Point & Figure Analysis

A Disciplined Approach to Buying and Selling Stocks, ETF’s, and Mutual Funds

The Company fundamentals looks great. All the analysts love it. So why is the stock going down?

Fundamental Analysis vs. Technical Analysis

1. What to Buy2. Company Management3. Earnings Quality4. Price/Earnings Ratio5. Product Acceptance

1. When to Buy2. Trend Analysis3. Relative Strength4. Momentum5. When to Sell

What is Fundamental Analysis? What is Technical Analysis?

FREESTAR BANK WEALTH MANAGEMENT DEPARTMENTS

Investment Center (Raymond James)– Kevin Moore Financial Advisor– Blake Karls Financial Advisor Associate– Deborah Jaso- Operations Manager

Trust Department Dan Fry, Debbie Lopez

Farm Department Brent Crane, Colleen Slagell

Supply and Demand

We all understand the basic forces of supply and demand.

The same forces that affect prices in the supermarket also affect prices in the stock market.

Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket.

64 64 6463 63 63 63 6362 62 62 62 62

61 61 6160

58 58 5857 57 5756 56 56

55 55 5554 54 5453 53 53

52 52 5251 51 51 5150 50 50 50 50

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38 38 38 38 38 38 38 38 3837 37 37 37 37

36 36 36

ORIGINAL POINT & FIGURE CHARTORIGINAL POINT & FIGURE CHART

Point & Figure Basics

X’s = Price is rising

O’s = Price is falling

Alternate columns of X’s and O’s

Minimum of 3 X’s or O’s in a column

Time = First action in month use number. (1 for January, etc.)

Use daily high & low for charting price action.

Chart Source: www.dorseywright.com

Citigroup (C)

Did the fundamental analysts learn from the 2000-2002

Technology Bubble?

The following is a quote from the February 9th New York Times

article, “Why Analysts Keep Telling Investors to Buy”

“At the top of the market, they urged investors to buy or hold onto

stocks about 95 percent of the time. When stocks stumbled, they

stayed optimistic. Even in November, when credit froze, the

economy stalled and financial markets tumbled to their lowest

levels in a decade, analysts as a group rarely said sell. “

Causes of Price Movement

Market

Sector

Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals!

Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King

Typical Resource Allocation

Most people, however, spend 80% of their time on stock evaluation and only 20% on sector and market evaluation. In other words, they ignore where the greatest amount of risk lies – the market and sector forces.

Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King

Market

Sector

The Five-Step Game Plan Step 1: Market Analysis Step 2: Sector Analysis Step 3: Fundamental Analysis Step 4: Technical Research Step 5: Risk management and Follow-up

Step 1: Market Analysis

The Buy-and-Hold Myth Buy the “Market” in 1929…

It took 25 years to get back to even.

Buy it in 1973…

It took 7.6 years to get back to even.

Starting in 1987 IBM went down 74%...

It took 10 years to recover.

Cisco Systems (CSCO) was as high as $82 in 2000. It has yet to recover.

Note: Past performance is no guarantee of future success.

Source: http://www.nytimes.com/interactive/2009/01/06/business/20090106-comeback-graphic.html

Leg #1: Equity Exposure and Managing the Trade

Leg #2 & #3: Two of the Following Domestic Equities International Equities Commodities Foreign Currencies Fixed Income Cash

3 Legged Stool Approach to “How Offensive or Defensive Should I Be?”

Leg #1: Measuring Supply & Demand

Double Top

One column of X‘s exceeds a previous column of X‘s.

Double Bottom

One column of O‘s exceeds a previous column of O‘s.

35 O X

34 O X X

33 O X O X

32 O X O X

31 O O

38 X X

37 X O X O

36 X O X O

35 X O O

34 X O

Leg #1: NYSE Bullish Percent

• X’s = Offense – Wealth Accumulation

• O’s = Defense – Wealth Preservation

• Two Lines of Demarcation: 30% and 70%

• Measures Risk in the Market

• Does not have to move in tandem with the S&P 500 or the Dow Jones.

Leg #2 & 3: Compare One Asset Class to Another

US Stocks CashFixed Income

Int’l StocksForeign Currencies Commodities

The Way Investors Invest --

Who Do You Believe is Going to Be a Better Football Team Next Year?

The Way Investors Invest --

Who Do You Believe is Going to Be a Better Football Team Next Year?

• All major sports have a ranking system. The Point & Figure Relative Strength tool is the ranking system we use for ETF’s.

• Daily Calculation:

Cash X 100 = Relative Strength US Stocks Reading

• This reading is plotted on a Point & Figure chart which then tells us whether we want to be in cash or US stocks

Relative Strength CalculationRelative Strength Calculation

Cash or Stocks?

Relative Strength: A Ranking System

• X’s = Cash – Wealth Preservation

• O’s = Stocks – Wealth Accumulation

Cash: 2001-2002

Cash: 2008-Present

Cash or Commodities?

Relative Strength: A Ranking System

• X’s = Cash – Wealth Preservation

• O’s = Commodities – Wealth Accumulation

Date Range ColumnCash - Money Market

Continuous Commodity

7/15/98 - 10/15/02 X - Cash 18.41% 10.11%

10/15/02 - 8/15/08 O - Commod. 16.87% 115.71%

8/15/08 - 1/31/09 X - Cash 0.23% -26.97%

Leg #2 & 3: Asset Class Evaluation

Equity

Commodities

Fixed Income

Int’l

Reaching Your Destination

Keep in mind that there is no assurance that this or any strategy will ultimately be successful or profitable.

Point & Figure Analysis

Documents

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