Technical Analysis + Valuation Analysis: A Powerful Combination
I noticed some of the recent ‘Alpha Trades’ (Short LB from $61.35, Short ALK via Put Spread at $72.24 and longs in KRE and XLE at $57.98 and $27.55, respectively) make note of valuation levels as well as technicals. Is this something new?
Brent S – Franklin, Tennessee
Thank you for the question. I love that area of the country; we were in Nashville and Franklin last year.
It’s probably no surprise that valuations have always been of interest and a component of the trade selection process. However, I was never satisfied with the generic output I was getting. Measures like PE ratios, price to book, price to sales, ROE, and ROA were either commoditized or simply offered no edge to what others were using in the marketplace.
That changed during the summer when I began working more earnestly with a friend and colleague of mine. We discussed the shortcomings of the traditional valuation approach and determined that there was a better way to formulate them. After wrapping our heads around the issue, we came up with a valuation process that we believe offers an edge. Since then, using valuations has proven to be a really critical part of the trade selection process.
As prices will usually track towards the proper valuation level (all else being equal) it is critical you understand where you are on the charts BEFORE placing a trade. Since we started using the valuation process, I can see how it eliminates false positives that appear on the technical front.
For example, we had recently saw the push lower in Texas Instruments (TXN) as a technical sign that lower prices were possible. However, when you reconciled that view with our take on the valuation, it makes the idea of forecasting lower prices and/or shorting TXN not the best idea.
The result? We now have the ability to further refine the trade selection process and choose trades we believe have higher probability of success.
Interested in learning more about combining VALUATION and TECHNICALS?
We will be offering a webinar on February 13th at 4:30 PM Pacific that will provide more insight on this process as well as offering an overview of our new Model Portfolios.
Have a question for me? Just ask.