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Golden Rule #4 - Share Price Sentiment

A positive market view of a company will be reflected in a positive price trend. We understand that stock prices represent the market's perception of value based on the future expectations of a company's earnings. The share price trend can therefore help highlight the fundamental qualities and active risks in a business. When the share price is declining relative to the market, this often means heightened risks in the business that should be investigated.

To assist investors with their exit and re-entry strategies based on their sensitivity to drawdowns, Stock Doctor has developed two technical price trend indicators SDMAX and SD30TSR. Both of these indicators can be accessed within the company 9 Golden Rules screen and in the Advanced Charting Tool.

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Percentage Shorted

You can chart the percentage of shares a company has shorted against it under Golden Rule 4 to help monitor the level of short-interest in the business and whether that is contributing to current price sentiment. When there is a spike in the amount of short interest and/or a consistently high level of short interest, it can mean negative sentiment exists, and the stock may be in for a period of extreme volatility.

Which Stock Doctor technical price trend indicator to use will depend on how sensitive you are too significant price declines: 

SDMAX - Stock Doctor 20/65-day High/Low Moving Average crossover (daily) indicator is suitable for highly trend sensitive and, therefore, willing to be very active in managing their portfolio. This indicator is based on the high and low of 20 days (fast) and 65 days (slow) simple moving averages. Click here to learn more.

SD30TSR - Stock Doctor Trailing Stop loss 30% exit / 30% re-entry (daily) indicator is suitable for moderate trend sensitive to price declines but are still prepared to let the stock price fall 30% to avoid churn. Click here to learn more.

Be wary of stocks whose share prices are historically volatile, under-performing its peers, sector or indices, or trending downwards. A positive trend indicates the markets' appreciation for the stock, its business, and its industry.

Golden Rule #4 - Share price sentiment can play an important role in portfolio construction because a negative share price trend can signal underlying fundamental problems within the company.

It is important to note that share price sentiment plays no role in the decision-making process of a value investor. However, looking at stocks on value only can be a high-risk strategy due to the potential for “value” traps.

Income seeking investors, particularly volatility averse investors, prefer stable share prices with minimal spikes or shifts in price. However, dividend maximisers don't mind volatility as a decline in price often makes the dividend yield more attractive.

Notwithstanding the above, should a Star Stock’s share price fall, however, remain fundamentally sound with its active risks under control, then a declining price may represent an opportunity to acquire the business at a cheaper level.

What does share price sentiment show us?

It demonstrates whether the market likes:

  • the business
  • the company’s current operations; and
  • the industry the company operates in

Share price sentiment can help identify previous issues or good news the company has had that may warrant further investigation.

 

Important Information: Information presented in this SD30TSR Helpfile (Communication) is as 6 October 2020 unless otherwise indicated. 

This Communication has been prepared by Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167. This document may contain general financial advice. It has been prepared without taking account of your personal circumstances (including your objectives, financial situation or needs), and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. You should read and consider our Financial Services Guide (FSG), which sets out key information about the services we provide. The FSG is available at www.lincolnindicators.com.au .

The SD30TSR and SDMAX (Indicators) have been identified through a rigorous research process using historical price data against Star Stock selections. Each indicator has its strengths and weaknesses as outlined in this Communication and corresponding SDMAX Communication. The information contained within the Indicators is for general information purposes only. It is not intended as investment advice or a recommendation to buy, sell or hold a stock and is not to be relied upon as such. Past performance is not an indication of future returns.

Lincoln acts in good faith and has taken the utmost care and precautions to ensure that the Indicators are timely and accurate. However, Lincoln specifically disclaims any liability (whether based in contract, tort, strict liability or otherwise) for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of these Indicators including their accuracy, reliability, currency or completeness.

Except as provided by consumer protection law, under no circumstances will Lincoln and its related companies be liable for any loss or damage caused by a client’s use of, access to, or reliance on the Indicators. Contact our office should you require assistance on how to apply these Indicators correctly.

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