March 20th, 2013

Rocket or Breakout? What say you?

imageThe second most difficult challenge (after auguring the market’s future near-term direction) is to select the best stocks into which to put some money to work so as to maximize potential returns while keeping risk of loss acceptable.  Most of the time, whenever you hear or read a comparison between two stocks, “talking heads” like Jim Cramer usually  throw out such slogans as “buy best of breed” as the guide in making your choice.  However, although “best of breed” is subjective and is boiled down fundamental factors like sales and earnings growth, great management or higher profit margins.  Seldom does Technical factors such as stock volatility, institutional support or relative strength seldom enter a “best of breed” discussion.

For example, on January 26, 2012, Cramer’s theStreet.com had a piece on XLB, the basic materials ETF in which they claimed that “DuPont Company (DD) is the undisputed king of basic materials. From the 2009 rally, DuPont was the top performing Dow component.”  However, PPG (PPG) wasn’t mentioned at all.  PPG represented only 4% of the ETF as compared with DD’s nearly 10%.  But which was actually the better stock to have bought more than a year ago.  A comparison of the two shows that PPG actually appreciated 58% while DD declined nearly -3% (click on images to enlarge).

PPG - 20130319DD - 20130319 I’m now sitting on some cash trying to figure out if I should redeploy it in yesterday’s momentum stock leaders (who are still advancing nicely) or taking a gamble on stocks that have great charts and look like they may soon breakout and become tomorrow’s leaders.

In technically-based comparison like these, IBD’s rule is to only buy stocks that are within a few percentage points above what IBD labels their “buy point”, those breakouts or crosses above resistance trendlines which are top boundaries of a variety of chart patterns such as inverted hear-and-shoulders, ascending triangles or IBD’s cups-and-handles.  This comparison might match up LKQ (automotive parts), a stock that’s advance 370% since 2009 in a near straight shot and, perhaps, may continue to advance higher against, for example, Williams-Sonoma (retail home furnishings).

LKQ - 20130320WSM - 20130320

Putting aside fundamentals and basing the investment choice strictly on a technical basis, the choice rests on how one evaluates two factors:

  • Trading off the risk one perceives in buying a stock continuing to advance after having nearly doubled in each of the past four years vs. the risk that a stock will continue to languish for continued economic sluggishness.
  • How important the psychic reward might be for you to have found a new “high flyer” before others vs. piggybacking on a winner that others continually discovered over the past four years.

I’ve always tended to chose the breakout but what say you?  Would you catch the tail of a comet like LKQ or get on what you hope might be a future rocket?  And why?

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March 1st, 2013

“Timing Is Everything”

imageCNBC never cease to amaze me the way they always trot out mostly bearish commentators on day’s when the market is declining severely, like Monday’s 1.83% plunge, but the bull’s when the market makes a stunning advance like the 1.27% rise a few days later.  Rather than counter-balancing the market’s prevailing psychology, CNBC feels that it’s in their best interest to go with the flow: panic when everyone else is throwing stocks overboard and be euphoric when buyers are flocking back into stocks.  Promote “risk off” on days when everyone has already decided to sell and “risk on” when the bulls are already stampeding.

They are a “news” organization and, as such, their time horizon is  very short and they need to present stories and “talking heads” who primarily describe or explain why something is just happening or has recently happened.  The information they offer is mostly anecdotal, opinions or canned offerings by companies rather than analytic and are, therefore, irrelevant to decision-making about the investable future.

That’s why I don’t watch the business media.  Rather, I attempt to peer out into the future and see if I can perceive where the next turning point might be. Towards that end, I’ve been focusing an area I labelled the “Crunch Zone”, the range between the 2000 all-time high and the 2007 all-time high (approximately 1545-1575) and have been monitoring for Members since the beginning of February as the market closes in on that target:

