Technically, JDS Uniphase Is a Buy

The signal line crossover says you should buy JDS Uniphase (Nasdaq: JDSU) right now. But you might not want to listen.

We examined JDS Uniphase using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks based not on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but signal line crossover is one common analysis. It uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below, you can find a current chart of JDS Uniphase's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! But seriously, this is actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 18 times!

Want to buy JDS Uniphase today? Just know that technically, the odds suggest that you should flip and sell JDS Uniphase sometime very soon. If that sounds like madness to you, well, we here at the Fool agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race toward schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relative simple science, and they eliminate the vast complexities of evaluating a company's true value.

Technical analysis is an attractive theory, but it's ultimately the wrong path for individual investors. It relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

But even if opportunities existed, with as much 75% of market trading now done by Ph.D-level programmers at massive high-frequency funds, what chance do individuals have to sniff out these deals? And with so much volume now driven by these funds, how can you even be certain that the same rules of patterns still exist?

Need further convincing? Check out the research. A Massey University study across 49 countries showed that more than 5,000 trading rules add no value.

However, the real reason to forget about technical investing is the one we mentioned earlier. JDS Uniphase crossed the crossover 18 times in the past year! The sheer amount of trading in most technical analysis schemes invites commission fees and short-term trading taxes to eat away at profits. More importantly, it overshadows the idea of holding a portfolio of great companies that can accrue wealth over the long term.

That's the antithesis of what we preach at Fool.com. When we look at JDS Uniphase and its peers, here are the areas that interest us:

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity, as well as qualitative values like competitive advantage and managerial effectiveness. These areas led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best way for individual investors to build lasting wealth and achieve their financial goals.

So when you look at JDS Uniphase, don't evaluate it for crossing a momentum line.  Buy or sell it because:

• JDS Uniphase could benefit from spending within the telecommunication industry. As carriers build out next-generation networks, and work to increase capacity for their existing networks, JDS enjoys an advantageous position. Also, the growth of IP traffic in general puts pressure on all telecoms to boost their networks, which should give further tailwinds to JDS Uniphase’s optical products.
• While JDS Uniphase might sit in an industry that’s enjoying its best position in years, it also faces tough competitive dynamics. Equipment suppliers must win contracts from a small base of large telecommunication companies, which can take bids from a host of suppliers. This leads to a tough competitive dynamic and cutthroat pricing.
• Speaking of cutthroat pricing, JDS Uniphase hasn’t seen a full year of positive net income since way back in 1996! While recent trends have been increasing, this company lacks any history of generating positive shareholder wealth. You can thank industry dynamics and a company cobbled together during the dot-com boom for its less-than-stellar continuing performance.

These factors will drive JDS Uniphase's long-term wealth. Best of all, establishing a portfolio of well-managed companies with strong advantages over their competitors spares you from having to sit bleary-eyed in front of a computer, buying in and out of companies with a Big Gulp full of coffee. That's not the kind of future I'm looking for. But hey, if your idea of protecting your future involves charting the ups and downs of Moving Average Convergence-Divergence charts, then I recommend buying JDS Uniphase right now. Just don't plan to hold it for too long.

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