	The Coca-Cola Company	9	option	uptrend
9	PM	Philip Morris International, Inc.	8	option	uptrend
10	UN	Unilever NV		O.I?	uptrend
11	AGNC	American Capital Agency Corp.	9	option	uptrend
12	NLY	Annaly Capital Management, Inc.	9	option	double top
13	BMY	Bristol-Myers Squibb Company	8	option	uptrend
14	MCD	McDonald's Corp.	9	option	uptrend
15	TJX	The TJX Companies, Inc.	7	option	uptrend rebound
16	V	Visa, Inc.	7	option	uptrend rebound
17	CNP	CenterPoint Energy, Inc.	9	option	uptrend rebound
18	EXC	Exelon Corp.	9	option	uptrend channel
19	NI	NiSource Inc.	9	O.I?	uptrend rebound
20	SO	Southern Company	7	option	double top

MSN scouter

The figures in the MSN scouter column of Table 3 above are extracted from msn.com.

(http://investing.money.msn.com/investments/stock-price?symbol=MSFT)

Example of  MSN scouter ........

 

According to msn MONEY, good stocks are those that score 8 and above. However, not all stocks with numbers bigger than 8 have good charts. For instance, Microsoft has a scouter number of 10 but the chart is not trending up nicely enough.

Chart of MSFT (Microsoft) downloaded from freestockcharts.com

You may review the charts of all the stocks in the watchlist to check out the pattern of the charts. Technical analysis is very useful to ascertain the current trend of the stock.

Option criteria

Adequate Open Interest is the most important of all criteria. There must be demand for the call option you intend to invest. You may get such data from Thinkorswim platform. If you have not registered and downloaded TOS yet, you may still obtain the data from MSN.com MONEY.

http://moneycentral.msn.com/investor/options/default.asp?symbol=EXC&month=1&year=2012

(Open interest should be at least over 300 contracts)

News support

Although good traders seldom make buying decisions base on news, it is alright to read some of them sometimes. For example,

http://seekingalpha.com/article/289094-utilities-are-beating-the-s-p-plus-doubling-its-yield?source=msn

Utilities Are Beating The S&P, Plus Doubling Its Yield

This story appeared in the above site on 22 August 2011. It named 7 energy utilities stocks (AEP, D, DUK, ED, EXC, FE, SO) within the S&P500 that have good yield.

3 out of the 7 have good msn scouter numbers.

ticker	msn scouter	Chart pattern
AEP	9	double top
D	9	up trend channel
DUK	9	up trend rebound

Another 2, EXC and SO, are already in our watchlist.

As such, you may also consider buying the related ETF or their call option.

XLE	Select Sector SPDR Energy
XLU	Select Sector SPDR Utilities

 Likewise, the watchlist has a few gold related stocks. So you may also consider buying gold shares! 

GLD	SPDR Gold
IAU	iShares Gold

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GOTO NEXT LESSON:-

Lesson 6
Learning technical indicators and chart patterns can help to find the right stock to invest.

http://trendtrader-kk.blogspot.com/2011/09/91-lesson-6-stock-pick-etf-stock-or.html

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[x] Lesson 4: stock pick: ETF, stock or basic call option (step 1)

What to buy? How much to buy? When to buy?

These are very pertinent questions asked by every trader. Let us take 3 simple steps to answer the first question:-

Step 1 – screen for uptrending stocks that meet basic fundamentals

Step 2 – analyze the watch list from above to qualify for options trading

Step 3 – short list and determine the instrument to buy

In this lesson, we discuss how to screen for uptrend stocks that meet our fundamental criteria.

In Lesson 3, it was discussed that a better way to screen stocks is to include both the fundamentals as well as the technical. There are so many stocks on the exchange and to find the right stock will be very tedious. However, there is a wonderful and free website where you can do a fairly good screening that contains both fundamental and technical of a stock (only US market).

FINVIZ.COM

Table 1 (finviz.com screener filter criteria)

Technical	year up =  uptrend stock
	quarter up = break 3 month high (break resistance)
fundamental	EPS growth = past 5 years +ve and projected next 5 years +ve (strong business growth)
	return on assets +ve = strong management
descriptive	cap = over 300 million (above average size companies)
	dividend = +ve yield (good cashflow)
	average volume = over 2 million (reasonable trading volumes)

In the table above, we set in the “technical” category under “performance 1” as year up and “performance 2” as quarter up. In this way, we filter out all those counters that are not trending up in the last quarter.

