Technically, you should sell Chimera Investment (NYSE: CIM) right now.

We examined the company 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 not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

Signal line crossover is one of the more common ways to interpret MACD. 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 Chimera Investment'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! OK, we're jesting -- but in all seriousness, 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 24 times!

A better way to size up companies
Here at Fool.com we're more interested in other measures of company value. When we look at Chimera Investment and its peers, here are the areas that interest us:

Company

Chimera Investment

Annaly Capital Management (NYSE: NLY)

Capstead Mortgage (NYSE: CMO)

MFA Mortgage Investments (NYSE: MFA)

Market Cap (billions):

$3.4

$10.8

$0.8

$2.0

Quarterly Rev Growth (yoy):

131.4%

N/A

(26.3%)

(26.8%)

Revenue (TTM, billions):

$0.5

$1.3

$0.1

$0.3

Operating Margin (TTM):

92.7%

87.9%

87.2%

92.5%

P/E (TTM):

5.4

9.1

9.5

7.4

PEG (5-year expected):

0.7

4.2

1.6

N/A

Sources: Yahoo! Finance and Capital IQ, a division of Standard and Poor's; TTM = trailing 12 months.

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 solution for individual investors to build lasting wealth and achieve their financial goals.

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

  • Often described as Annaly Capital's "little brother," due to its shared management, Chimera boasts a 17.4% yield that should leave dividend investors happy. 
  • While Annaly has kept its focus on agency securities which have an implicit government backing, Chimera's investment strategy is tilted more toward non-agency residential mortgage backed securities (RMBS). For that reason, if you're looking for a lowered level of risk, Annaly would probably be a better choice.
  • The main threat to both companies is interest rates. Right now, they're borrowing at extremely low rates and collecting a generous spread that produces the outsized dividends investors are receiving. A short-term rate hike from the Fed would hurt, but the greater threat might be falling long-term rates which would crimp the "spread" they collecting between their borrowing costs and investment returns.

Want to sell Chimera Investment based on technical merits today? Technically, odds are that you should flip and buy Chimera Investment sometime very soon. If that sounds like madness to you, well, we here at the Fool.com 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 relatively simple science, eliminating the vast complexities of evaluating true company value. However attractive, this theory is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

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

I could also point to Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier: Chimera Investment crossed the crossover 24 times across the past year! While traders might not buy and sell with each crossing, cases of high momentum are normally short lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's why, at Fool.com, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then Chimera Investment looks like a sell right now. Just don't expect that technical sell signal to last for very long.

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Jeremy Phillips owns shares of no companies listed above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.