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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?

© Point & Figure Coaching and Research GmbH


Fundamental Analysis vs. Technical
Analysis
What is Fundamental What is Technical
1. WhatAnalysis?
to Buy 1. Analysis?
When to Buy
2. Company 2. Trend Analysis
Management
3. Relative Strength
3. Earnings Quality
4. Momentum
4. Price/Earnings Ratio
5. When to Sell
5. Product Acceptance

© Dorsey, Wright & Associates 2009


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
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
ORIGINAL POINT & FIGURE CHART
64 64 64
63 63 63 63 63
62 62 62 62 62
61 61 61
60
59 59
58 58 58
57 57 57
56 56 56
55 55 55
54 54 54
53 53 53
52 52 52
51 51 51 51
50 50 50 50 50
49 49 49 49 49
48 48 48 48 48
47 47 47 47
46 46 46
45 45 45 45 45
44 44 44 44 44 44 44
43 43 43 43 43 43 43 43 43
42 42 42 42 42 42 42 42 42 42 42 42
41 41 41 41 41 41 41 41 41 41 41 41 41
40 40 40 40 40 40 40 40 40 40 40 40 40
39 39 39 39 39 39 39 39 39 39 39 39 39
38 38 38 38 38 38 38 38 38
37 37 37 37 37
36 36 36
35

© Dorsey, Wright & Associates 2009


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
© Dorsey, Wright & Associates 2009
Chart Source:
www.dorseywright.com

© Dorsey, Wright & Associates 2009


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. “
Chart Source:
www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source:
www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source:
www.dorseywright.com
© Dorsey, Wright & Associates 2009
Causes of Price Movement

Market and sector forces together


Market typically cause 80% of the price
movement in a stock. That means
the company fundamentals usually
Sector account for less than 20% of a
Stock 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

© Dorsey, Wright & Associates 2009


Typical Resource Allocation

Most people, however, spend 80%


Stock of their time on stock evaluation
and only 20% on sector and market
evaluation.
Market
In other words, they ignore where
Sector the greatest amount of risk lies –
the market and sector forces.

Source: “The Latent Statistical Structure of Securities Price


Changes” Benjamin F. King

© Dorsey, Wright & Associates 2009


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

© Dorsey, Wright & Associates 2009


Step 1:
Market
Analysis

© Dorsey, Wright & Associates 2009


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.

© Dorsey, Wright & Associates 2009


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

© Dorsey, Wright & Associates 2009


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

© Dorsey, Wright & Associates 2009


Leg #1:
Measuring Supply & Demand
Double Top Double Bottom
One column of X‘s exceeds One column of O‘s exceeds
a previous column of X‘s. a previous column of O‘s.

39 O 39
38 O 38 X X
37 O 37 X O X O
36 O 36 X O X O
35 O X 35 X O O
34 O X X 34 X O
33 O X O X 33 X
32 O X O X 32 X
31 O O 31 X
30 30 X

© Dorsey, Wright & Associates 2009


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.

© Dorsey, Wright & Associates 2009 Chart Source:


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

Fixed
US Cash Income
Stocks

Int’l
Foreign Commodi
Stocks
Currencies ties
© Dorsey, Wright & Associates 2009
The Way Investors Invest --

Who Do You Believe is Going to Be a


Better Football Team Next Year?
Relative Strength
Calculation
• 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
Cash or Stocks?

Cash: 2001-2002

Cash: 2008-Present

© Dorsey, Wright & Associates 2009 Chart Source:


Cash or Commodities?

Date Range Column Cash - Continuous


Money Commodity
Market Index

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


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

Chart Source:
8/15/08 - 1/31/09 X - Cash 0.23% -26.97% www.dorseywright.com

© Dorsey, Wright & Associates 2009


Leg #2 & 3:
Asset Class Evaluation

© Dorsey, Wright & Associates 2009


Reaching Your Destination

X
Int’l

Cash
Commodit
ies

Fixed
Equit Income
y
Copyright © 2009
Dorsey, Wright & Associates, Inc.
Keep in mind that there is no assurance that this or any
strategy will ultimately be successful or profitable.

© Point & Figure Coaching and Research GmbH