How Does Bernie Schaeffer Identify His Stock Picks?

Daily Bulletin

The cornerstone of Bernie’s unique analytical approach that underlies the picks in Schaeffer’s Daily Bulletin is what we call Expectational Analysis®, a methodology that analyzes technical and fundamental factors within the context of market sentiment. The key to this approach is accurately gauging investor expectations through various sentiment indicators.

Why are expectations so important? Because the price of a stock represents investors’ perceptions of reality and often these perceptions are excellent contrary indicators. A stock with relatively low expectations stands a good chance of rallying, as skeptical investors (and their money) wait on the sidelines, ready to bolster a stock’s appreciation by buying up the supply from profit-takers. Conversely, high expectations usually mean that most of the sideline money has already been committed to a stock. Buyers are now scarce and selling will predominate on any perceived negative news, resulting in a price decline.

One of the most important tenets of Bernie’s Expectational Analysis® approach is that the power of a contrarian indicator is much greater when the underlying sentiment runs counter to the direction of the stock. For example, pessimism (e.g., a high put/call ratio, high short interest, fewer analyst “buy” ratings) would be an expected reaction to a downtrend and thus would not be a valuable contrary indicator. On the other hand, such skepticism on a rising stock is a powerfully bullish combination, as tops aren’t usually seen until optimism reaches extreme levels. Using the same contrarian perspective, a declining stock viewed in a positive light (e.g., lower put/call ratio, low short interest, high percentage of “buy” ratings) supports a bearish outlook due to these high expectations potentially translating into selling pressure.

For Schaeffer’s Daily Bulletin trades, we use a vast array of sentiment indicators and filters to search for low-expectation securities that sport strong technicals and/or fundamentals. For example, a stock that is outperforming the broad market (strong technicals) but has high short interest and a high put/call open interest ratio (negative or skeptical sentiment) would be an ideal portfolio component. Why? Because skepticism toward the stock will eventually unwind as investors jump aboard the stock’s bandwagon, which adds more buying pressure to keep the uptrend intact.

If you have any questions about using Schaeffer’s Daily Bulletin, please call the Schaeffer's Investment Research customer support team at (800) 448-2080.

We wish you the best of luck in your trading.

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