May 27th, 2011

May 2011 = August 2010

Time moves awfully slowly when you’re waiting for something to happen and it’s no different during consolidations or corrections. You wonder when momentum will pick up again? You begin second quessing your operating assumptions and wonder whether the market isn’t actually at a reversal turning point rather than merely a much needed consolidation?

Whenever I begin asking those sorts of questions I go back to earlier posts to see whether the market has vered far from the game plan. If they have then I’d have to trash those earlier assumptions and come up with a plan; if they haven’t then there’s not much to do but wait.

For the time being, the current game plan (i.e., view of the market’s near term projection) goes back to January 20 in a piece called “Pivot Points and Sell-Fulfilling Prophesies” in which I included the following chart (click on images to enlarge):

I wrote: “the market is edging ever closer to a zone (1300-1350) that has seen six pivots since 1999. As a matter of fact, the last pivot was in 2008 …. No one can predict what the market will do now but there’s a good chance that, in its pursuit of symmetry, it will replicate the 2008 pattern…” This chart followed:

And here we are, four months after that post and, as expected, the market stalled out just about where I thought it might (today’s close was 1325.69). We’re back to the original question: Where to from here?

For that I turn to what might be considered a contra-indicator, Individual Investor Sentiment. The AAII published their most recent poll of how individual investors felt and concluded that their members haven’t been this negative since August 2010:

Do you remember what happened in September 2010, the month after the last bottom for sentiment? It marked the beginning of a stupendous bull run that carried the market 30% higher in 8 months. The market’s current February-May course looks fairly similar to the May-August 2010 path. I wouldn’t rule out the possibility that this one could also be followed by a rise to at least the all-time high of 1550, or 15-20% above today’s close just as the symmetry charts indicated.

May 25th, 2011

Mark Haines 1946-2011

I’m going to miss Mark Haines. During the Tech Bubble, I associated CNBC with Mark Haines. Every now and then, when I traveled on business or had an opportunity to go into the office late or skip work altogether, I’d try to catch the market’s open and …. there he was, Mark Haines, whetting my appetite for more. I planed for and looked forward with anticipation to the day when I would be able to quite my day job and begin trading full time.

That day came at the beginning of 2002 and I’ve started nearly every weekday having breakfast with Mark, waiting for the opening bell to ring at 9:30. Whenever Mark was out and a substitute was necessary, I had to make a conscious decision as to whether or not I’d watch the market open that day (whenever they stuck in Simon Hobbs I made it a point of quickly turning the t.v. off).

Even with the sound muted as is often the case at my desk, Mark’s absence is another marker of a passing era. Market openings for quite a while just won’t have quite the same excitement as they’ve had in the past.

May 25th, 2011

Market Time Well and Market Success Follows

There’s an experiment in A Random Walk Down Wall Street in which a large number of coin tosses are recorded and graphed. Soon the graphs began looking like your run-of-the-mill stock charts (i.e., head-and-shoulders, double heads, wedges, etc.). If each coin toss was random and a series of coin tosses resembled stock charts then the movement of stocks must also be random. That’s the logical conclusion the author, Bernard Malkiel, intend his students and the reader to have. The lesson intended to drive home the idea that the best investment strategy is investing in index funds on a buy-and-hold basis rather than individual stocks.

iStockChart.com offers an online stock market simulation game that leads to another conclusion. The game’s premise is to demonstrate that “historical data is an integral part of playing the stock market …. with the game, you can test your mettle at analyzing the historical data and making strategic decisions as to when to buy and sell.” The goal here was diametrically opposed to Malkiel’s game so I decided to try my hand.

Contestants, presented with a hypothetical $100,000 and a nondescript chart are asked to either buy or sell the stock based on what they see. For up to the next 90-120 days that they hold the stock (or have sold the stock short), they are asked to make the same decision (hold your position or not). When the decision is finally to sell (or cover the short), contestants are presented with another chart but from another random starting date. Again, the decision is whether to roll over the proceeds into this next stock or skip the next. As many charts can be skipped as might be necessary until a stock appears worthy of commitment.

