This year provided a challenging environment caused by high inflation and the Russia/Ukrainian war. As people try to perceive the direction of the market and swing price levels, the system I use identified remarkable instances of excellent entry points. This article illustrates an actual investment I made using the TEA/POT (Trade Email Alert / Portfolio Online Tracker) software I developed for capturing market declines and sending Email Buy-Alerts.
I’m like many of you, I get my stock tips from Seeking Alpha authors. If the stock meets my requirements I wait until I get a purchase signal based on RSI and price Z-score (both defined in this article). Both indicators are calculated from a years-worth of price data. I have my quote updates set for 1 minute interval where the RSI and Z-score is recalculated in real time. If a signal is detected, an automated Trade Email Alert is sent to my cellphone. I do not need to be sitting at my computer during market hours to trade stocks.
As I have suggested in previous articles, I consider fundamental analysis being half the battle. The other half is buying a stock at a reduced market value. This is true especially for high yield investments where someone can increase their margin of safety to improve their total return.
PennyMac Mortgage Investment Trust (PMT) is the only residential MBS (Mortgage-Backed Security) and MSR (Mortgage Servicing Rights) stock I own. The reason is, PMT has an edge against increasing rates that negatively affect their MBS holdings. That edge is their MSR investments generating additional income as a counterbalance. People will find it difficult refinancing their current 3% mortgage to a 5% mortgage just to cash out some capital gains. This will provide a steady source of earnings.
A recent article from Colorado Wealth Management Fund outlines their decision to purchase more PMT shares during the recent stock decline on April 19th. This author provides valuable information concerning stock updates.
PMT Trade Email Alert
Figure-1 shows the Portfolio Online Tracker chart display of my current portfolio. Notice the red circle highlighting PMT price decline on April 19, 2022. The purple bar indicates both the RSI (Relative Strength Index) and price Z-score (price standard deviation) trigger levels were active.
The RSI is a momentum indicator based on price acceleration in either direction. It is calculated from a years-worth of price data. The Z-score is the standard deviation of price from its mean. This is also calculated from a years-worth of data. Please reference Appendix-A at the end of this article for more information concerning both indicators.
Figure-2 is a new chart I added to the TEA/POT software. With a simple push of a button, I can tell where my stocks reside between over-sold and over-bought.
I can leave this chart active during market hours and watch the stocks RSI vs. price Z-score move around with each automated price quote update. The PMT stock moved decisively into the Over-Sold zone (red circle). I received an E-mail indicating this event during the day on April 19th, see Figure-3 below for the actual data I received.
Figure-3 shows the Email I received at 11:39 AM mountain time to purchase PMT shares. I purchased shares at $14.74 during the day. The RSI momentum indicator was 23, well-below my 30-trigger level, that told me people were dumping shares. I wait for this type of signal to add income shares. I don’t guess at price but instead wait until I see massive selling. This type of action always happens, the criterion for this method requires patience and time to take advantage.
Figure-4 is a daily chart for PMT. Notice the time stamp of 1:39 PM Eastern-time (red circle). The time stamp in Figure-3 Email-Alert is 11:39 AM, because my location is using the Mountain time zone. As shown the stock had trouble right up to the end of day, notice the high volume.
I was not home watching price for PMT, but instead was notified by email of this event while running errands. I let my software do the hard work and get notified during market hours.
Many of these trade signals happen during the day and when I get notified of such over-sold or over-bought events, I can take action or just watch the price-movement. Figure-3 and Figure-4 shows the accuracy of my email signals and the correlation to an actual daily chart.
The S&P 500 declined 2.77% Friday April 22, 2022, and PMT only declined 1.44%, because most of the weak hands dumped shares April 19th. In a matter of fact, my purchase price was $14.74 and by Friday the price closed at $15.06. Using indicators to buy stock provides a margin of safety that will improve total return along with dividend income.
It must be noted this year will be challenging with high inflation taking a bite out of many stocks and PMT might move lower along with other mREIT investments. I’ll be ready to add more shares when this happens. Good luck to income investors; Joe HYCF.
Appendix A, POT Indicators Explained
I have outlined the following Buy-Signals used by the TEA/POT software I currently use to enhance my trading experience.
RSI (Relative Strength Index)
The RSI number goes from 0 to 100 indicating oversold and overbought conditions. Every price quote taken during the day re-calculates the RSI level and notifies the investor of any meaningful change.
A good definition is from Investopedia: “The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph 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 application and initiate an email notification.
An RSI of less than or equal to 30 is suggested as oversold. This provides a quick evaluation of a possible purchase.
An RSI over 70 indicates the stock may be overbought and a possible trimming is in order.
Z-score, Price Standard Deviation
The diagram in Figure-1 demonstrates 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’s worth of price data.
The percentage in Figure-1 is a range, based on the dataset of prices for each individual stock. To interpret a normal distribution in Figure-1 the stock’s price will remain 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 is entering an oversold condition.
Figure-1; bell curve
It must be noted the data representing price is not an absolute normal distribution, because price is very volatile. We can still use price representing a normal distribution that allows comparative results with other stocks. A single daily stock quote gives a good indication where price fits on the bell curve range.
When looking at the bell curve Figure-1 diagram, the center value is the price mean. The calculated Z-score can vary above and below the mean to tell us how far away from the mean price has moved when receiving a quote. For my trigger point I use “-1” to signal an alert telling me the price has deviated from the mean. The larger the negative value, the greater the chances for a possible purchase after examining the rest of the technical parameters.
50 SMA and 200 SMA (Simple Moving Average)
An explanation is outlined by Investopedia, using Moving averages to detect directional changes:
“Another strategy is to apply two moving averages to a chart: one longer and one shorter. When the shorter-term MA crosses above the longer-term MA, it’s a buy signal, as it indicates that the trend is shifting up. This is known as a “golden cross.” Right arrow in the chart.
“Meanwhile, when the shorter-term MA crosses below the longer-term MA, it’s a sell signal, as it indicates that the trend is shifting down. This is known as a “dead/death cross.” Left arrow in the chart.
Left arrow indicates the 50-day SMA just went below the 200-day SMA, (death cross). Right arrow indicates the 50-day SMA went above the 200-day SMA (golden cross).
Both signals indicate a change in direction.