Hottinger’s E-Zone Signals have arrived at

If you’ve been to the site lately you may have noticed the home page has changed. There is a big new emphasis on the E-Zone Trading System. That’s because we are merging the web site with the site.

Why the merger?

I was recently contacted by Fritz Hottinger who said that he would like to transition to a role where he was less involved in the day to day activities required to maintain a popular web site. He wanted to know if I would like to take over his site or perhaps merge it with my own.

I opted for the merger. Upon reflection, it seemed that having the E-Zone functionality on the web site would provide an end-to-end set of investing capabilities for my users.

In my humble opinion, I think offers a great set of tools for finding prime investment ideas among stocks and ETFs. If you’re familiar with the site you know our array of stock screeners, Alert HQ, Stocks to Watch, Top 10 Stocks and more.

Now, once you’ve found a great stock idea, we offer the E-Zone System to help with your trading.

How the E-Zones can guide your trading —

The E-Zone System provides a framework for looking ahead so you can plan your next trade. It develops your personal stock timing and trading signals for the next day and the next week using the latest in genetic programming.

Two sets of numbers project statistically relevant Entry and Exit zones for the next trading period – – one day (or week) ahead. If your investment moves into one of these zones, you are alerted to take action: either Buy or Sell. If your investment moves into the area between the two zones you are instructed to simply Hold.

Basically, the system guides you in and out of your investment, avoiding the pitfalls of buy-and-hold:

  • You move to cash when a stock, ETF or fund becomes over-priced. (in the EXIT zone)
  • Hold the cash when it’s in a neutral area (between the zones)
  • Then re-invest when it becomes reasonably priced. (in the ENTRY zone)

You receive not just a picture of where your stock has been, but a more accurate forward-looking chart with which to track your holdings. Rather than vague buy and sell instructions, you get actual numbers on which to base your orders. Here is an example of a chart that was generated at the end of the day on Friday, 9/28/2012 (note that the Entry and Exit zones are projected into the next trading day, which would be Monday, 10/1):

E-Zone Example: QQQ

The red area in the chart is the Exit Zone and the green area is the Entry Zone. In this example, the system would provide the following advice:

  • Place an order to SELL at the Open tomorrow if QQQ’s price is between $69.78 and $71.08; in other words, if it is inside the Exit Zone.
  • BUY the Open tomorrow if QQQ’s price is between $67.1 and $68.8; in other words, if it is inside the Entry Zone.

The system also takes into account the slope of the Entry and Exit Zones and would provide the following Slope Guidance advice:

  • Exit Level is slanting downward so place an order to SELL the Open tomorrow if QQQ’s price is greater than $71.08; in other words, if it is above the Exit Zone.

Summary –

The E-Zone systems works with stocks, ETFs and mutual funds. The daily zones are ideal for swing traders while the weekly zones can be used by position traders.

Use all the tools you’ve come to know from to find great stock ideas and now try the E-Zone System to guide your trades.

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An ETF to play earnings season

While we’re on the topic of earnings season (see my last post at the blog), I wanted to share with readers an ETF that fits right in with the earnings theme.

The ETF is the Wisdom Tree Total Earnings Fund (EXT). I hadn’t really heard of this ETF before but I recently started seeing it on the E*Trade Commission-Free ETF Scorecard as one of the top performers.

This ETF is small (total assets around $43M) and thinly traded (1000’s of shares traded per day, not millions) but offers an interesting way to play earnings season. The ETF is attempts to track a proprietary index created by Wisdom Tree itself called the Wisdom Tree Earnings Index. Here is how they describe it:

The WisdomTree Earnings Index is a fundamentally weighted index that measures the performance of earnings-generating companies within the broad U.S. Stock Market. Companies in the index are incorporated and listed in the U.S and have generated positive cumulative earnings over their most recent four fiscal quarters prior to the index measurement date. The index is earnings-weighted in December to reflect the proportionate share of the aggregate earnings each component company has generated. Companies with greater earnings generally have larger weights in the index. WisdomTree Investments uses “Core Earnings”, computed by Standard & Poors, as the weighting metric. Core Earnings is a standardized calculation of earnings developed by Standard & Poors designed to include expenses, incomes and activities that reflect the actual profitability of an enterprises ongoing operations.

In other words, this is not a market-weighted index; it’s a fundamental-based index.

The top ten components of the index and their relative weights are as follows:

1. Exxon Mobil Corp 4.00%
2. Apple Inc 3.53%
3. Microsoft Corp 2.54%
4. Chevron Corp 2.47%
5. JPMorgan Chase & Co 2.35%
6. Wells Fargo & Co 1.65%
7. Wal-Mart Stores Inc 1.44%
8. International Business Machines Corp 1.43%
9. Intel Corp 1.33%
10. Citigroup Inc 1.32%

If you’re getting the impression this index is slanted toward large cap stocks you would be correct. The MarketCap Breakdown is as follows:

Large Cap (> $10 Billion) 79.05%
Mid Cap (= $2 Billion and = $10 Billion) 15.68%
Small Cap (< $2 Billion) 5.27%

Despite the preponderance of large caps, there is still enough of a mixture of market styles that Wisdom Tree considers the benchmark to be the Russell 3000.

Of note is the fact that EXT managed to eke out a gain since its Feb 2007 inception while the Russell 3000 showed a small loss. That is what one would hope to see – that the focus on “strong” companies from an earnings perspective would allow the index to suffer less severe declines when the market as a whole fell. That can be seen in better detail in the following chart where EXT showed out-performance in comparison to IWV, the iShares Russell 3000 ETF.