 In the “fundamental” category, we are interested in stocks that have earnings growth. We only want companies that have strong growth. Such companies are usually the favourite of fund managers and institutional players. We also add one more criteria – “return on assets”  as positive.

Finally, under the “descriptive” category, we set “dividend yield” positive to screen for profitable companies with a strong cashflow that can pay dividends and also “average volume” over 2 million. It is quite the same as in the example mentioned in Lesson 3. But, here, we add one more criteria – “market capitalization”. In Lesson 3, we have over a hundred stocks and it will be difficult to check and filter the better ones. Hence, we choose those companies with bigger capitalization. Normally, institutional funds would prefer to invest in bigger companies.

Follow this link: click on it or copy the URL to your browser.

http://finviz.com/screener.ashx?v=111&f=cap_smallover,fa_div_pos,fa_eps5years_pos,fa_estltgrowth_pos,fa_roa_pos,sh_avgvol_o2000,sh_opt_option,ta_perf_52wup,ta_perf2_13wup&o=-volume

From the list in the web page, choose the top 20 highest volume. We want the most popular ones.

Table 2 (extract of Finviz.com screener results)

No.	Ticker	Company	Sector	Industry	Market Cap	P/E	Volume
1	ABX	Barrick Gold Corporation	Basic Materials	Gold	52.02B	13.59	13,597,900
2	AUY	Yamana Gold, Inc.	Basic Materials	Gold	12.00B	19.15	14,979,000
3	EGO	Eldorado Gold Corp.	Basic Materials	Gold	11.09B	50.5	7,926,000
4	GFI	Gold Fields Ltd.	Basic Materials	Gold	12.53B	37.78	7,241,900
5	GG	Goldcorp Inc.	Basic Materials	Gold	43.72B	25.06	10,733,600
6	KGC	Kinross Gold Corporation	Basic Materials	Gold	20.05B	16.65	11,006,700
7	SLW	Silver Wheaton Corp.	Basic Materials	Silver	14.22B	39.85	9,605,400
8	KO	The Coca-Cola Company	Consumer Goods	Beverages - Soft Drinks	154.46B	12.57	9,826,400
9	PM	Philip Morris International, Inc.	Consumer Goods	Cigarettes	120.71B	15.73	8,027,200
10	UN	Unilever NV	Consumer Goods	Processed & Packaged Goods	93.83B	15.28	6,131,600
11	AGNC	American Capital Agency Corp.	Financial	REIT - Residential	5.11B	4.07	5,014,200
12	NLY	Annaly Capital Management, Inc.	Financial	REIT - Diversified	17.49B	6.31	17,196,100
13	BMY	Bristol-Myers Squibb Company	Healthcare	Drug Manufacturers	47.84B	14.61	13,307,300
14	MCD	McDonald's Corp.	Services	Restaurants	90.55B	17.73	7,087,900
15	TJX	The TJX Companies, Inc.	Services	Department Stores	20.49B	15.93	3,865,900
16	V	Visa, Inc.	Services	Business Services	65.18B	18.69	4,835,300
17	CNP	CenterPoint Energy, Inc.	Utilities	Diversified Utilities	7.95B	15.55	3,949,300
18	EXC	Exelon Corp.	Utilities	Diversified Utilities	27.57B	10.41	5,052,600
19	NI	NiSource Inc.	Utilities	Diversified Utilities	5.63B	18.24	5,049,000
20	SO	Southern Company	Utilities	Electric Utilities	34.32B	17.03	6,813,500

Note: you can export the page in the Finviz.com web and open it in Excel spreadsheet.

The export function is at the bottom right corner of the page that contains the data above (red arrow).

Now you have a watch list. You may add these stocks to your Portfolio or Watchlist in your charts.

Where can we get free charts? Go to this site: http://chartnexus.com/software/cnx.php click DOWNLOAD and load into your computer. You have a choice of multiple market data, not just USA! However, you only get 3 years data free of charge. You have to pay to get more features.

Another web base free charts http://www.freestockcharts.com/

Post comments or ask questions and let’s learn together. Sign up to follow my blog. Thanks for visit.

GOTO NEXT LESSON:-

Lesson 5
The continuation of step by step guide on stock picking.

http://trendtrader-kk.blogspot.com/2011/08/xi-lesson-5-stock-pick-etf-stock-or.html

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