Rules of the Game: A Foray to the 200-Day

 | Feb 25, 2013 | 2:10 PM EST  | Comments
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ibm

Lately I've been writing lately about my conversion from a trader with a short time frame to an investor with a longer horizon. When I was getting educated as a trader, the term "buy and hold" was used in a derisive, mocking manner, and applied (inaccurately) to anybody who held through mild pullbacks, rather than exiting in a panic.

I've come to believe that the core of a portfolio should consist of low-cost ETFs, pegged to more or less plain vanilla indices. In other words, there should be no inverse or leveraged instruments, and no indices concocted by an ETF company's marketing department.

But plenty of investors like to add alpha through a portfolio of individual stocks. In my view, it's generally best to stick with large-caps in this case, possibly mixed with a few very liquid mid-caps.

One way to screen for stocks with potential is to run a scan of those getting support near their 200-day averages. I also look at earnings estimates. We all know that estimates can be wrong, either to the high side or the low side. However, they give you an indication of analysts' confidence in a stock at any given point in time.

Express Scripts (ESRX) is one large-cap name that popped up on my screen over the weekend. Shares of the pharmacy-benefit-management company have been consolidating since October, when they pulled back from its $66.06 high.

The stock closed Friday at $55.63, 2.1% below its 200-day moving average, and 1.7% above its 50-day. If you'll notice, that means Express Scripts' 50-day line is currently below the longer-term price line. That's not an ideal situation -- you would normally prefer to see the reverse.

That situation usually corrects itself as a stock rallies out of its consolidation – and that usually happens if the fundamentals remain solid. With Express Scripts, this appears to be the case. Analysts are eyeing earnings per share of $4.26 this year, up 14% from 2012. In 2014, that number is seen rising another 15%, to $4.92 per share.

Given the outlook, this stock is one to watch. There may be some questions about how the new healthcare law will affect the company as provisions kick in next year. But be careful -- there is always analyst and "pundit" noise surrounding a stock, and then there is the real performance. Be careful not to make decisions based on forecasts and opinions.

Another stock that made my screen is tech name IBM (IBM), which is consolidating below its Oct. 5 high of $211.79. This is another name with solid expectations for earnings in the next two years: Wall Street expects income of $16.77 per share this year, a year-over-year gain of 10%. The same level of gain is anticipated next year. Analysts see the company earning $18.46 per share.

Above, I noted that that Express Scripts' 200-day line was above the 50-day as the stock consolidated. Until recently, the same was true of IBM -- but the shorter-term line crossed above the longer line Feb. 20.

So take a further look at these picks. While it may not seem exciting to buy Dow components, they are often solid additions to large-cap portfolios.

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