Signals on Hedgefolios are largely based upon multiple forms of technical analysis with additional factors coming from fundamental valuations, market and sector strength, and corporate news. Due to the number of stocks covered, some people have assumed (incorrectly) that Hedgefolios is a “black box” system that relies entirely on quantifiable mathematical algorithms that spit out UP or DOWN signals. The reality is that I look at each stock each week and make an assessment based upon the technicals AND fundamentals. While most of the analysis is based upon data like charts and ratios, the final decision on each signal comes from my intuition.

Since the Hedgefolios database is updated weekly, I use technical analysis based upon weekly data bars. Between the Friday close and opening of the following trading week, I review each stock chart and typically look at over 4,000 charts, each consisting of 8 primary technical indicators. Once I have evaluated all the stocks, I come back to the ones that are confusing or are suggesting that I should consider changing the prior signal. For this second pass, I use daily technical analysis to try to improve the precision of the timing and confirm or deny that the signal should change that week.

As I mentioned, I use multiple forms of technical analysis - some basic and some that are advanced - such as support/resistance, chart patterns, candlesticks, volume, traditional indicators (Bollinger bands, stochastics, et al), Elliott wave, Fibonacci studies, sentiment indicators, etc. Whenever there is an unexpected move that is contrary to the current signal, I research the news and fundamentals to determine whether the price action is warranted. In my opinion, fundamentals always trump technicals, and it is critical to use both disciplines when evaluating investing decisions. Additionally, I rely heavily upon the bias in the overall market and specific sector so those themes also impact the Hedgefolios signals.

I never understood the ratings that brokerages and independent research firms use even though they provide explanations on their websites. Evaluating equities is tough enough without having to evaluate the ratings themselves. Despite Spitzer’s lawsuit and the 2002 push by the NYSE and NASD to make them easier to understand, equity ratings are still confusing AND plentiful. We have Perform, Market Perform, Sector Perform, Peer Perform and the similar variations with Outperform and Underperform. We have Overweight and Underweight. We have Buy/Strong Buy and similarly (but very rarely) Sell/Strong Sell. We have more generic terms like Add, Hold, Neutral,Maintain, Avoid, Reduce, Accumulate, and Attractive. We have alphabetical ratings like A,B,C,D,F as well as numeric ratings from 1-99 or 1-5 (some with stars, some without.) Well, there are a few more, but you get the idea - there are a lot of terms to evaluate.

Sadly, most people only focus on these one or two word, letter or number ratings and not the 20 pages of excellent research that most analysts put out to justify the rating. I guess it’s human nature, but there is a premium put on soundbites, and in the investment world, these stock ratings are the ultimate soundbite for brokers as well as do-it-yourself investors. However, successful financial advisors and investors know that they should not rely on ratings alone and that each investor’s unique and different profiles dictate what they should “Buy” or “Strongly Buy”.

I am not sure about everyone, but I know what I want and I know what most people ask me about. It’s quite simple really and it’s not ambiguous. It’s “Is the stock likely to go up or down?”

At Hedgefolios, there are no ratings or recommendations and I never suggest that the Hedgefolio signal should be the sole determinant of an investor’s decision. I choose to focus on the basic question of a stock’s likely direction. Since Hedgefolios emphasizes simplicity, speed, and clarity we only have two signals - UP or DOWN. If, based upon my analysis, I think the stock has a higher probability of going up in the foreseeable future, then the signal is UP and the reverse is also true. The moment that the signal is no longer UP it is immediately DOWN.

The market capitalization, also known as market value or market cap, is found by multiplying the share price by the number of shares outstanding. In Hedgefolios terminology, the market capitalization is referred to as “Size” and you have 3 choices to sort the database - LargeCap, MidCap, and SmallCap.

If you search the web for definitions of market cap, you won’t find standard answers or clear dividing lines. For years, LargeCaps were defined as stocks that were worth over $5 Billion, MidCaps were between $1 Billion and $5 Billion and SmallCaps were less than $1 Billion. That might have been relevant in the days of Dow 3,000 but as the market expands and contracts, the definitions have to adapt over time.

Our methodology provides this flexibility by comparing each stock to the total market cap of the Hedgefolios Universe (almost $20 Trillion). Breakpoints are found at 78% and 94% of the cumulative total. By clicking on ANALYZE STOCKS, you will be able to evaluate the ranges of market caps for the current month. For January 2006, LargeCaps were above $9.6 Billion, MidCaps from $1.75 Billion to $9.6 Billion, and SmallCaps were less than $1.75 Billion.

To find stocks of a certain size, just go to EVALUATE and click on the name of the market cap you want within the One-Click Folios or select a market cap from the drop down list box in the Custom Folio section and hit search.

Of all the stock newsletters, there are very few that have a larger universe than HEDGEfolios (over 4,000 stocks and ETF’s). I have tried to make sure that if a stock is of interest to the majority of investors, it will be included here. The goal is to cover every stock traded on the NYSE, Nasdaq and Amex that has a market cap in excess of $500 million. While HEDGEfolios had 625 stocks in the MicroCap realm (less than $500 million) at the beginning of 2006, these stocks generally met my requirement of being a stock “of interest” due to their familiarity to investors (e.g. - Taser) and/or having a substantial amount of trading activity.

Another requirement for inclusion is that the stock must have been trading for enough weeks to generate a meaningful stockchart. Although I would like to add IPO’s as soon as they begin trading, I cannot provide a signal until the technical analysis is reliable. As important as Google is, it traded for one month before I felt comfortable with its inclusion in HEDGEfolios. I am constantly following more stocks that qualify for inclusion but they will not be added to the searchable database until each stock gives a new UP or DOWN signal.

Once included, stocks stay in HEDGEfolios for a long time and only under a few circumstances (such as not meeting the market cap / trading volume requirements) they will not be dropped from coverage. However, any stock that becomes delisted will be removed and HEDGEfolios does not like to cover any stocks traded on the OTC Bulletin Board or Pink Sheets. If a stock stops trading due to a merger / acquisition, it will disappear.

I am confident that there are hundreds of stocks that users would like to see in HEDGEfolios and unless I get overloaded with requests, I am willing to accept suggestions for coverage. If you have a stock that meets the requirements for inclusion, use the Contact form and provide the symbol and I will consider it.