  • February 2: “The most glaring difference [between the 2007 attempt at crossing into new high territory and now] is that OBV [on-balance volume indicator] was also making new highs in 2007 but it has failed to do so, so far, this time.  That difference could be attributed to greater investor skepticism in 2012 than there was in 2007 as evidenced by the huge volumes of cash still sitting on the sidelines and in fixed income/gold safe haven investments.  That actually, could be positive indicator for the market actually finding success in breaking higher this time around.”
  • February 10: “the 50-day moving average of daily volume of the 500 S&P stocks has declined since peaking in 2006.  As the Index and OBV (on-balance-volume) continued to advance to new highs in 2007, average daily volume diverged and failed to move higher.  As a matter of fact, average daily volumes have trended lower to where they are now about 50% of the that 2006 peak….What events will cause these trends to reverse direction?…Stocks usually move opposite of interest rates: when interest rates decline, stocks advance and when interest rates rise, stocks fall.  Rates have been falling since 2009 and stocks have increase.  But because of the Fed’s intervention, when interest rates begin to rise, stocks could also rise.”
  • February 17: “Technically almost nothing new has happened other than the market has edged a little closer to the “crunch zone” ….The one significant development is on the volume side: 1) On-Balance Volume (OBV) has finally matched the peak during last year’s March high and 2) the 50-day moving average of daily volume seems to have finally bottomed out and shows a teeny-tiny upward slope…..Since the Market moves at glacier rather than human speed, we probably won’t get an answer of what follows the Crunch Zone interaction until the fall.”
  • February 24: “the market is bumping up against the “Crunch Zone”….I wouldn’t be surprised if we were stuck in this area through the summer…..Don’t believe the media “talking heads” who offer explanations for a pause or correction at these levels grounded in the employment numbers, earnings reports, interest rates, exchange rates or corporate guidance announcements.  The true explanation is that investors small and large have acrophobia, they fear heights, especially those at levels they’ve never seen before…..What encourages me is that there aren’t any bubbles today and, rather than being buoyant, the economy is still struggling to gain its footing.  Rather than exuberance, there’s still a lot of skepticism and fear about the stock market and the economy, the sort of ground in which the seeds of a true bull market can begin to root and grow.”

We don’t need CNBC to tell us that approaching the bottom edge of the Crunch Zone will be a bumpy ride.  As much as we might hang on every word of their prognostications, neither Cramer, Gartman, Kass nor any of the other familiar cast of characters can tell us whether we will ultimately cross through the Zone or bounce off it, reverse and begin sliding lower again (click on image to enlarge).

SP 500-20130222

You’re familiar with the old saw that “timing is everything”; the next few weeks or maybe months is a perfect time to heed it.  This is no time to make new commitments if you’re getting into the market for the first time or are looking to put some idle cash to work.  You’ll know when this struggle between bulls and bears, supply and demand, in the “crunch zone” is resolved and you’ll have plenty of time to add new positions to participate in the next trend to higher levels.  Don’t fret losing the first few percentage points; consider them insurance against the possibility that the market reverses instead.

On the other hand, I like most of the 70 positions in my Portfolio and don’t see weakness in most of their charts.  There’s little reason to unload them and run the risk of losing out on the launch of the next wave higher if the “crunch zone” turns out to be only a milestone rather than an insurmountable wall.

I don’t know about you but I’m currently around 90% invested and have no plans to either unload in anticipation of a correction or bear market or aggressively put the remaining cash to work until this uncertainty is resolved.  The Market moves at glacier rather than human speed so we probably won’t know what follows the Crunch Zone interaction until sometime around Fall. This may not be want you want to hear – we all like to see more action – but it’s unfortunately what we’re going to get.

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January 2nd, 2013

Shaking Off the Fear

If you’re an individual investor, one of the most important articles of last week besides the focus on the “Fiscal Cliff” debacle was an article in the December 29 Washington Post entitled “Bull market roars past many U.S. investors“.  The gist of the story was that “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis……Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.”

According to the Post, much of the damage to investors is “self-inflicted” because of fear and anxiety brought on by market volatility and memories of past “crashes”.  However, U.S. growth has improved and earnings tied to the economic are expanding.  Those improvements have been reflected in stock prices.  Of the 500 stocks comprising the S&P 500 Index, 481 are higher now than they were in March 2009 or when they entered the gauge.  Some of the statistics supporting these conclusions are:

  • Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
  • The proportion of stocks in the assets in 401(k) and IRA (excluding money market funds) fell to 72 percent from 72.5 percent in 2009.
  • The percentage of households owning stock mutual funds has dropped every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997. [Of course, this could also result from the wide choice, availability and acceptance of competitive ETFs]
  • New money has gone to the relative safety of fixed-income investments as corporate bonds and Treasuries have received nearly $1 trillion since March 2009.

