Stock Market Education

Dear friends, thank you so much for participating in this simple blog by asking a lot of questions, either through comments or email. By then, I know what I should write. Sorry if I could not reply your question one by one. Therefore, once in a while, I'll make an article that contains a collection of your questions as well as the answer. Hopefully this way I can accommodate all the input from you. This article is the first one, check it out!

Related to Moving Average, how many periods you usually use?

In the article entitled 'Moving Average', I state that I used SMA with the composition of 50 and 20 day periods. That is a stardard composition to predict stock price movement during the mid-term or long-term of 1 year. In the graphic, it shows that the composition generat six crosses (signal) between the red line (SMA with period of 50) and the blue line (SMA with period of 20). That’s why, in a year, you just need to get in and out in MEDC’s stock as much as 6 times.

What if you want to predict stock price movement in shorter period, eg 3 months? You can do that by shortening the SMA’period composition, let’s say, become 12 and 10 days. Hoever, you need to count on the risk. There might be false signals, where the red and blue lines intersecting, indicating that the stock price will go up or down, yet it turned out it didn’t happen.

If you look at it, the range period for the mid long term of SMA (50 and 20 days, with range of 30 days), is wider than that on the short term (12 and 10 days, with range of 2 days only). Why so? It is because a wider range produces fewer signals, yet more accurate. So if the intention is for the long term in which you are certainly too lazy to go in and out at any time, then based on experience, the composition of 50 and 20 is the ideal composition (but if you are curious, may try other compositions). On the contrary, a thinner range produces more signal though the signal is being biased, so it is suitable for you who like to get out into the market all the time and speculate.

Why some companies with high PER like ANTM, INCO, TINS, ITMG, and UNVR still being favorite? While some with smaller PER such as ELSA and TBLA are less recommended?

Those stocks are indeed highly recommended by analyst or mass media, although the PER is already high. It shows that the stock is in very high price, maybe too high. Why so? Because usually the analysts almost always look at the stock price from its future prospect, not from its value at the present.

Take an example from ANTM. This company released a press conference on last April, and stated that the company is now focusing on nickel mining, because the price was in its peak. At that time, the price of nickel is almost 28,000 per ton, and predicted to reach 30,000 Dollar per ton in the near future. At the moment, ANTM was on the position of 2,450, and many analysts recommend that ANTM will reach points of 3,000 because the information from the press release. The result? Lots of investor enter to ANTM. But the fact? The nickel price was freefall and now at the position of 21,000 per ton. What about ANTM price? It’s far from points of 3,000. After that day (April 30), ANTM continues to drop until it touched points of 1,650 on May 25, although then it's been back to the position of 1,900 (in average), but still far from previous expectations.

So the conclusion is, why do those stocks are often highly recommended? It is because the companies often release information or news (which is usually more like advertisements) regarding sales targets, acquisition, etc. Tt said that it would raise the value of the company in the future, so that the shares were said to be up. Although some of those recommendations is true in the short term, alias the stock price is up, but in the long run, you still have to look at its fundamentals, unless you want to end up like the shareholders of ANTM.

Why does small stocks like TBLA and ELSA are less recommended? That is because they rarely put out media releases that could make people go for the shares.

Was by looking at the PER alone is sufficient to assess the reasonable price of a stock?

The PER point is already defined abouth 50% of a company’s fundamental. To complete it, in order to obtain approximately how much the price of these shares, you also need to see the numbers of PBV, ROA, ROE, and other key ratios. On the other hand, the fundamental observation has already described about 50% of the share’s future prospect. To complete it, you also need to observe psychological technical factor, current market condition, and so on.

Sounds complicated? Well, not really. Especially if you are already used to it.

Well, I guess it’s enough for now. I apologize for the unanswered emails or comments, and I will try to give the feedback soon. If there’s any further question, please feel free to comment or send it via email.

Original article was written on June 2^nd, 2010