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Introduction

The major problem I had in the past was having a simple method to determine daily price changes from the annual historical price. I’m not the type of person to sit at a computer watching daily price changes all day. I have do better with my time. The problem I had was never knowing which stock was oversold or overbought in my stock portfolio.

I can research past financial results and choose good stocks. The end results always come down to the price I pay for the investment. I recently solved this riddle with software to automatically determine the psychology of the market and the stocks I currently own.

In this article, I present to you the June 16, 2022 market decline where most of my stocks moved into oversold territory. I received email alerts during that day and enjoyed several purchases. Since that day, the market has recovered, including my holdings.

Trade signals are based on the RSI (momentum indicator) and the Z-score of the price (standard deviation), see Appendix A for more information. Both indicators are calculated from one year of price data.

Market Perception

It is not easy to change the perception that price increases are good and price decreases are bad. The way I circumvented this perception is due to the dividends hitting my account every month. We are programmed to expect price gains as the only method of success, but I am here to tell everyone that there is another way to gauge market performance.

Receiving something from a purchase is how we buy food, utilities, cars, homes, wants and needs. We know how to do this stock hunting and the stock market is no different!

We need to stop thinking that the stock market is some kind of magical entity that only professional investors play in. Price cuts are nothing more than getting more dividend-paying stocks for less. June 16 was a great day to increase my annual dividends.

Current holdings

CDB (business development company)

(FDUS), (GBDC), (GSBD), (TSLX), (HTGC), (TPVG), (CSWC), (OCSL), (ARCC)

mREIT (Mortgage Real Estate Investment Trust)

(BXMT), (BRMK), (ABR), (PMT), (STWD)

FEC (Closed-end funds)

(RCS), (PDI), (PTY), (PFL), (GOF), (ECC),

All companies listed above are RIC (Regulated Investment Company) shares.

These are intermediary companies that avoid double taxation. Income tax is passed through to shareholders as the most appropriate ordinary income in a tax shelter. When using these types of investments in IRA/ROTH accounts, the portfolio will grow very quickly over time.

Portfolio Alerts, June 16

Figure 1

The pursuit of a high return of 15% is excellent in a bear market, the change in the price of the shares of the portfolio from June 16

Author

Figure 1 shows the graphical display of my current portfolio with a return of 11%. On June 16, 19 out of 20 holdings indicated an oversold status. Purple bars indicate that the RSI and Z-score have entered the buy zone. The single orange bar indicates that the Z score was triggered, but not the RSI.

Figure 2

Zscore RSI Chart

Author

Figure 2 is a new chart that I can tell where my stocks are in the oversold and overbought range.

I received many oversold alerts on June 16th and took advantage of three ABR, BRMX and PMT. I also added ECC (very close to full buy alert). All four are underallocated in my portfolio, I went shopping for value.

Profitable Business Email Alert

The PMT (PennyMac Mortgage Investment Trust) transcript reaffirmed its dividend for the remainder of 2022, but the book value declined due to an accounting change this year. See the following quote from the latest transcript.

Our guidance for PMT’s taxable income and liquidity continues to support the ordinary dividend at its current level of $0.47 per share through the end of 2022.

… book value decreased to $17.87 from $19.05 at the end of the prior quarter. The decline in book value per share is out of proportion to PMT’s performance this quarter, as a recent accounting change beginning in 2022 required us to reclassify the portion of PMT’s senior notes that are exchangeable for common stock of PMT…

PMT stock moved decisively into the oversold zone with an RSI of 16 well below my limit of 30. I received an email indicating this event during the day, see figure 3 below for the actual email I received.

Figure 3

PMT stock alert

Author

Figure 3 shows the email I received at 12:49 PM MT to purchase PMT. Notice in the email that the RSI was below 30 four days in a row. I bought shares at $11.99 that day.

The Z-score of the price is negative 3 standard deviations below its mean. This is an extreme measurement with the RSI at 16 well below the trigger level of 30.

I’m not guessing the price, but rather expect to see massive sales. This type of action always happens, the criterion of this method requires patience and time to take advantage of it. We will see further market declines the rest of the year.

In the list of portfolios below, note how high stock returns are. Look at ABR with price standard deviation of -5.4 and RSI at 15. It was time to take action.

