How to Play: Am I Diversified (Diversifying your Stock Portfolio)

In Jim Cramer's CNBC TV show, "Mad Money", Jim Cramer has a segment where callers call in and mention their top five holdings. Jim Cramer then analyzes the stocks, and determines whether or not the caller's portfolio is diversified. Many other people on the social networking site Stockpickr.com ask the same question. But is there a way to determine on your own whether your portfolio is diversified or not? Definitely!

Sector Diversification

The main focus of "Am I diversified?" focuses on sector diversification. Many companies and analysts may have some variations, but there are around ten major sectors:

1. Basic Materials: These include gold, copper, composite material, chemicals, industrial metals, mining, forestry and paper companies such as FCX (Freeport McMoran), and ATI (Allegheny Technology).
   
2. Consumer Discretionary: Consists of General Retailers, Media, Travel and Leisure, Food and Drug Retailer companies such as TGT (Target), DIS (Disney), BBY (Best Buy), and SBUX (Starbucks).
   
3. Consumer Staples: Consists of Household Goods, Beverages, Food Producers, and Tobacco. Some others (such as those at ishares.com ) would include Automobile Parts, and Leisure Goods. Examples include PEP (Pepsi), MO (Altria), PG (Procter and Gamble), and SLE (Sara-Lee)
   
4. Energy: Consists of Oil & Gas Producers, Oil Equipment and Services, Coal, and Alternative Energies (such as Solar). Stocks include XOM (Exxon-Mobil), SLB (Schlumberger), and BTU (Peabody Energy).
   
5. Financial Services: Consists of National and Regional Banks, General Financial companies, Brokerages, Exchanges, Nonlife Insurance, Real Estate, and Life Insurance Companies. Examples include WFC (Wells Fargo), GS (Goldman Sachs), NYX (New York Stock Exchange-Euronext), AMTD (Ameritrade), PGR (Progressive Corp).
   
6. Healthcare: Consists of Pharmaceutical, Biotechnology, Health Care Equipment and Services, Healthcare Insurers. Examples include PFE (Pfizer), JNJ (Johnson and Johnson), MDT (Medtronic), GILD (Gilead Biotech), UNH (United Health Group), ISRG (Intuitive Surgical)
   
7. Industrials: Consists of General Industrials, Aerospace and Defense, Support Services, Industrial Engineering, Industrial Transportation, Electronic and Electrical Equipment, Railroads, and Construction and Materials. Examples include GE (General Electric), BA (Boeing), CAT (Caterpillar), UPS (United Parcel Service), UNP (Union Pacific Corp), DE (Deere), WMI (Waste Management), FLR (Fluor Corp), MDR (McDermott), and TEX (Terex).
   
8. Technology: Consists of Hardware, Software, Semiconductor, Internet, Networking, and General Technology Companies. Examples include MSFT (Microsoft), CSCO (Cisco), GOOG (Google), AAPL (Apple), IBM (IBM), INTC (Intel), NOK (Nokia), and RIMM (Research in Motion).
   
9. Telecom: Consists of Fixed Line and Mobile Telecommunication Companies. Examples include T (AT&T) and VZ (Verizon Communications)
   
10. Utilities: Consists of Electricity, and Gas, Water and MultiUtilities. Examples include EXC (Exelon Corp), TXU (TXU Corp) and DUK (Duke Energy).
    

How to Sector Diversify

So what you can do is look at each stock in your portfolio, and categorize them into one of the sectors above. After you go through your entire portfolio, you may find that some stocks may be grouped into a single area. For example, you may hold NYX (New York Stock Exchange-Euronext) and GS (Goldman Sachs). While one is a Stock Exchange, and the other is a Broker, both are grouped in the Financial Services Sector.

There are some companies that may be difficult to pin down to any one sector. For example, AMZN (Amazon). Is it Consumer Discretionary or is it Technlogy? Use your best judgement. If you want, during your analysis, you can put 50% of Amazon under Consumer Discretionary, and 50% of Amazon under Technology.

Sector Diversification is the main form of diversification preached by Jim Cramer.

Other forms of Diversification

Sector Diversification is not the only form of diversification. There are many other forms of diversification.

Market Capitalization Diversification

Companies have different market capitalizations. Some are very large companies (large market capitalization) like GE (General Electric), while some others, are small or mid capitalization companies such as NTRI (NutriSystem). Stocks of different market capitalizations behave differently from each other.

Growth and Value Diversification

Some stocks are considered Growth Stocks. Investopedia defines a Growth Stock as one whose "Shares in a company whose earnings are expected to grow at an above-average rate relative to the market."

Some other stocks are considered Value Stocks. According to Investopedia, a Value stock is "A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio."

So within a portfolio, you can further diversify by holding different styles of stocks from growth to value.

Peter Lynch, in his Book, One Up On Wall Street, further groups stocks into six categories:

1. Slow Growers
   
2. Stalwarts
   
3. Fast Growers
   
4. Cyclicals
   
5. Turnarounds
   
6. Asset Plays
   

International and US Diversification

Another way to diversify your portfolio is to hold stocks that are based in the United States, or based internationally. With international stocks, you can further group them into Developed International Markets such as Europe, Japan, and Australia, or into the Emerging International Markets such as Taiwan, Korea, China, Brazil, India, Eastern Europe, Africa, Middle East, and Russia.

