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The Financial SIG

 

G. Norman Black is a retired Air Force Colonel. His professional certifications include both Pharmacy and Clinical Laboratory. His Air Force career was spent entirely in the management of hospital laboratories. Avocations now include technical trading and skiing.


Have you heard these old adages before: “ It takes money to make money” or “Born with a silver spoon in his mouth”? The first expression applies to nearly all of us and the second expression applies to very few of us.

Money management, the theme for this month’s issue of the PC Alamode, presumes that one has the money to manage. There is obviously the need to manage your week to week living expenses, but lets think beyond that point.

Saving a consistent portion of your weekly paycheck in a savings account at first and then eventually moving to an IRA, Roth or other investment program is in everyone’s best financial interest. And, the ultimate goal should be to put a part of those savings into investments that will outgrow inflation over a longer period of time. The next question is: “Do I use Mutual Funds, Stocks, Bonds, Commodities, Real Estate or some other investment vehicle”?

The Financial SIG (Special Interest Group) began several years ago with the intended purpose of helping Alamo PC members learn how to use their computers to technically screen stock prices as a part of the investment selection process. This was and continues to be an educational process, not a stock selection group.

We have used videotapes, guest speakers, computer projections and our own member presentations to further this education process. 

Today’s stock market programs can build charts of stocks and other investment vehicles, with a multitude of overlaid indicators, virtually instantly. Although these indicators may involve complex mathematical formulas, their interpretation and use are comparatively simple. The three most common groups of indicators used in technical analysis are the oscillators, moving averages and trading bands.

Oscillators may be defined in their simplest form as measurements of internal strength over a period of time. Typically, the charted value for an oscillator will range between certain fixed minimum and maximum values, commonly being 0 and 100. This charted oscillating line will tend to follow or lead (depending on the indicator used) the price of the equity being studied. Directional changes that occur from below the 20% area or above the 80% area are considered to be bullish or bearish respectively. Indicators that fall into the oscillator group include the Relative Strength Index, Stochastic Oscillator, William’s %R, Chaikin’s Volatility, Accumulation/Distribution and many others.

A moving average, in its simplest form, is the sum of a series of numbers divided by the number in the series. The two most common averages are simple and exponential. The advantage of using an exponential average rather than a simple one is that the exponential average will give a quicker directional change when the equity price begins to reverse direction. The MACD (Moving Average Crossover Divergence) is an oscillator derived from two or more moving averages. The MACD is an indicator derived by subtracting a shorter moving average from a longer moving average and then commonly creating a moving average from that line to produce a two line indicator. This is an indicator that is quite responsive to directional change of the equity being studied.

Trading bands are a third group of indicators that are useful in assessing market direction for an equity. Bollanger Bands are probably the most common example of a trading band. These bands represent a two standard deviation (95% confidence) value above and below a simple moving average of the equity being charted. 

There are still more complex indicators, such as Linear Regression Trendlines and Fibonacci Studies that can be used for the technical evaluation of equity prices. 

Though the math calculations for many of these indicators may be complex, it takes nothing more than the push of a button in most charting programs to create any of these indicators. Grouping two or three different types of indicators together on a chart is the best way to use them. Then, one should look for two or more of the indicators to give a similar signal before accepting a projected price change in the equity. Metastock is an example of a charting program that is able to perform all of these various functions.

One of the ways that we study and use these various indicators is to look at stock selections that were made two to four weeks before the meeting. Then, by studying the price action of the equity and the related movement of the indicators, we can best judge how to use these indicators in making our own investment decisions.

About two years ago the Financial SIG began to look at technical analysis programs that had the ability to make market selections based on a predetermined set of technical criteria. 

We have subsequently looked at and many members of the group have since started to use one or more of three specific programs. In fact, each of these three programs now has its own SIG.  These programs are Monocle-II, IRL (Investors Reference Library) and TC-2000. These programs are only briefly described here because there will be separate articles this month on each program.

Monocle-II is a mutual fund analysis program. The user can rank funds by his/her own criteria or have the program make selections via the Dynamic Asset Allocation routine built into the program. There is an Alpha calculation found in this program (and in few others) that many of us have found to be very effective in selecting mutual funds for short-term purchases.

Investors Reference Library is a stock select program that uses a database of about 8,500 stocks and lets you pick and choose from about 200 criteria for searching this database. This program can screen for both technical and fundamental and fundamental criteria. Typical screens are performed in a matter of seconds.

TC-2000 is similar to the IRL program in that it can screen for both technical and fundamental criteria.

The success of the Financial SIG comes especially from the sharing of ideas and interpretations by the members of the SIG. This SIG meets on the 3rd Saturday of the month from 9:00am-12:00 noon at the AlamoPC Resource Center.


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