With so little information, how do contestants decide whether invest in the stock depicted in the chart or not? Do you look for a clear trend? the beginning of a chart pattern? Furthermore, when do you decide to sell? Is it all purely random chance? I tried a variety of approaches at first:

  • All you had to do, I thought, was to figure out which stock it was since, knowing that, you’d know how the stock actually performed over the subsequent 90 days. But that was easier said than done because of the huge volume of data that would have to be reviewed.
  • I thought I would pass on any chart that didn’t have a clear trend or chart pattern but it turned out that very few met these criteria and many of the ones that did turned out to fail soon after the chart started rolling forward.

It finally dawned on me! I was focusing too much on the individual stock stock chart itself and had neglected a key lesson learned long ago: 50% of a stocks movement is dictated by the market. The only relevant information in each of the charts was the chart’s beginning and ending dates. If I referred to a long-term chart of the S&P 500 beginning with those dates, I’d know whether the subsequent 3-6 months were bullish or not. If they clearly were, I would buy the stock; if the market was bearish, I’d sell the stock short; if neither, I’d pass on it and move on to the next.

By making market timing my sole investment strategy, my stake grew from $100,000 to $387,146, first place and five times greater than my runner-up after 35-45 purchases plus another 35-45 I had passed on (see the leaderboard on the iStockChart.com site)! I quickly sold the relatively few stocks that failed to prevent additional losses.

If we had invested in an Index vehicle on a buy-and-hold basis for the past 11 years we’d still be behind the curve. This game convinced me, even more than I ever imagined before, that about the only thing you need to make money in the market, even more than picking good stock charts, is knowing with a high degree of probability the market’s trend over the near future. In other words, time the market well and stock market success follows. My subscribers know that my portfolio management strategy begins with market timing.

Wow! Having known that 25-30 years ago would have saved me a great deal of money and many sleepless nights. “Better late than never”, as they say.

May 20th, 2011

What’s Happening to Semiconductor Stocks (SMH)?

I could say things are pretty much evolving as expected. The market successfully held the line at the 50-dma, so far, and is now striving to make new highs for the year. I’ve rotated a large chunk of my portfolio into health care related stocks like drugs, biotech, medical supplies and services.

The only thing that seems to be underperforming and even, perhaps, failing right now are some of my techs, especially the semiconductor stocks. Hey, what’s going on there? I took a look at the SMH Semiconductor Industry etf and found what I think might be a possible answer.

Exactly a year ago, based on the SMH chart at the time, you would have said that there’s a good possibility that, as a proxy for the whole group of semiconductor industry stocks, SMH could appreciate 25-30% from the then current level of 27.45 to the 34-36 area. At the time, that projected target level, if SMH actually got there, was the descending upper boundary of a long established channel, assuming good support from a favorable market (click on images to enlarge):

Roll the tape forward, please, and here’s what we see today:

Interesting but … so what? What it means to me is that seeing the TXN, TQNT, TSM and other semiconductor stocks in my portfolio stall out might actually be more a function of where the whole industry is than something going on with the individual stocks. As a group, stocks in the industry are now at that upper boundary resistance.

As bulls and bears struggling it out for control to determine if the semiconductor group can final cross into territory not seen since after the Tech Bubble burst in 2001, the decision every individual investor with a stake in that struggle, like myself, has to make is whether to sell any or all of their semiconductor-related stocks today or should they try to weather out what could be a the long and possibly disappointing struggle of the big boys. Furthermore, how long might this contest take? Weeks? Months? Quarters? And what opportunities, if any, might be lost by having money tied up in semi’s?

The Bulls failed in 2003 and 2007; there’s no guarantee they won’t fail in 2011. I think I’m going to step back a little and watch this from the sidelines.

May 19th, 2011

Homebuilders and Financials: The Economy’s and Market’s Missing Wheel

Two Industry Groups stand in the way of further market advances: financials and homebuilders.

Home building industry spokespeople go on CNBC regularly each time of the housing statistics are announced, like monthly sales, financing and refinancing, starts, or permits issued. And the spokespeople each time differentiate between the sales of new homes and resales, especially those that are in foreclosure or underwater; they also attempt to differentiate between national statistics which include negative information from extremely skewed markets like Las Vegas, Phoenix and Florida and the rest of the national housing market.

