The Missing Link between Fundamental and Technical Equity Analysis

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The missing link between fundamental and technical equity analyses is a meaningful correlation matrix.

Analysis of the above Correlation Matrix

1. The correlation among Apple (AAPL), Amazon (AMZN), Facebook (FB) and Google (GOOG) is very (positively) high (> 0.80), meaning they will move in tandem. A portfolio comprising exclusively of such highly correlated stocks would be considered an 'Ultra Aggressive' portfolio.

2. Twitter (TWTR) however adds a low-to-moderate positive correlation to the aforesaid four, meaning there are days TWTR will not necessarily move in lockstep with the other four stocks. A portfolio constructed as such would, nonetheless, be 'Very Aggressive.'

3. IBM, on the other hand, shows negative correlations with all five and obviously very high negative correlations with the first four, thus providing an excellent hedge. The inclusion of the IBM hedge would lower the overall risk, paving the way for an 'Aggressive' portfolio.

Ideally, in order to capture any meaningful shifts in relationships, researchers should run this matrix in three phases: short-term (recent 30 days), medium-term (6 months) and long-term (9-12 months). 

Disclaimer - The author is not advocating any of the stocks listed here; instead, this is just a research piece  - often overlooked - connecting fundamental and technical analyses. Consult your Registered Rep, RIA or Financial Planner for an appropriate asset allocation model and the holdings therein.  

-Sid Som, MBA, MIM
President, Homequant, Inc.
homequant@gmail.com
  

Link to the Book

Consider these Additional Factors while Choosing High Dividend Stocks - for Long Haul

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In choosing a set of high dividend stocks for the long haul, data savvy investors need to additionally consider, at a minimum, price-earnings ratio and volatility. Of course, equity research analysts would consider a slew of other factors including book, cash, reserve, growth, liquidity, debt, etc.  

A composite combining PE and Beta (or V-factor) is critical. The two composites - Beta-adj and Vfact-adj - have been used (the graphic above) to make the case. While the Beta-adj composite points to Verizon (VZ), P & G (PG), IBM (IBM Corp.), XOM (Exxon Mobil), GE and JNJ (J & J) as the best (< 50 as acceptable scale value) high dividend stocks, Vfact-adj picks PG, VZ, XOM, IBM and MRK (Merck). 

Despite high dividend yields, CVX (Chevron) and KO (Coca Cola) didn't make either cut due to high PEs. Likewise, BA (Boeing) didn't fare well either due to the high volatility.

Disclaimer - The author is not advocating any of the stocks listed here; instead, this is promoted as an alternative research in creating a statistically significant and more predictive volatility factor for individual stocks. Consult your Registered Rep, RIA or Financial Planner for an appropriate asset allocation model and the suitability of stocks and other holdings.  

-Sid Som, MBA, MIM
President, Homequant, Inc.

homequant@gmail.com

Link to the Book