Figure-4

Business Update

Author

Figure 4 is my actual portfolio sent 10 minutes before market close on June 16th. PMT is down more than 8%, second column, price of $11.90 third column, return of 15.8% fourth column, price Z-score -3.3 fifth column, RSI of 16 in sixth column .

The last column with the “Buy-S” indicates a strong buy as the RSI and Z-score have risen above their trigger levels.

During this day, I was not at home to watch the price of the PMT, but I was informed by e-mail of this event while I was shopping. I will continue to use this method to add revenue shares for the rest of the year.

Figure-5

The pursuit of a high return of 15% is excellent in a bear market, the change in the price of the shares of the portfolio from June 16

Author

The yellow cells were the stocks purchased on June 16, 2022 and added to my portfolio. The chart above illustrates the importance of buying stocks based on technical analysis when investors are rushing to the exit. Just the RSI and Z-score of the price is all I need to indicate possible good entry points. In just 8 days, you can see the price gains of 19 out of 20 stocks.

Conclusion

The S&P 500 fell 3.2% on Thursday, June 16, 2022 and the PMT fell 8% as investors raised cash. In fact, my buy price was $11.99 on June 16 and on Thursday June 30 the price was $13.83, a 15% gain in 8 trading days. Using indicators to buy stocks provides a margin of safety that will enhance total return as well as dividend income.

It should be noted that this year will be difficult with high inflation which is eating away at many stocks and the stocks in my portfolio will drop. I’ll be ready to add more shares when that happens. Good luck income investors.

Joe HYCF.

Appendix – A, Explanation of POT Indicators

I have described the following buy signals used by the TEA/POT software that I currently use to enhance my trading experience.

RSI (Relative Strength Index)

The RSI number ranges from 0 to 100 indicating oversold and overbought conditions. Each price quote taken during the day recalculates the RSI level and notifies the investor of any significant changes.

A good the definition comes from Investopedia“The Relative Strength Index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to assess overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line chart that moves between two extremes) and can have a reading from 0 to 100.

Oversold and overbought trigger points are user selectable in the POT app and trigger an email notification.

An RSI of 30 or less is suggested as oversold. This provides a quick assessment of a possible purchase.

An RSI above 70 indicates that the stock may be overbought and a possible adjustment is in order.

Z-score, standard deviation of prices

The diagram in Figure 1 illustrates a normal distribution of data values. They can represent any dataset sorted from minimum to maximum. For the Z-score calculation I use one year of price data.

The percentage in Figure 1 is a range, based on the price data set for each individual stock. To interpret a normal distribution in Figure 1, the stock price will stay in the blue shaded area 68.2% of the time within +-1 standard deviation. Visually, you can see that when the Z score becomes more negative, the price enters an oversold condition.

Figure 1; bell curve

standard deviation

MIT News

It should be noted that the data representing the price is not an absolute normal distribution, as the price is very volatile. We can always use the price representing a normal distribution which allows for comparative results with other stocks. A single daily stock quote gives a good indication of where the price falls within the range of the bell curve.

When looking at the bell curve diagram in Figure 1, the center value is the price average. The calculated Z-score can vary above and below the average to tell us how far the average price has moved away when receiving a quote. For my trigger point, I use “-1” to signal an alert telling me that the price has deviated from the mean. The larger the negative value, the greater the chances of a possible buy after considering the rest of the technical parameters.

50 SMA and 200 SMA (simple moving average)

An explanation is described by Investopedia, using Moving averages to detect direction changes:

“Another strategy is to apply two moving averages to a chart: a longer one and a shorter one. When the short-term MA crosses above the longer-term MA, it is a buy signal, as this indicates that the trend is up. This is called a “ Gold Cross.” Right arrow in chart.

“Meanwhile, when the short-term MA crosses below the longer-term MA, it is a sell signal, as this indicates that the trend is down. This is called a “death/cross of death.” Left arrow in chart.

stock averages

Investopedia

The left arrow indicates that the 50-day SMA has just crossed below the 200-day SMA (death cross). The right arrow indicates that the 50-day SMA has crossed above the 200-day SMA (golden cross).

Both signals indicate a change of direction.

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