Discussed less frequently are conditions and prospects for banking, insurance, asset managers and the rest of the financial industry group. Since the bottom in 2009, I have believed the sector was a key to launching a true bull market:

  • On 3/20/09 in Financial Stocks are Laggards I wrote: “It’s often said that financial stocks are the Industry Group that leads the market out of the average Bear Market. In this case, however, the financials not only lead us into the Bear Market but they were the principal cause.
  • On 5/18/09 in XLF (Financial Sector ETF): What Now? I wrote: “XLF seems to be making what looks like the beginning of an inverse head-and-shoulder, a stock pattern that looks similar to the S&P 500 Index pattern….There’s only a one-in-four chance that XLF will be able to cross the resistance at the 13.00 neckline allowing it to move up to 17.00. It’s almost certain that 12-18 months from now XLF will be double what it is today [closed at 12.29 on that day], we just can’t say when.
  • On 6/7/2009 in XLF (Financial Sector ETF) = Market Health I wrote: “…the key to solidifying the market’s turn, to a true change in momentum from bear to bull is financial stocks starting to move up…..The financial sector is tied up with economic health, exchange value of the $US, interest rates and the health of the financial system itself. I’ll rest easier when I see the XLF successfully and with conviction cross above it’s neckline. “
  • On 9/16/10 in Housing and Finance: Two Superimposed Crises and Bear Markets I wrote: “[The] graph clearly depicts what I see as two coincidental and superimposed Crises the country has faced. We often see them merged into one continuous stream of bad news but, in reality, there was a Financial Crisis (impacting business) that was preceded by Housing Bubble and Bust (impacting consumers).” and inserted the following graph, now updated to last night’s close (click on image to enlarge):

A year later, while the rest of the economy has regained its footing enabling the market to push higher (up nearly 20% since then), those two industry groups are still stuck below significant resistance and unable to breakthrough and push significantly higher:

  • Homebuilders
  • Financials

If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.

May 17th, 2011

Lunar Cycle Tweaked on Stocktwits

My May 5 blog post entitled “Time-Segmented Market Analysis with Lunar Phases” was tweaked on StockTwits so I’m going to have to answer here even though I fear giving the Lunar Cycle Theory more credence than it truly deserves. @fstrtrdr had this to say the next day:

“Lunar phases? Add in the Werewolf and vampire indicators and watch Loonie Tunes for trade ideas?”

Now fstrtrdr’s bio says “My trading records for personal reference only. Don’t follow me since I am almost always trading options against a spread or hedge that would not make a single leg of the trade a good idea.” It’s clear why he/she would have no interest in something that on average runs 20 days. But perhaps the rest of you may.

The intention of that May 5 piece was to put a time perspective on the market’s current volatility, a framework so to speak for market expectations. One common way of doing that is to look at the market’s movement in time-segmented intervals and the Lunar Cycle is, although arbitrary, one way. Basing volatility expectations for the next 20 days based on the volatility over the past year, granted, is just one approach. So on May 5, I wrote:

Although the extreme outside range of change has been from +8.29 to -6.17% for these two week lunar phase periods, the averages have been much narrower: 2.87% for when the market finished up and 2.61% when the market finished down. For the current two week period that will end on May 17, an average move down would carry the market to 1321.21, almost precisely to the level of the 50-day moving average (currently at 1318.18 as of last night’s close). Based on this analysis, my guess (and blatant hope) is that the market will again approach the 50-day moving average as a support and, like it did on April 18, it will again pass the test.

Here we are, April 18, and the intra-day low was 1318.51 with a close of 1328.98. So shoot me, I missed the mark by 0.23% as far as the low is concerned (that’s %, not percentage points!) but the Market lightly kissed the 50-dma and then bounced.

What might we expect for the next phase? I’m not going to risk my record so you make your own guess. Here is the data:

To help you, here’s what the close on June 1 with a range of changes during the next phase:

Good luck guessing! [Psst! I’m going for 1368.85]

May 17th, 2011

Industry Rotation Among S&P 500 Industry Groups

I don’t know what’s happening to the market or how long it will go on but there is a weird transition happening. Others had talked about for a number of days so I had to see for myself and, lo and behold, it turns out to be true.