Housing is making a comeback and housing stocks were among the leaders last year, banks are on the mend and financial stocks were also among the best performers and 2013 auto sales are projected to approach 1.5 million. Is it time then for individual investors to begin fearing declines in the value of their fixed income investments as interest rates reverse (regardless of Bernanke’s protestations to the contrary) and start moving money back into stocks?

Meanwhile, institutional investors (the group I call the “herd”) hasn’t fared that well in the market either.  According to in December 26 Wall Street Journal article entitled “2012 Was Good for Stocks, Bad for Stock Pundits“,

  • At the end of 2011, Mr. Cramer warned investors to avoid bank stocks. Oops. They were one of the best-performing sectors in 2012. He urged investors to avoid real estate, but housing prices are up more than 2% from a year ago…..and the stocks of home builders, as measured by the S&P Homebuilders exchange-traded fund, are up 53.6%.
  • Of the 65 market “gurus” tracked during the last few years by CXO Advisory Group, the median accuracy for market calls is 47%. If that sounds low, or you wonder about the quality of the pundit, consider that the list includes such well-known names as Bill Fleckenstein (37%), Jeremy Grantham (48%), Bill Gross (46%) and Louis Navellier (60%).

So how do I deal with the noise coming from the “talking heads” and the uncertain produced by the market?  I maintain my equanimity in the face of volatility by relying on how market participants have behaved during similar situations in the market’s history.  I rely on my Market Momentum Meter to give me some indication of what market participants believe will happen, on average, in the near-term as reflected in their collective buying and selling decisions.  It’s measure by whether they are pushing prices up or down and the momentum behind those decisions.

The Market Momentum Meter turned a bright Green on January 31, 2012 when the Index was 1312.41, or 10.25% under today’s close of 1462.42.  It wasn’t Green for only 10 trading days during the year (the longest period was 7 days around the November correction low:

Like a parent who never quite trusts riding in a car that his kid is driving, I didn’t fully trust my own creation.  It took me a few months after that Green signal at the end of January to increase the money I had in stocks.  As hard as I tried to totally drown out the noise (news) about Euro debt and currency problems and, more recently, the fiscal cliff debates, I never could bring myself to be fully invested and, like corporate America, always had a significant amount of cash on the sidelines.  And then in after the November elections, as the Market reacted to the realization of a second Obama term and continued Congressional stalemate, it looked for a couple of weeks like we might see a repeat of the 2011 market implosion.  Fortunately, I waited this one out and saw money begin flowing back into stocks as prices quickly recovered.

Like many other market participants, I need additional “guarantees”.  Even though the Meter says that these sorts of market conditions in the past have lead to higher prices and that it’s all clear to be fully invested with relatively low risk, I still want to see the Index continue its assault on the all-time highs by first crossing above where it stalled out last September.  When that happens (which could be next week), I’ll feel more comfortable putting rest of cash to work.

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December 6th, 2012

More Reliable: Horizontal vs. Sloped Trendlines?

Over the past several years, charts have become more pervasive than ever in discussions, commentaries and prognostications about individual stocks and the market in general.  Even Cramer, who once considered technicians to be on the same level as astrologers or readers of tea leaves, no regularly refers to the analysis of one chartist or another.

One of my pet peeves, however, is that bloggers and media talking heads will insert trendlines in their discussions almost willy-nilly as they pontificate about the support or resistance they hope the line they drew will presumably offered them. Because the use of trendlines is so prevalent, it’s assumed that everyone understands their meaning and relevance; we rarely hear about the arbitrariness and subjectivity that goes into their selection.

