Moving Average: upward momentum is confirmed when a short-term average

(e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward

momentum is confirmed when a short-term average crosses below a long-term
average.
MACD: commonly rely on the default settings of 12- and 26-day periods. A positive
MACD value, created when the short-term average is above the longer-term
average, is used to signal increasing upward momentum. This value can also be
used to suggest that traders may want to refrain from taking short positions until a
signal suggests it is appropriate. On the other hand, falling negative MACD values
suggest that the downtrend is getting stronger, and that it may not be the best time
to buy.
Aroon Up/Down: The lower the Aroon up, the weaker the uptrend and the stronger
the downtrend, and vice versa. The main assumption underlying this indicator is
that a stock's price will close at record highs in an uptrend, and record lows in a
downtrend.
ROA & ROE: one of the most important is return on equity. Many professional
investors look for a ROE of at least 15%. For high growth companies you should
expect a higher ROE.
So, be sure to look at ROA as well as ROE. They are different, but together they
provide a clear picture of management's effectiveness. If ROA is sound and debt
levels are reasonable, a strong ROE is a solid signal that managers are doing a good
job of generating returns from shareholders' investments. ROE is certainly a "hint"
that management is giving shareholders more for their money. On the other hand, if
ROA is low or the company is carrying a lot of debt, a high ROE can give investors a
false impression about the company's fortunes.
ROCE: ROCE is especially important for capital-intensive companies.
In general, investors tend to favor companies with stable and rising ROCE numbers
over companies where ROCE is volatile and bounces around from one year to the
next.
P/BV: A lower P/B ratio could mean that the stock is undervalued. However, it could
also mean that something is fundamentally wrong with the company.
Earnings Per Share
Before you can understand many of these ratios it is important to learn what
earnings per share (EPS) is. EPS is basically the profit that a company has made
over the last year divided by how many shares are on the market. It gets a little
more complicated because you don't include preferred shares, also the number of
shares could change throughout the year. But don't worry this number will be given
to you on any financial website.
Price To Earnings Ratio
The price/earnings ratio (P/E) is the best known of the investment valuation
indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely
reported and used valuation by investment professionals and the investing public. A

high P/E ratio means investors are paying more for today's earnings in anticipation
of future earnings growth.
Price to Sales Ratio
A stock's price/sales ratio (P/S ratio) is another stock valuation indicator similar to
the P/E ratio. The P/S ratio measures the price of a company's stock against its
annual sales, instead of earnings. Like the P/E ratio, the P/S reflects how many times
investors are paying for every dollar of a company's sales. In this example the price
of a share is divided by the sales ($3,286) which is adjusted for average share
outstanding throughout the year (3,286/247.1). This results in paying 5.1 dollars for
every dollar of sales.
Debt To Equity Ratio
The debt-equity ratio is a leverage ratio that compares a company's total liabilities
to its total shareholders' equity. This is a measurement of how much suppliers,
lenders, creditors and obligors have committed to the company versus what the
shareholders have committed. A lower number means that a company is using less
leverage and has a stronger equity position. This ratio is not a pure measurement of
a company's debt because it includes operational liabilities in total liabilities,
nevertheless, this easy-to-calculate ratio provides a general indication of a
company's equity-liability relationship.
Dividend Yield
A stock's dividend yield is expressed as an annual percentage and is calculated as
the company's annual cash dividend per share divided by the current price of the
stock. The dividend yield is found in the stock quotes of dividend-paying companies.
Investors should note that stock quotes record the per share dollar amount of a
company's latest quarterly declared dividend. In this example the $1 dividend and
$67.44 share price creates a 1.48% yield.
Price To Book Ratio
This Ratio compares a stock's per-share price (market value) to its book value
(shareholders' equity). The price-to-book value ratio, expressed as a multiple (i.e.
how many times a company's stock is trading per share compared to the company's
book value per share), is an indication of how much shareholders are paying for the
net assets of a company. "price-to-book", provides investors a way to compare the
market value, or what they are paying for each share, to a conservative measure of
the value of the firm. In this example the share price is divided by the book value
(adjusted into a per share number).
Payout Ratio
This ratio tells you how much profit goes out in dividends. This ratio identifies the
percentage of earnings (net income) per common share allocated to paying cash
dividends to shareholders. The dividend payout ratio is an indicator of how well
earnings support the dividend payment. Dividends are paid at the discretion of
management, if the percentage is too high (over about 75%) then the dividend
could be cut. If the result is low then the dividend payment could continue into the
future.
Current Ratio

The current ratio is a popular financial ratio used to test a company's liquidity (also
referred to as its current or working capital position) by deriving the proportion of
current assets available to cover current liabilities. The concept behind this ratio is
to ascertain whether a company's short-term assets (cash, cash equivalents,
marketable securities, receivables and inventory) are readily available to pay off its
short-term liabilities (notes payable, current portion of term debt, payables, accrued
expenses and taxes). In theory, the higher the current ratio, the better. In this
example current assets are valued well over 2 times the current liabilities.