Scroll through the charts of the S&P 500 stocks for yourselves, as I did, and you’ll find it hitting you right in the face. The thing that’s happening is that there seem to be only three group of stocks recently moving ahead while the rest of the market seems to have hit a stone wall and have fallen back. You can look at a long-term stock chart and, before looking at the stocks symbol can correctly guess the industry group about an 70% of the time. There’s such a divergence between the groups and such a similarity between the stocks within a group.

The groups moving ahead (big time) are:

  • healthcare related like biotech and drugs, equipment, services and health plans, drug wholesalers and retails
  • consumer staples like cosmetics, personal care, soft drinks, tobacco, grocery wholesalers and retailers, etc.
  • utilities including electrical, natural gas, etc.

Several other groups have actually formed top reversal patterns and are headed south, like oil & gas. The rest of the stocks are at or marginally above long-term resistance levels at either the 2006 or 2000 highs. Most notable among these are the financials including banks, insurance and asset management companies.

Lost in the shuffle are tech, defense, industrial equipment, construction and most retail stocks. Most of the large-cap techs are retreating (MSFT, TXN, BRCM, INTC, QCOM) while the small-tech software, equipment and Internet stocks seem to be deciding in which direction they’ll fall.

What does this survey mean for you; how can you use subjective evaluation like this? I’ll tell you what it means for me. It means that I’m going to reconsider the investment strategy I’ve been following since last November when the “mid-term election cycle” started. Interestingly, the S&P has already done that when viewed on an equal-weighted basis rather as contrasted with the traditional capital-weighted basis.

I’ve been looking for a move to around the previous all-time high on the S&P by year-end with a interim consolidation at around 1325, around the market’s level. Many “talking heads” started calling for the double dip recession which could be forcing a move by the herd towards the safer, low growth, dividend paying stocks…..at least through the summer.

I already have over 20% in health care related stocks and have dumped my energy and precious metals stocks. Should I follow the herd and now also abandon the tech stocks now representing another 20% of the portfolio? How long will this stock rotation phase last and where will it go to next [my guess is back to the long-dormant but waiting-for-a-pop financials]? Tough calls but one that has to be made in order to stay even with the herd.

May 12th, 2011

Sell Rule: Out-of-Favor Industry Groups

A mistake most traders, including myself, often make is focusing too much on what is or, more correctly, what will in the near future be moving higher. In the Weekly Recap Report I send to subscribers, I include both an breakdown by industry group of stocks in the current Portfolio as well as a list of Investors’ Business Daily’s top-ranked Industry groups and Groups moving up in rank the most during the past 3 months.

Our goal is finding tomorrow’s hot stocks. At the same time, however, we should make sure that the stocks we already have in our portfolios continue performing. It’s just as important to see what Industry Groups are falling the most in their rankings as it is those that are rising the fastest.

For example, I’ve been beating the drum for healthcare related Industry Groups for some months and, as of this past weekend, over 20% of the portfolio is now made up by stocks in those groups; most have performed extremely well. I included the following chart in a recent Recap Report of the Medical-Biomed/Biotech ranking showing that these stocks, as a group, have been among the best performers for over a year (click on images to enlarge):

What I hadn’t looked at or acted on was the other end of the spectrum – the industry groups that might have been falling fastest. If I had, I would have seen, for example, was that all the Oil & Gas related Industry Groups had begun losing their top rank positions. I had blinders on but if I had looked at the other end, I would have seen the stocks that were dropping the most in ranking. I would have seen groups like the Oil & Gas-International Exploration and Development:

and the Oil & Gas – Canadian Exploration and Development:

Both of these groups had started turning down from their top rankings in mid-March and were now among the lower half in ranking of the 197 Industry Groups; both were now clearly under the 20-week moving average of their ranking. If I had taken notice and acted as quickly to dispose of these stocks in the Portfolio as I was adding healthcare stocks then I would have preserved a lot of profit.

