Less than two months ago, as described in “Living and Learning with Tom Demark Indicators”, I sold my position in Western Digital (WDC). The sell was based on my reading of the Demark TD-Sequential Indicator. In that post, I said that “Tom Demark would say that a better entry point lies in the future for this stock.”
The time has come. I purchased WDC today (July 28th) at $27.84 per share, with 3% of my portfolio.
I’m getting back into WDC at a 17% discount to my June sell price ($33.72). So it was a good decision to sell in June and wait for a better entry price.
Only this time I’m not using TD-Sequential as an entry indicator. Instead, I’m using Demark’s ‘Range Expansion Index” (TD-REI). TD-REI is Demark’s Overbought/Oversold indicator. Here’s why I’m using TD-REI instead of Demark’s more famous Sequential Indicator:
TD-Sequential captures significant trend exhaustion points. But not every stock will complete a TD-Sequential, especially on the longer time frame (weekly) that I am interested in. My goal with my stock purchases is to buy highly ranked candidates (those below a Margin of Safety) on short-term weakness. I would miss purchasing many of these stocks if I wanted each to form a TD-Sequential pattern. Thus I’ve been looking into alternatives.
TD-REI is similar to the more familiar Relative Strength Indicator (RSI) that is standard in every stock chart package. But Demark as usual has made some significant improvements. TD-REI prevents buying into a steep decline/advance by requiring price to exhibit some proof of slowing its decline/advance. Like RSI, TD-REI is an oscillator that fluctuates between +100 and -100. Overbought/Oversold readings are +40/-40. The formula to calculate TD-REI is a little cumbersome, though Excel can handle with ease. I’d refer you to Demark’s books (or maybe a future post here) for the construction.
It’s not just technical analysis that keeps me interested in WDC. Here’s a few of my calculated numbers:
FCF Yield: 16%
10-yr median ROIC 26%
10-yr median Profit Margin: 7%
Hussman Price/Peak FCF: 5.0
and 43% of the market value is cash, an enormous amount for such a large company.
And here’s a few links to other articles describing the value in WDC: