Applying Bond Wisdom to Stock Trading

The conventional wisdom in bond investing is that, as interest-rates rise, you shorten maturities. As rates fall, you lengthen them. But what to do about holding-periods for equities? Might not the same thinking apply as markets rotate between their bull and bear phases? When faced with intermediate to longer term trends whose directions are flat to downwards, might it not be a good idea to tighten trailing stops and/or be prepared to get in/out quickly when technicals are overwhelming fundamentals, maybe even to the extent that technicals become fundamentals, as Soros argued in one of his books when he was still a shrewd trader rather than yet another political meddler?

To that end, I’m going to set up a campaign to trade the stocks in the SP1500 and the same number of ETFs, using some scanning software I have that can slam though 100 stocks/ETFs per second looking for breakouts that might be worth buying or breakdowns that might be worth shorting. I have no idea what the outcome of the campaign will be. But it’s the project that interests me right now, and to keep myself honest, I’m going to document the project here.

The SP1500 index includes the stocks in the (large-cap) SP500 index, the (mid-cap) SP400 index, and the (small-cap) SP600 index. There isn’t a similar index for ETFs, though Seeking Alpha has put together some pretty good lists that cover the major asset classes and that I’ll be borrowing from and augmenting. So, my “trading universe” will be 3,000 items.

The investing thesis is this. “Over-sold should be bought. Over-bought should be sold.” In other words, this will be a ‘mean-reversion’ gig rather than a ‘momentum’ gig. Scanning for breakouts/breakdowns will be done with a legacy charting program called Candle Power Ultra. Any buy or sell signals for stocks generated by CP Ultra will be vetted technically at BarChart and fundamentally at Simply Wall Street. The signals CP Ultra generates for ETFs will just get technical vetting, again at BarChart.

So, here’s an example with the signals based on yesterday’s close for the SP500. There’s a single ‘buy’ (BAX) and 20 or so ‘sells’. Here’s yesterday’s chart for BAX.

Pretty obvious what’s going on, right? CP Ultra is saying that BAX is very over-sold to the point of becoming a ‘buy’. But the chart for BAX contradicts that. Price (again) closed below the MAs, and TSI is still negative. In other words, there isn’t yet any evidence that BAX is going to turn itself around. Here’s what Simply Wall Street says:

Yeah, BAX is trading at a discount to intrinsic value (IV), and the earnings forecast is strong. So the stock might seem like a value play. But the company’s financial health sucks pretty majorly, especially when compared to a peer in the industy like HAL.

My takeaway? Rather than screw around with individual stocks in the sector, the smarter play might be just to trade an index for the sector, such as XLE, or better, one of the long/short ETFs pairs for crude or nat gas, which adds a third screen that would need to be run, namely, building a correlation matrix that benchmarks all stocks in the sector against the broad market plus an index or two that tracks the sector. What you’re looking to find is which securities are redundant to each other and --hence-- don’t need to be tracked, as well as finding which ones lend themselves most easily to being charted/traded, i.e., aren’t likely to whipsaw you, not hat all whipsaws can be avoided, though they all must be managed.


Opps. I was assuming --from faulty memory-- that BAX was an oil patch stock, rather than a member of the healthcare sector. My bad. But the original part of he previous post is still valid. BAX might be ‘over-sold’, but it isn’t yet a ‘buy’.

Fortunately, there’s an easy fix for my mistake. At BarChart, for any stock ticker you enter, they will provide a list of all industry competitors. That list can be hand-charted using their ‘FlipCharts’ feature, or it an be exported as an Excel file. (There’s a limit of 5 exports/day for free accounts.) That list can then be run through your stock scanner for buy/sell signals.

OK. Barchart puts 94 stocks into the ‘medical products’ sector, and CP Ultra says that 1 of them was a ‘buy’ --which is BAX as before-- and 9 were a ‘sell’. In fact, one of them had signals that coulda/shoulda been acted on, JUPW. However, a new difficulty emerges. To short a stock, it has to be borrowed. But TD AmeriTrade’s platform, Think or Swim (henceforth, TOS) says NTB. [None To Borrow.] Furthermore, even if the stock were ETB, the borrow fee would still need to be found out, because some of them are truly abusive and you’d a larger penalty than you’d likely make in cap-gains.

Here’s JUPW’s chart where the right-most bar is today’s close.

As you can see, JUPW opened today at 0.84, which isn’t an unrealistic price where you could have sold (had you been able to borrow the stock), and the low for the day was 0.55, with a close at 0.62, meaning, you could have grabbed a 1–day, 26% profit.

OTOH, here’s a chart of ICUI --that TOS says is ETB-- with same technical setup.

On Weds, there’s a Doji, indicating buyer-seller standoff and the liklhood of a trend reversal that is confirmed the next day by a bearish engulfing candle. Given that two-day pattern, one’s expectation for the following day should be a continuing sell-down. That’ expectation is confirmed by ICIU’s balance sheet, which is pretty sucky.

Aside: ‘Sucky’ is a technical term, meaning, the company is running on fumes. It can meet its short-term liabilities, but not its long-term ones. Its debt level is high. It isn’t reducing that debt. It has poor debt coverage and poor interest-rate coverage. In other words, ICUI is not the sort of company you’d want to lend money by buying its bonds, nor the sort of company whose common stock you’d want to own, either. In short, the company is a short.

OK, back to the chart and the expectation for a decline in its price Friday (today). But that isn’t what happened. ICUI opened higher than it closed yesterday. Therefore, if one intends to sell stocks short, ‘sell-stop’ orders should be/must be used if one wants to stay out of avoidable troubles. (IMHO, 'natch.)

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The technical term for “sucky” is “zombie company.” The Federal Reserve has analyzed that about 9% of listed companies are zombies.

The Federal Reserve Understates the Proliferation of Zombie Companies

"A “zombie” company is a business that is unable to generate enough earnings to support its interest expenses. In 2021, under the Federal Reserve’s definition of zombie companies, about 9% of publicly listed entities were estimated to fit into this category. However, when strictly using an interest coverage ratio of less than one, we found that about 40% of publicly listed U.S. companies are zombies.

The proliferation of zombie companies started with low interest rates, and as the Fed hikes rates, we are already beginning to see the highest-risk companies falter. It is a global problem, as well, with 31% of the roughly 30,000 non-financial domestic and foreign public companies fitting into zombie status." [end quote]

Note that these articles were written before the Federal Reserve began to raise the fed funds rate in mid-2022.

The definition of a zombie is a company that doesn’t have the free cash flow to pay off the principal of its debts. These zombies will be forced to roll over their low interest debt at much higher rates than the ultra-low rates supported by the Fed’s Covid emergency rates.

A long-term investor needs to be aware of the fundamentals. Will a short-term trader be blindsided by a downdraft caused by the fundamental investors when the zombie’s debts roll over?


"A long-term investor needs to be aware of the fundamentals. Will a short-term trader be blindsided by a downdraft caused by the fundamental investors when the zombie’s debts roll over?


You don’t understand ‘fundamental analysis’, nor ‘technical analysis’, nor have a meaningful way to distinguish ‘long-term’ from ‘short-term’.