Last November, I wrote “My Sell Rules Discipline” in which one rule is selling “individual stocks where risks associated with that stock appear to have increased”; the fourth example is “an industry group if it falls out of favor”. I just didn’t follow my own rules. I have long known that Industry Group factors contribute about 30% to a stock’s movement (the market is 50% and factors related exclusively to the individual stock contribute the remaining 20%). What I just now re-learned, a lesson I won’t soon forget, is that we have to look not only for new stocks to add but also to find and quickly act to prune out stocks in Industry Groups out of which money clearly is flowing.

May 5th, 2011

Time-Segmented Market Analysis with Lunar Phases

I wrote in the Weekly Recap Report mailed to subscribers on Sunday:

“You may be wondering why so many Wall Street analysts say the market’s next target is 1430. Those analysts, as do I, look back across to the other side of the canyon of the Financial Crisis Crash and see the market ricochet off that level several times in 2007-08 early on its way to the bottom. That 1430 zone was critical, first as a level of support and then as a level of resistance (click on images to enlarge):

It may look like the market was bouncing around 1430 for twelve months but it had actually already begun trending downwards. While everyone today talks about 1430 as a ceiling or resistance level, I’m hoping it again, at its worse, will become the midpoint of another trading range on its way to an upper boundary somewhere around the historic all time high, my target since last November with the start of the “mid-term election year” cycle.”

That was last weekend, before this week’s correction began. One subscriber, therefore, now asks “Do you have any opinions you would share if the market closes below your 1345 mark?” Fair question.

I decided some time back that I restrict Lunar Cycles tracking updates to my Facebook page but that data may actually be helpful used in another way: putting the market’s current weakness into some perspective and providing a framework for expectations. Lunar phases offer a way to look at the market’s past movement in terms of time-segmented, albeit somewhat arbitrary, chunks (click on image to enlarge):

Since July 2009, shortly after the recovery bull market began, there have been 46 phases roughly equal to 2-week periods. During that span of time, those periods produced the following results:

Although the extreme outside range of change has been from +8.29 to -6.17% for these two week lunar phase periods, the averages have been much narrower: 2.87% for when the market finished up and 2.61% when the market finished down. For the current two week period that will end on May 17, an average move down would carry the market to 1321.21, almost precisely to the level of the 50-day moving average (currently at 1318.18 as of last night’s close). Based on this analysis, my guess (and blatant hope) is that the market will again approach the 50-day moving average as a support and, like it did on April 18, it will again pass the test.

The media thrives on immediacy by focusing mostly on today’s events and headlines; what they may have said or focused on last week is of little interest or forgotten. The fact that last week “talking heads” trumpeted the cross above 1345 and that several Wall Street gurus were touting the economy and the stock market is no longer “news”. The news media provide no context, and offer little perspective; continuity for them just isn’t that interesting.

May 3rd, 2011

Yahoo! Jump or Dump

How much of the “fundamental” analysis offered by Wall Street is actually rationalization for having the positions they already own and how much of what we hear is merely story telling, a sales pitch, fabrication about something they hope will eventually turn out to be a reality. So much of what we see and hear is little more than predictions or, more correctly, wishful thinking?

I happened to be listening to a discussion between several Wall Street analysts on CNBC yesterday about the prospects for YHOO, the stock. The discussion was precipitate by news that a hedge fund had taken a large position in the stock in the hopes that the company can realize rewards from their Chinese assets, not about their traditional position as a search engine and, perhaps its origins as an “web portal target=”new”” (remember that nomenclature from the 1990’s?).

By virtue of the evolution of new technology, Yahoo has been searching for a strategy. Today, I have an app on my iPad, Zite, that aggregates articles (they call it a “personalized magazine) from a nearly unlimited supply of websites a range of categories of my choosing. I selected, because of my interest of course: Business & Economics, Personal Investing, Economics, Finance, Stocks, Trading and Science News. I could just as easily have selected Architecture, Wine & Mixology, Health & Exercise or any other terms that encapsulates my interests. While Yahoo continued trying to be “the” portal website, the true portal migrated to the platform.