Last week, I offered three examples of head-and-shoulders patterns (GLD, AAPL and FDX), each demarcated by a horizontal trendline, or the pattern’s “neckline”.  [As an interesting aside, I may have been one of the first to publish an alert about the possibility of AAPL forming a head-and-shoulder top which could result in a correction down to approximately 400 in my November 8 post, "AAPL Gets a Cold, the Market Gets …..?"  Now many are commenting about it and Cramer even had a segment tonight dismissing the stocks technical risks.] What makes the head-and-shoulder such a “reliable” (if you allow me to use that term in the context of something so subjective as the reading of stock charts) pattern is that the supporting trendline is horizontal.  I’ve seen sloping necklines but these never turn out to be as recognizable nor as accurate.

As I describe in my book, Run with the Herd,

What makes trendlines so confusing is that many trendlines that seemed so precise at first may lose their potency as new trading is tacked on.  As a matter of fact, as more transaction data over longer and longer periods of time with multiple trading days condensed into individual bars, you’ll usually find yourself drawing a plethora of trendlines.  Some trendlines are short and some long, some connect pivot points that once seemed compelling and inviolate become less significant and even irrelevant when viewed in a longer-term.  The support or resistance expectations implicit in short trendlines at one may become overwhelmed and irrelevant as more recent buying and selling emerges.

Trendlines are nothing more than an arbitrary, imaginary lines that visually connect two or more pivot points. Pivot points are those spaces in time and price where control is transfers between buyers and sellers, when one trend in one direction reverses and begins moving in the opposite direction. In reality, this transfer doesn’t occur in one transaction at one price but instead occur over a period of time, a large number of trades at a range of prices.  There’s no precise way of locating when that transfer is complete and the struggle continue even when a reversal appears to be complete.

Why is it important to locate these pivots? Because we believe that after having occurred several times at approximately the same point, the failure to occur at that same level sometime in the future means that the winner of the last battle has lost control of the trend and it now resides in the other side who will control the trend until the next struggle begins.  That transfer of control is the breakout.

Repetitive struggles at the same price make intuitive sense.  An institutional investor looking to sell its large holding in a stock will continue to do so as long as a stock’s price is above a certain level; when it drops to or below the level they hold their shares back from the market; they will continue to accumulate shares up to a certain price but not above that price.  But what can we say the same thing about pivot points at different levels?  Bottom line, they tell us little about what we can expect about where the next pivot might be and we can say little about whether that recent pivot is the beginning of a reversal or the continuation of a trend.

The above chart for LKQ presents a pretty channel but it offers little information about the risks of the trend failing, how much profit potential remains in the channel trend or when it might collapse.  It is easy to draw the channel trendlines after the fact but drawing those lines in 2010 would have produced the dotted trendlines.  Which more accurately defines the trend, the solid or dotted lines.  Is the stock currently within the trend boundary or is it outside the bounds and bound to correct.  The most common mistake when inserting trendlines is thinking that the recent pivot is critical in establishing a meaningful trendline.  In other words, trendlines are usually discovered within the time frames of the chart, rarely coming in from prior the chart’s beginning.  That’s why I always simultaneously look at a charts in three time horizons.

That error doesn’t occur when you look for breakouts across horizontal trendlines like this one for NEOG.  Is there any doubt that a cross above 48.00 indicates that the bears have lost control to the bulls who have launched a new push to higher stock prices?

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November 28th, 2012

Head-and-Shoulders Patterns: AAPL and GLD Case Studies

In my book, Run with the Herd, I retell the coin toss experiment from Burton Malkiel’s book, A Random Walk Down Wall Street.  In it, he asked students to

“continuously toss coins with heads arbitrarily representing a move up in a stock’s price and, conversely, tails a move down.  All the price changes were assumed to be of equal magnitude and all were recorded in a line chart.  After an unspecified number of tosses, the students began to see patterns in the charts that looked similar to those of stock charts.”

One of the most talked about, recognized and perhaps most reliable stock chart patterns are the head-and-shoulders and its mirror image the inverted head-and-shoulders. What makes these patterns so important is that they fall into the reversal category (as contrasted with the continuation or trending patterns).  In these patterns, the price/value of the stock, index or commodity makes three different attempts to reverse the direction of the prevailing trend.  Characteristically, the price/value reaches approximately the same level the first two times and then falters; it succeeds in the third attempt and crosses the level reached the previous two attempts. The elements of the pattern include a shorter left “shoulder”, a longer middle “head”, and a shorter right shoulder; all are connected by a trendline at what is called a “neckline”.