Chart of ETFs: EXT and IWV

It is interesting to see that EXT began to more noticeably outperform IWV after the October 2011 bottom. As the rally developed and confidence in company earnings apparently increased, EXT outperformed at short-term peaks and had milder declines during the short-term down-turns.

A few further notes on this ETF:

  • Expense ratio is 0.28% which is rather high considering the expense ratio for SPY is barely 0.10%
  • Dividend yield is around 2%, a little over what is available if you were to hold SPY but a good 40 bps more than if you held IWV.
  • The year-to-date gain is about 11.9%, in line with IWV and a bit better than the performance of SPY though as the chart above shows, performance  clearly exceeded IWV since last October.

Conclusion —

The Wisdom Tree Total Earnings Fund is a broad-based ETF that is focused on holding those stocks that represent the largest earnings streams in the US stock market. Its tilt toward large cap stocks keeps it closely correlated to the S&P 500 but the ETF has provided a bit more downside protection since the market bottomed in 2009 which has smoothed performance slightly.

Another benefit is that the ETF is among the group of commission-free ETFs available to users of E*TRADE. This is important. A trader can use the commission-free aspect to offset the higher than average expense ratio.

This ETF won’t offer a dramatic improvement over tried and true ETFs like SPY or IWV but it may have a place in your portfolio if you are interested in alternative indexing methodologies and wish to have a slightly smoother ride over the peaks and valleys of the markets.

Disclosure: no position at this time in any ETF mentioned in this post but I am strongly considering entering a small position in EXT in the very near future

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It’s Time to Dust off the Stock Screener And Start Prospecting for Nuggets

Guest contribution provided by Forex Traders —

The holiday season is upon us, but amidst the ringing bells and blinking lights, it is also the right time to prune your portfolio of losers for tax purposes, fine-tune the mix of your holdings with diversification in mind, and, lastly, to search for those new entrants that will make your returns sparkle in the year to come.  While we wait patiently for the proverbial Christmas rally to arrive, it is doubtful if Santa will leave his best picks for 2012 under your tree.  It’s time to find your stock screener and begin prospecting for gemstones.

From a fundamental perspective, 2011 was filled with uncertainty and volatility in every sector.  Analysts expect these conditions to continue in 2012, primarily because Europe cannot get their act together to produce a creditable solution that the market will accept.  It is also an election year in our market, but even though Congress seems deadlocked, the economy has been showing positive signs that a stable recovery is finally forming.  China is warning of a slowdown, if backing off from 9.5% to 7.5% GDP growth can be described as a severe pullback.  Time to diversify and focus on safe equities.

With this basic backdrop for 2012, here are few screening suggestions:

1)      Blue Chip Stocks:  T’is the season to play it safe when everything about you is spinning out of control.  Search for high dividend paying blue chip winners, hopefully, ones that are not overexposed to the European market.  As for where to look, the Dow Jones has thirteen stocks that pay over 3% in dividends.  The top five that are often recommended are Chevron, Home Depot, Intel, Procter & Gamble, and Verizon.  Use your screener to check out a few more. For example, try using the Free Stock Screener on this site. Just choose a juicy Dividend Yield (over 4%), a Market Cap that is large ($10B to $200BN) and a P/E that is greater than 0 (i.e., profitable).  Don’t forget that you can also include some technical analysis criteria like requiring the stock to be above its 200-day EMA, for example.

2)      High Growth Stocks:  There is always a gem out there ready to take off, but with safety the watchword for the coming year, you need to be very selective.  Search for high revenue growth for companies with market caps over $1 billion and share prices over $5.  You will also want sufficient liquidity, at least 300,000 shares traded daily on major US exchanges only.  Also look for high share multiples when compared to asset values. With the Free Screener you can use the Growth Screen preset to dial in profitable stocks (PE > 0), positive sales and EPS growth, solid Return-on-Equity (over 20%) and Debt-to-Equity < 1 to identify growth stocks. Throw in a requirement that the stock be trading over its 50-day EMA and the results will be revealing.

3)      Contrarian Companies:  When the market is sliding, there are always a few companies that perform well regardless.  For example, Philip Morris has over 65% of their sales in Europe, but they have been on a rise lately.  Search here for companies that have a history of rising share prices, regardless of what direction the prevailing market is tracking.

4)      Bottom Fishing:  Many good companies have taken a beating this year and may have been pushed well below their true valuation.  Sector leaders with lower than normal P/E ratios are one place to look.  Also, commodities and precious metals are consolidating gains won from the global recovery that “hiccupped” earlier in 2011.  When the growth engines start accelerating, you will want to jump on board early in the process.  ETFs offer the easiest way to invest in this sector, ensuring good liquidity and accurate valuations. If you’re more interested in stocks rather than ETFs, use the Value Screen preset on this Free Screener to find low-PE stocks that remain profitable, have a low Price-to-Sales ratio, a low PEG ratio and a low Enterprise Value/EBITDA ratio. Combine these value criteria with a couple of technical requirements like having the stock trading below its 200-day EMA while it’s 20-day EMA is above its 50-day EMA and you will find some interesting opportunities.

5)      Emerging Markets:  This sector has also taken a beating and may offer significant opportunities for bottom fishing.  If you are a forex trader at heart, you may be expecting the Dollar to strengthen by about 10% in the months ahead.  Hedging your foreign currency risk may be prudent.  Check with your investment advisor for guidance.

All signs are suggesting another year of turbulence in the investment arena.  Be cautious, but make an effort to screen for the nuggets that are surely there.

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