Speculative and Non-Speculative

In his books (such as "Real Money: Sane Investing in an Insane World") and his shows, Jim Cramer preaches that up to 20% of a (discretionary, not retirement) portfolio could be allocated to more speculative stocks. This is yet another form of diversification.

Conclusion

So in order to have a diverisfied portfolio, be sure to diversify across several industry sectors as mentioned above. You can also choose to diversify in other ways as well such as market capitalization, growth vs. value, speculative vs. non-speculative, US vs International Diversification.

Stock Chart: NYX (NYSE-Euronext) Next Support Levels (June 21, 2007)

This site has been discussing the NYX stock (New York Stock Exchange-Euronext). Previous posts here (June 19, 2007) and here (June 6, 2007).

Now the chart above looks at the next support areas. I've determined the resistance based on previous horizontal resistance and my version of Fibonacci Estimates. I have confidence in the Fibonacci Grid I created above because the Fibonacci lines also coincides with other resistance areas.

So the next levels of support (Approximates) are $76, $72, and $70.

Stock Chart: NYX (NYSE-Euronext) is in a downtrend? (June 19, 2007)

On June 6, 2007, this site analyzed the NYX (New York Stock Exchange-Euronext) Chart, and said that the NYX stock was in a holding pattern.

So how is it doing now?

Let us start with a 2.5 Year Chart:



Looking at this chart, we see that the NYX stock has been on a good 2.5 year uptrend. But if we draw a trend line (see note below on Trend Lines), we notice that the stock may have recently gone below the uptrend, though it has not done it with good volume.

Looking at the this time frame, we also notice that the Bollinger Band Width is under 10 (for this stock), a low value. Everytime the BB Width goes below Ten, we often have a move (either up or down). Some people would call this a volatility squeeze.

Now, the 10 month chart of NYX:



There is a lot of information on this chart, so let us examine each part.

The Negatives:

1. NYX stock has gone below horizontal resistance of around $79.31.
   
2. Once Support has been broken, Support becomes resistance.
   
3. Stock is below both the 50 day and 200 day moving average.
   
4. Based on the 2.5 year chart, the 2.5 year uptrend line may have been broken.
   
5. Stock's 50 day moving average has gone down below the 200 day moving average, also known as the Death Cross.
   
6. If you look to the left, you'll see the volume of stock activity by price. Around the $80-$88 range, we have a lot of congestion and lots of buying and selling. However, below that we see that buying and selling volume is much lower. Will buyers be supporting this stock at lower levels?
   
7. If the stock continues to drift down, the stock will have difficulty moving up again because of all the overhead supply. Look at all the volume at the $80-$88 level and above. Investors who have held the stock at higher levels want to desperately sell the stock as it gets closer to their cost basis, pushing the stock down.
   
8. Notice that from March 2007 to June 2007, we notice an inverse cup and handle, which is a bearish pattern.
   
9. Since December 2006, the stock has formed a series of Lower Highs and Lower Lows, or in other words, the stock is in a 7 month downtrend.
   

The Positives:

1. Stock has not gone down with good volume. However, stocks can still drift down without volume confirmation.
   
2. In the lower window, we have a MACD (Moving Average Convergence/Divergence) indicator. There's a possibility that we may have some positive divergence with the NYX stock and the MACD indicator. The NYX stock has recently been going down, but the MACD indicator seems to be suggesting higher lows, a positive divergence.
   

Conclusion:

So what do we make of the NYX Stock Chart? Many indicators would point to a breakdown in the stock. There are some positives we can look at but at this point, the negatives outweigh the positives.

From the sentiment perspective, there are many holders of the stock from $80 and above. Many investors may even be accumulating more shares at the $80 level. If the stock starts to trend downwards, there will be many investors who will be holding the stock at a loss. Their patience and conviction could be tested. If NYX continues to go downwards, many holders at higher levels will finally give up, and we will finally hit the bottom as former holders capitulate. This could then start a slow and arduous climb back up. But we are not at those levels yet.

Track NYX Stock Chart Now

2.5 Year Current Chart of NYX

Ten Month Current Chart of NYX


Note on Trend Lines:

Yes, give a chart to several chartists, and they may draw trend lines a bit differently. However, in the case above, the trend line looks correct, as the line is validated by seven different points along the line. The Trend line also nicely approximates the 200 day moving average.

NYX Stock in a Holding Pattern (June 6, 2007)

The New York Stock Exchange-Euronext Stock seems to be in a holding pattern. The multi year uptrend remains intact, but there has also been a 7 month downtrend, forming a symmetrical triangle. With this pattern, a stock normally trades within this triangle, and near the end, the stock may break out (up or down) on good volume. We can determine which way to trade/invest based on the direction of this breakout.

Currently, stock is stuck between support at around $79 and resistance at the 50 and 200 day moving average above. The stock is also being restrained by the symmetrical triangle described in the chart.

In the lower indicator window of the chart, there is a Bollinger Band Width indicator. Based on previous history, when the Bollinger Band Width is 5 or lower (on this stock), the stock normally has a large change in price (either up or down). Right now, Bollinger Band Width is around 6. So we are almost there.

Overall, NYX is in a holding pattern, but a big move to the upside or downside could be coming within the near to intermediate term future.