As you might expect, as a chartist I believe that comparison between the randomness of coin tosses and stock chart patterns is a false one using the wrong logical argument (incorrectly using deductive reasoning rather than inductive reasoning).  But it is true, however, that the head-and-shoulder chart patterns are easier to perceive in retrospect and not as readily discernable in real-time.  Furthermore, when the pattern has evolved sufficiently in order to actually intimate its future likely outline, the practical question remains as to when might be the best (highest probability of being realized with the lowest risk of being failing) time to act on that perception.  Here are two cases in point:

    • AAPL: At the beginning of the month, I wrote a piece entitled “AAPL Gets a Cold, the Market Gets …..?” when the stock was at 563 in which I included a chart showing a partially formed head-and-shoulder pattern and wrote: “Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder topall the way down to 390 (nearly 30% from current levels).”Compare the chart in that post with the one below and you’ll find that AAPL is closely following the course outlined there:

      Although Robert Weinstein of Cramer’s theStreet.com wrote today that investors should “Put Away the Prozac, Apple’s Just Fine”, this emerging pattern continues to look to me uncannily like an emerging head-and-shoulders top [Cramer's Action Alerts Plus service has been a long-term AAPL investor with a 90+% profit].  There’s no way to tell whether the stock will follow-through but it pivots and starts declining again, I would order a refill from the pharmacy.

    • GLD: I wrote a piece at the beginning of the summer entitled “When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)” in which I included a chart of GLD with a pattern that looked like a descending channel and wrote: “I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.”

Today that channel has morphed into what might turn out ultimately to be an inverted head-and-shoulder pattern.  The hesitation in calling it that is that the pattern is developing after a major bull run rather than at the bottom of a major decline.  Consequently, this inverted head-and-shoulder will further morph a consolidation pattern or some type of reversal top pattern.

Bottom line, no matter how good these chart patterns may look a year from now, unless and until they cross their necklines, there’s no certainty that they won’t fail to deliver.  While getting in early will produce a greater return, the trade entails more risk that the stock moves in the opposite direction.  [In fact, even after a trendline is crossed, the stock will often reverse and test the trendline in what is called a "Buyers'/Sellers' Remorse Correction".]

 

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November 27th, 2012

Long-term Performance of Cramer’s Action Alerts Plus

I’ve been feeling a little guilty for not having written many posts recently nor making many trades (other than peeling back the worst stocks in my Portfolio and building the cash position to around 40%) and wrote members of my Instant Alerts service the following explanation:

“it’s a very apprehensive time for the market and that uncertainty is reflected in the performance of the [S&P 500] Index.  The market close on Friday is only 3.34% higher than the close at the end of April, 2011, nineteen months ago.  That’s an annualized rate of a little more than 2%.  It’s very difficult to consistently make profits in markets like these unless you’re willing to take a lot of risks or are extremely lucky.  Since there’s no easy money to be made in this market, many individual investors remain seated on the sidelines.

Based on the extensive analysis in constructing my Market Momentum Meter (you can read all about it in my book, Run with the Herd), I find Jim Cramer’s continual optimism bewildering and somewhat disingenuous, if not outright dishonest.  How can he claim that “there’s always a bull market out there” and he’s going to find one for us when he should probably be instead telling his viewers to pare back their holdings, raise cash and reduce exposure to risk for opportunities to buy back later somewhere down the road at more attractive prices?

I find the same to be true for the venerable Investors Business Daily who always seem to be fully invested and continually promoting their list of top-50 market leaders, being fulling invested without regard to market conditions.  As a matter of fact, I wrote extensively about extremely volatile results from their failing to explicitly time the market (see “IBD and Market Timing? I Don’t Think So” of October 22, 2010).

But let’s get back to Jim. I understand that his show is for the very novice individual investor ….. they’re the only ones who would put up with his fast-paced prattle.  Of course, I assume his facts to be true but the quantity of what he says is way beyond what most investors need to know or can reasonably absorb.  He’s more like a salesman (or can I say huckster) who will continue selling long after he’s closed the deal.