Does company produce more cash: A successful company will produce more cash
capitalfrom the business than it consumes, just as a successful household does
the same, or else it goes into debt. Smart investors track this surplus over time
Does the Company Pay a Dividend?
discounted cash flow or DCF models
Companies with high P/E, P/S, P/B, and P/CF ratios arent necessarily bad
investments, but you need to have good reasons to look beyond these figures if
they suggest truly inadequate business results.
DOES THE COMPANY HAVE ANEXCELLENT BRAND? IS THE COMPANY
A MARKETLEADER?
Gaining market share
Can control price
Loyal customers
Growing margins
Producing, not consuming, capital (free cash flow)
Steady or increasing ROE
Management forthcoming, honest, understandable
THE FOUNDATION PORTFOLIO
In this construct, each investor defines and manages a cornerstone foundation
portfolio, which is long term in nature and requires relatively less active
management. Frequently, the foundation portfolio consists of retirement accounts
(the paradigmatic long-term investment) and may include your personal residence
or other long-lived personal or family assets, such as trusts, collectibles, and so
forth. The typical foundation portfolio is invested to achieve at least average market
returns through index funds, quality mutual funds, and some income-producing
assets like bonds held to maturity. A foundation portfolio may contain some longterm plays in commodities or real estate to defend against inflation, particularly in
such commodities as energy, precious metals, and real estate trusts. The foundation
portfolio is largely left alone, although as with all investments it is important to
check at least once in a while to make sure performanceand managers if involved
are keeping up with expectations.
THE ROTATIONAL PORTFOLIO
You manage the rotational portfolio fairly actively to keep up with changes in
business cycles and conditions. It is likely in a set of stocks or funds that might be
rotated or remixed occasionally to reflect business conditions or to get a little more
offensive or defensive. More than the other portfolios, this portfolio follows the
rotation of market preference among different kinds of businesses and business
assets. The portfolio is managed to redeploy assets among market or business
sectors, between aggressive and defensive business assets, from large cap to
small cap companies from companies with international exposure to those with
little of the same, from companies in favor versus out of favor, from stocks to bonds
to commodities, and so forth. Sector-specific exchange-traded funds are a favorite

component of these portfolios, as are cyclical and commodity-based stocks like gold
mining stocks.

Is this about market timing? Lets call it intelligent or educated market timing.
Studies telling us that it is impossible to effectively time market moves have been
around for years. It is impossible to catch highs and lows in particular investments,
market sectors, or even the market as a whole. Nobody can find exact tops or
bottoms. But by watching economic indicators and the pulse of business and the
marketplace, long-term market performance can be boosted by well-rationalized
and timely sector rotation. The key word is timely. The agile active investor has
enough of a finger on the pulse to see the signs and invest accordingly.
While the idea isnt new, the advent of low-friction exchange-traded funds and
other index portfolios makes it a lot more practical for the individual investors. What
does low-friction mean? They trade like a single stockone order, one discounted
commission. You dont have to liquidate or acquire a whole basket full of
investments on your own to follow a sector. We should note that its been possible
to rotate assets in mutual fund families for years with a single phone call, but most
funds in these families are less pure plays in their sector, and most families do not
cover all sectors.
THE OPPORTUNISTIC PORTFOLIO
The opportunistic portfolio is the most actively traded portion of an active investors
total portfolio. The opportunistic portfolio looks for stocks or other investments that
seem to be notably under- or overvalued at a particular time. The active investor
looks for shorter-term opportunities, perhaps a few days, perhaps a month, perhaps
even a year, to wring out gains from undervalued situations.

The opportunistic portfolio also may be used to generate short-term income through
covered option writing. Options are essentially a cash-based risk transfer
mechanism whereby a possible, but low-probability investment outcome is
exchanged for a less profitable but more certain outcome. A fee or premium is
paid in exchange for transferring the opportunity for more aggressive gain to
someone else. You collect this fee. Effectively, you as the owner of a stock can
convert a growth investment into an income investment, paying yourself a dividend
for the ownership of the stock by selling an option. Is this risky? Actually, it is less
risky than owning the stock without an option.

Curiously, the main objective of this short-term portfolio is to generate income, or

cash. Most traditional investors look at the long-term, more conservative
components of a portfolio to generate income through bonds, dividend-paying
stocks, and so forth. In this framework, the short-term opportunistic portfolio

actually does the heavy lifting in terms of generating cash income. An active
investor might look to trade those stocks with varying degrees of frequency or to
sell some options to generate cash. These swing trades usually run from a few
days to a month or so, and may be day trades if things work out particularly well
and move particularly fast. It should be emphasized again that day trades are not
the active investors goal or typical practice.

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