When you are experiencing a medical condition, you will often reach out to a second doctor to get another opinion and (hopefully) confirming diagnosis on your proposed action. Likewise, you would probably like a second or third opinion before you invest in a stock to ensure that you are making the best investment possible. At Chaikin Analytics, we believe that you can get multiple second opinions from varied sources that can help hone your decision.
For example, Research Analysts at the Wall Street brokerages all publish not only buy/sell ratings, they also publish future estimates of earnings. You can look at an average of these estimates to form an opinion of where the stock may go. I already know what you are going to say, “but Nick, analysts have conflicts, and are often late to change direction on a stock.”
In that case, maybe you want to look at how the market, as a whole, views the stock. There is a measure that will give you a sense of that. We call it Relative Strength (as opposed to the RSI). Relative Strength measures a weighted average of a stock’s performance relative to a benchmark’s performance. If a stock has persistently strong relative strength, you know that the market as a whole expects the stock to do well. Okay that is helpful, but you know that your crazy uncle from Texarkana invests in the market, and you don’t necessarily trust that an overall opinion that takes his views into account can be trusted. I don’t blame you.
Fine, we have more sources. How do the institutions that run hedge funds, large mutual funds and proprietary trading accounts view the stock? Hmmm, that is a little tougher to figure out since that data is not revealed until it is way too late to matter in an investing decision. All is not lost though! There is a technical indicator that Marc Chaikin developed thirty years ago called Chaikin Money Flow (CMF) which is available in most trading platforms. CMF serves as a proxy that tracks whether a stock is receiving Institutional interest. If CMF is persistently strong, that indicates that these institutions are taking larger positions in the stock. These institutions serve as a buffer and support the stock during market downdrafts.
Okay, so now we have pulled the research analysts, the market as a whole, and large institutions’ opinion on a stock. Is that enough? Let me give you two more places to get opinions – and these are some of the people that know the most about a particular stock.
First, Short Interest will reveal whether there is a large short position on a particular stock. These investors tend to spend a ton of time investigating a stock before putting on a position. They do this because short positions are a) more expensive to trade and b) the market has a positive bias so they really have to know what they are doing to make money. So if short interest is growing with a stock that would indicate that there is a population of shrewd investors betting against this stock. Not particularly where you might want to invest.
Finally, one more area where you can look for a knowledgeable opinion is Insider Trading data. Insiders are defined as high level executives of a firm. They are required to notify the SEC if they want to trade their stock in a company. If insiders are selling their positions, that should be reason for looking a little closer. It may not mean that the company is going to tank, but it could mean that insiders feel that the stock price is relatively high compared to the inside knowledge that they have.
This may seem like a lot of work to gather up all of these opinions and synthesize them into your investing decisions. Good news! Chaikin Analytics does the hard work here. Each of these factors are considered in our twenty factor model: the Chaikin Power Gauge rating. Guess what: we like second opinions too at Chaikin Analytics.