He may claim to be the individual investors’ helper (those “home gamers”) but either there aren’t that many individual investors left in the market or they just aren’t watching Cramer any more since his nightly viewership remains between 100,000-200,000 as contrasted with nearly 2 million viewers at Fox News at that time (see “The Cramer Metrics: Return of the Individual Investor” of January 4, 2011).   The viewership statistics for the 6:00 hour on the cable news networks haven’t changed much from what they were two years ago other than the fact that MSNBC has nearly doubled viewership by adding Rev. Al at 6:00pm EST.

The measure of Cramer’s true value is in his results. I decided to accept his invitation to a trial subscription to Action Alerts Plus, his instant alerts service. Fortunately for me, the site offers a recap of the service’s performance since its launch in 2001. The results confirm what I wrote to my subscribers this weekend (“It’s very difficult to consistently make profits in markets like these….”) and my view that the only real way to outperform the market in the long-run is to avoid the crashes while running with the herd when the bulls are running.

The Action Alerts Plus portfolio is currently 93.83% invested (6.17% cash) in 30 stocks.  Twelve of the 30 stocks, or 40%, have losses with the greatest loss being -13.53% in LRCX.  The largest position is WFC (4.2%) and the largest gain is AAPL (97.9%).  However, the most important statistic is how the portfolio has performed over the long-run relative to the S&P 500 benchmark (this is exactly how I measure the performance of the Model Portfolio in my Instant Alert Service):

Bottom line, you could have put your money into SPY or an index mutual fund and saved shelling the monthly subscription fee over to Jim because the Action Alerts Plus portfolio, with all of his trades, wisdom and extensive hedge fund experience behind it, has performed no better than the Index itself.  As a matter of fact, the 2011 mid-year mini-crash caused him to fall behind the benchmark (as it did for many of us) and it will be very difficult for him to make up that shortfall.

This again proves the point that success in the market comes less from stock selection than it does from market timing.  Ignore and any financial adviser, investment service or news service “talking head” who exclusively offers stock ideas in the absence of any market timing context.

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November 14th, 2012

The Contra-Kass Trade

I’m concerned.  Ever since having made his “generational low” call in 2009, I seem to have always be winding up on the opposite side of a trade by Doug Kass, the head of Seabreeze Partners and prominently featured “talking head” on Jim Cramer’s website and show.  For example, in April 2011, when the S&P 500 was 1312.62, I wrote in a post entitled “Kass Today’s Broken Clock?“,

““A week ago, I [Kass] wrote a column, “Apocalypse Soon,” which outlined, in a comprehensive way, the ingredients for a market fall.” ……. he wrote that a market correction loomed ever closer.  His reasons are a perma-bear’s litany of all the bad things wrong in the world, in financial markets and in government….

 

The market will eventually correct but it could be from a level 10-15% higher than when the pundits first made their calls. You can be ultra-conservative and allow to fear drive you to the sidelines now or you can try to benefit of a move higher ahead of the reversal, whenever that might come.  I’ll stick to my discipline and move to the sidelines only when the market tells me its time, not when the pundits do.”

In August, 16, 2012, Kass stuck to and reiterated his bearish call by adding a political dimension by suggesting than “Ryan’s selection will lead to Obama’s reelection and driving the the market down to 1300 (interestingly, he started his pitch by using an invalid and inaccurate technical view  of the market) because of Ryan’s conservative history and his known hostility towards Bernanke.  Kass believes that the highs for the market have already been made. (see my Scaling the Wall of Worry) .

To his credit, the market did drop to 1074.77 during the Euro Debt Crisis by the following October but subsequently recovered and went into bull mode pushing the market to 1474.51 on Sept 14,2012.

What worries me is that for some reason Kass has turned bullish.  In a recent long, multi-page blurb offered as a “preview” post on Cramer’s membership site, Kass reversed his previous bearish view and claimed “Current Fears are Overblown“.  His argument is that

“…recent signposts suggest a somewhat more reduced concern over the other cliffs and over the market risks served up by a rising tax rate on dividends and capital gains.  These signals, when combined with central bank easing around the world and the recent stock market slide, suggest that the current fears are overblown, that the rationale behind a meaningful market downside has been removed and that the market’s risk/reward has improved.  I am more upbeat than I have been for quite some time, and, while not “over my skis” long, I have increased my net long exposure as a manifestation of that increased optimism….there is likely to be an upside to my fair market value calculation in the months ahead.”

