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Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

Many momentum traders use relative strength to help find investment candidates. I think there is logic to this line of thinking, especially since positive industry and sector conditions help a stock with good underlying fundamentals generate better returns. The rationale is that a good company will prosper more if there is an industry tailwind behind it.

This is one of the areas where fundamental analysis and technical analysis merge onto the same path. Good earnings for companies in the same industry can move stock prices higher. Similarly, an upward trend for a sector exchange-traded fund (ETF) can signal positive underlying business trends.

In fact, this is one instance where a chart can lead you to stocks with good fundamentals. The key is to look for sectors with good relative strength, and then conduct additional research afterward. Michael Kahn, a columnist with Barron’s and a speaker at this year’s AAII Investor Conference, discusses the concept of relative strength and explains how charts can help you analyze it on page 7.

If you want suggestions for good charting software programs and websites, read this issue’s Hot Links column. Joe Lan provides a brief overview of and links to some of the best charting applications currently available. You can see the list on page 10.

Michael Kahn’s article is also the basis for this month’s First Cut. John Bajkowski combines increasing relative strength with positive earnings surprises and rising earnings estimates to find potential investment candidates. You can view the list of the top 30 stocks to pass his screen on page 11.

The Driehaus Screen combines relative strength with earnings growth to find investment candidates. This blend of price and profit momentum has led to some good returns for those who like trade more frequently and are willing to accept a higher level of volatility. Wayne Thorp describes the screen and some of its recent finds on page 27.

Stock analysis is typically discussed in terms of looking at financial statements, valuation multiples and charts. A company’s Securities and Exchange Commission (SEC) filings should be added to the list. These reports contain a great deal of information about a company and include items a company would rather not have publicized. Michelle Leder has made a career out of reading through the footnotes in these filings and finding potential warning signs. She gives a primer on what to look for on page 13.

Portfolio income that is exempt from federal taxes can be obtained by investing in closed-end municipal bond funds. Yields on many of these funds make them attractive, especially on an aftertax basis, but they are not without risks. John Deysher and Michael Walters of the Pinnacle Value Fund expound on these funds’ pros and cons, as well give you a list of fund names on page 17.

I realize the subject of bonds cannot be brought up without addressing interest rates, particularly given that the U.S. government hit its debt ceiling as we were going to press. Marilyn Cohen, editor of the Bond Smart Investor newsletter and also a speaker at our Investor Conference, advises investors to be proactive in the face of the current uncertainty. You can see some of her bond strategies starting on page 22.

Life insurance policies are typically purchased with the intent of a death benefit being paid when the insured passes. Since many whole life policies and universal life policies, sold in the 1980s and 1990s, are set to mature at ages 100 and 95, respectively, it is possible for the insured to outlive the death benefit. These scenarios require careful policy management, as Peter Katt explains on page 25.

A fairly common question new investors have is how much money is required to start investing. The answer is dependent on the costs you are likely to incur relative to the amount you have to invest. I provide more clarity in my Beginning Investor column on page 32.

Finally, AAII offers several emails that will help you get the most out of your membership. You can find out more about them in our Member News on page 33.

Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


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