In the meanwhile, the stock has languished:

From a high of 95 at the height of the Tech Bubble in 2000, the stock crashed to less than $5 in 2001. I has labored over the past 10 years to 18-20. Over the past several years, YHOO has formed what some might view as an ascending triangle with the neckline in the 18-20 area, right where it is today. This is where the fabrication and justification come in

According to TechTrader Daily column in Barons:

“Shares of Yahoo! (YHOO) are up 42 cents, or 2.4%, at $18.12 after reports circulated that Greenlight Capital, the hedge fund run by noted investor David Einhorn, took a position in the stock at $16.93 in Q1……the position came amidst a 2.5% drop in Greenlight’s total return in the quarter. The firm apparently is banking on the value of Yahoo!’s stake in Asian e-commerce venture Alibaba Group.”

A well researched story in Forbes by Eric Jackson says:

“….Yahoo!’s 40% stake in private Chinese companies Taobao.com and Alipay were worth at least another $14 a share currently given their torrid growth and the public comparables of other Chinese companies such as Baidu (BIDU), Sina (SINA), Dangdang (DANG), and Youku (YOKU). That brings the total intrinsic value [including Alibaba] for Yahoo! up to $31 a share. Yesterday, David Einhorn released his Q1 letter to partners in his Greenlight funds. In it, he disclosed his new long position in Yahoo! I welcome Einhorn’s position, as it will further inspire other investors to examine the private Chinese assets…..Few “facts” exist in the public universe in North America about Taobao and Alipay because these are private companies. This is probably a big reason why investors over here have a hard time giving Yahoo!’s shares the price they’re due….Tabai – owned by Alibaba Group – is basically a combination of the Amazon (AMZN) and eBay (EBAY) of China.

The Yahoo story continues to be spun further afield on Wall Street. You know my loathing of Wall Street stock “ratings”. In their ratings announcement, PiperJaffray reiterates:

“….. its Overweight rating on Yahoo! “Shares of Yahoo! currently trade at 3.5x FY12E EBITDA when factoring in the company’s Asian investments and cash. We believe a potential catalyst for shares in the next six months could be a spin-out of Yahoo!’s stake in Yahoo! Japan…..daily Ad checks in April appeared weak, and the “Display Industry Appear[s] to have essentially unchanged sell-through.” PiperJaffray holds at $22 price target on the stock.”

Other Wall Street firms added to the “fabrication” and “rationalization” by spinning out their “ratings announcements” (from American Banking and Marketing News):

  • RBC Capital analysts raised their price target on shares of Yahoo! Inc. from $20.00 to $22.00. They now have an “outperform” rating on the stock.
  • Deutsche Bank analysts raised their price target on shares of Yahoo! Inc. from $14.00 to $16.00. They now have a “hold” rating on the stock.
  • Goldman Sachs analysts raised their price target on shares of Yahoo! Inc. to $19.00. They now have a “neutral” rating on the stock.
  • Zacks Investment Research analysts reiterated a “neutral” rating on shares of Yahoo! Inc.. They now have a $18.00 price target on the stock.

So what should the individual investor do? Is Wall Street pumping up the stock to sell it to you or are they allowing you to get on-board ahead of the maddening crowd? Zooming in for a closer look of the above chart indicates perhaps a strategy:

Several times since 2009, YHOO rose to the 18-20 area and failed even as the market surged and regained much of the ground lost. Each time, as YHOO approached 18-20, the buying dried up or the selling eased up – or a combination of both. But it seems Wall Street is now trying to sell a story that this time it will be different. Should you jump or dump?

It’s not that I don’t trust Wall Street (which I don’t) but, referring back to my post “Compelling Examples for Buying on Breakouts“, I for one would wait to see whether YHOO successfully crosses above that neckline this time. I don’t want to risk buying shares from large institutional holders only to learn latter that Yahoo’s opportunities or execution in China weren’t truly as great as they were made out to look. The opportunities may turn into reality, the stock poll-vaults above the neckline and it costs me several points or I miss out on the whole opportunity all together. Alternatively, YHOO could again fail to cross but this time drops to new lows. It’s my money and I’d rather be safe than sorry.