He spends the next four pages supporting for his change of heart on the various risks the market’s been facing over the past year including: China weakness, Euro debt crisis, “Fiscal Cliff”, earnings disappointments, etc.  The S&P 500 closed that day at 1374.53 (it closed today at 1355.49).

What sent shivers down my back is that his turn to optimism comes just as I have become more bearish.  As I wrote to my Members this past weekend,  we’ve been anticipating, watching and reacting to the correction since the end of September:

9/23: “For the S&P 500 to be able to make new highs, there needs to be a convergence, sort of a reversion to the mean, a narrowing of the performance difference between the best and worst performers. I hate to say this but it sort of reminds me of the top of the Tech Bubble when everyone was piling into tech stocks and all other stocks were left languishing and looking for investors’ money flow.”

 

10/7: “I’m noticing two indicators pointing to the idea that the “herd” may be ahead of itself and in need of additional time to gather strength for the next push to higher levels – the market tends to correct whenever it has surged too far ahead of where it’s been over the prior 300 trading days. That’s not to say that it will crash; but it will be pulled back to the moving average level…..The OBV has trended lower as the market has hit recent new highs. Without volume support, it’s hard to see the market continuing to advance.”

 

10/14: “rather then betting one way or another when the odds of winning are no better than 50/50, it doesn’t seem to make sense to either sell or buy in the face of the uncertainty. Any single pundit’s prognostication is dismissed as just one more biased, slanted sell-serving position. Lumping all investors together finds that they are evenly split …. hence market stagnation. There’s going to be plenty of action coming soon and time to react. This is when patience pays off.”

 

10/21: “Even though all the moving averages are still trending higher and are in perfect alignment, a continued rapid erosion in the average to under the 200 day moving average at around 1380 (the “Death Cross”) would send an extremely bearish alarm.”

 

10/28: “we could be in trouble if the market crosses below the 200-dma, currently just 21 points below Friday’s close, when the Market Momentum Meter immediately flashes bearish Red and I’ll be then forced to consider reducing the Portfolio’s exposure to risk by 25-40%.”

 

11/4: “1) changes will need to be made in what we’re invested in and how much to have at risk and 2) our decisions will have to be made and acted on much quicker.”

My proprietary Market Momentum Meter has been signalling bearish Red and I have moved my Model Portfolio from 83% invested down to less than 60% invested.

Kass may have turned more bullish, but my indicators point to a risk of substantially lower prices if certain conditions materialize.  I hate to be on the opposite side of a trade by someone so well-respected as Doug Kass.  I hope he’s right but, based on his track record over the past year and half, I have to ask, how can someone’s market timing be so bad?

August 3rd, 2012

PEP vs ZMH: Technical vs Fundamental Analysis

We’re all often warned that we should be carefully about information we find on the internet.  Sometimes it’s true, sometimes it’s strictly opinion, sometimes it’s offered with some ulterior motive and sometimes it’s just inaccurate opinion.  Take for example the daily email midday alerts from Cramer’s theStreet.com.  The one today included a piece entitled “Katz: Two Names Continue to Impress.  The headline worked because it caused me to open the link.

Katz leads off with the following statement:

“In the second quarter, I recommended PepsiCo (PEP_) and Zimmer Holdings (ZMH_). Both companies recently reported better-than-expected earnings for that quarter, but their stocks followed very different trajectories. PepsiCo shares rallied to a recent high of $72.76, while Zimmer’s share price declined a bit to $58.70 based on a modest revenue shortfall and some market-share loss in the U.S. I continue to like both names, with a particular emphasis on Zimmer in light of the stock’s recent price decline.”

Katz goes on to repeat each company’s fundamentals like products, market share, sales and earnings growths and dividends history.  While he likes PepsicCo from a fundamental perspective, he is disappointed in Zimmer’s financial performance and marginal market share erosion.

