IVolatility.com - data and services usage: Stock Sentiment service, part II

We will continue describing our Stock Sentiment service in this newsletter – it is a powerful tool for analyzing a stocks performance. Last week we showed its basic functionality - the Summary section. Now we'll dwell upon more advanced topics - usage of Price Bands Calculator and Tech Analysis Charts. But first let’s have a look at the performance of the stocks picked by Stock Sentiment last week.

Stock Sentiment in action

First, let's look at the stocks which were picked to sell by Stock Sentiment service last week. These are NBIX:NASDAQ, LF:NYSE, MO:NYSE, BEAS:NASDAQ and MBG:NYSE. The table below shows the closing price of these stocks as of June 11 (when the stocks were picked) and about a week later, June 18.

Company June 10 2004 June 18 2004 % Change
BEAS (B E A SYSTEMS INC) 8.64 7.93 -8.22%
LF (Leapfrog Enterprises Inc) 20.07 18.75 -6.58%
MBG (MANDALAY RESORT GROUP) 68.42 68.45 0.04%
MO (Altria Group, Inc.) 48.48 47.58 -1.86%

Table 1. Performance of stocks picked on June 11 2004.

As you see, all the stocks except MBG:NYSE declined by from 2 % to 8 % last week - so selling them as recommended by Stock Sentiment was not a bad idea indeed. If you check the current sentiment for them (as of Friday close, June 18), you'll see the following:

Company Buy Sell Hold Change from last week
BEAS (B E A SYSTEMS INC) 0 7 3 even more bearish
LF (Leapfrog Enterprises Inc) 1 5 2 slightly more bearish
MBG (MANDALAY RESORT GROUP) 2 6 3 unchanged (bearish)
MO (Altria Group, Inc.) 0 5 4 unchanged (bearish)
NBIX (NEUROCRINE BIOSCIENCES INC) 0 6 3 slightly less bearish

Table 2. Sentiment dynamics for stocks from Table 1.

"Change from the last week" column shows the dynamics of the sentiment. Briefly, all these stocks are still looking to fall further, according to the Stock Sentiment, maybe except NBIX:NASDAQ - its sentiment becomes slightly less bearish.

Price Bands Calculator usage

This part of the service does not contribute anything to the Summary section. Rather it helps you to estimate the expected profit and to limit loss, once you've decided that entering the stock position looks attractive. Let's have a look at the most pronounced loser from the 5 stocks above - BEAS:NASDAQ. It has declined 8 % per week already, and its sentiment became even more bearish since then. What are we to expect from this stock in the next week ? See the Fig. 1. below for the answer.

Fig.1 Price Bands Calculator for BEAS:NASDAQ, as of June 18 2004 close.

We select "1 week" option in Date combobox, and leave Volatility combobox untouched (so that IV Index 30D is selected). It is the default choice for optionable stocks, and it is a good estimate of a stock’s volatility for the short term (up to 1 month or so).

Now let's look at the grid itself. First three rows show the estimated price range at the end of week, along with its probability. These ranges are computed for 1, 2 and 3 Standard Deviations from the current price - the common practice. As you will see, the price in a week is expected to be confined in $7.36 - 8.51 range (current close price being $7.93). Should an extremely violent stock movement occur, the price will still hardly be less than $6.20 or greater than $9.66 ("3 STD" row). These figures correspond to a 22 % stock price weekly change - and 44 % profit (or loss), assuming 50 % margin requirement.

The last row allows you to enter custom price range and see its probability. It is a convenient tool for estimating the risk involved. For example, it is seen from Fig. 1 that odds are 1:4 (20 % probability) that stock price will be above $8.41 in one week. This is a 6 % change in price, and a loss of 12 % if you are selling the stock.

Tech Analysis Charts

Yet another interactive tool in the service is the Tech Analysis Charts section. We do not provide a detailed description of the Tech Indicators used in this section here, but you can always read about this in the Stock Sentiment Guide (Adobe Acrobat Reader required). This tool contributes to the Summary, unlike the Price Bands Calculator. Selecting different terms for the Tech indicators will change the Tech Indicators Summary section. This allows you to easily check stock sentiment for different trading horizons - just select the terms as correspond to your trading style! By default, the terms are selected to fit the mildly short term trading horizon - from a week up to a month or so.

Let's see how this looks by taking a look at the example of the MANDALAY RESORT GROUP (MBG:NYSE). Short-term sentiment is rather bearish (Buy - 2, Sell - 6, Hold - 3):

Fig.2 Short-term sentiment for MBG:NYSE

But what about a mid to long term prospective like 4 months? If we set terms for all the indicators to 90 days (and 180 days for Long-term EMA), the Tech Indicators summary becomes distinctly bullish (Buy - 3, Sell - 0, Hold - 3):

Fig.3 Longer term sentiment for MBG:NYSE (4 months)

If we put together the Tech Summary with the Stock Snapshot now, the resulting picture would be neutral to slightly bullish in the long term, while still bearish in the short term.

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