But comparing PEP and ZMH is truly like trying to compare an apple to an orange.  They are in radically different industry groups and their stocks have dramatically different volatility and dynamics.  The only thing linking them is the performance of the stock market (remember, “the stock market drives 50% of a stock’s performance”).  Since he mentions only in passing the stock performance of each and that’s essentially all that we’re interested in, I’ll offer the two charts (click on image to enlarge):

PEP

ZMH

What’s interesting about these two charts (as contrasted with the long-winded fundamental analysis presented in theStreet.com offering), is that:

  • The stock market action impacted both stocks similarly
  • Both stocks have completed a right triangle and currently are at the neckline
  • Where they differ significantly is in volatility.  As expected, PEP has been about half as volatile as ZMH, a trend that might be expected to continue as the market soon breaks into new high territory.

TheStreet.com piece states that “This is a free preview of commentary that originally appeared in Real Money – the premium investment information service from TheStreet that delivers investment strategies from a veteran team of Wall Street pros, including Jim Cramer.”

With information like that above, why would you want to subscribe to their service?  I, for one, would rather rely for my investment decisions on seasoned technical analysis.  By the way, if your bullish you’d put your money into ZMH and if bearish into PEP; at this stage of the market’s correction, my bet would be with ZMH

July 11th, 2012

TIF and Cramer’s Luxury Retailers Call

I don’t see many clear tops these days but Cramer’s pontification this evening about difficult times for luxury goods retailers and manufacturers caused me to take a look at Tiffany’s chart.  What we may here is another case of warning of a fire long after the barn has already burned down.  What I mean is that TIF offers a textbook case of a head-and-shoulders top that could have been sold 20% higher and probably should have been sold without any question when it gapped below the neckline of that top reversal pattern at the end of May:

TIF is now 40% off its peak a year ago so Cramer should probably have spoken about where the bottom might be rather than taking a whole segment of the show to put together a rationalization for burying a whole group of stocks including COH, PVH, RL and VFC (I was fortunate he pumped TGT since it’s in my Portfolio).

According to some chart reading rules-of-thumb (i.e., neckline  is halfway between peak and trough bottom), TIF might be half way to the bottom or around 42.  These last ten points could be quick so those who play both sides of the street (short as well as long) should act quickly because the remainder of the trip could be over before you even realize it.

June 22nd, 2012

An important, emerging new positive chart pattern in the S&P

Look at the chart inserted on the June 12 post below, “Cramer and One of My Five Lines in the Sand” and you’ll see the second trendline from the top at 1365.  When the market touched that level on Tuesday, I emailed Members the following yesterday morning:

“Yesterday, the market touched 1363 and then fell back. Let’s see what happens today after the Fed Meeting. We’re not alone in looking at this trigger level and, if there’s any positive signals out of Washington about more Fed easing then all those technicians could launch the next move higher. I, for one, will join the herd.”

Having set that hurdle saved us a lot of money because after hitting that level a couple of days ago, the market pulled back significantly.  If we had bought stocks on the expectation that the advance would continue, we would have been hurt terribly yesterday as near 90% of stocks declined as the market took its biggest hit in months.

Those who make decisions based on the news that the media decides to spotlight each day will continue to be whipsawed.  Yesterday, everyone was talking about double-barreled mauling of the market with Goldman Sachs’ bearish call and the across the board marking down of the major banks’ credit ratings by S&P.  Today, they’re talking about the market’s surprising resilience and how “the ratings agencies are always late”, “when they only reflect what everyone already knew” and “changing the rating on one company is important but adjust the whole industry changes nothing”.

But for those of us who take a longer-term view (like the chart in the June 12 post), we need as much of a downside confirmation before heading for the exits as we needed an upside confirmation.  The chart below identifies those two critical levels: 1360-65 for the bullish confirmation and 1260-1266 for the bearish confirmation.

Chart reading is a dynamic exercise as new data reveal new balances in the continually changing struggle between bulls and bears.  Interestingly, a new chart pattern has emerged as a result of the recent volatility: a flag sort of correction (descending parallel lines) coming off the March high.  Patterns like these are usually constructive as they underscore consolidation (or continuation) rather than reversal.  Furthermore, crossing above the upper boundary of this new pattern as well as the 1360-65 level only solidifies further the strength of the following upside move.