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.

Technorati Tags: ,

November 5th, 2010

Avoiding the Next Bubble

Although everyone is ebullient about the market’s success in making a new 52-week high, I’m adopting an unusual and somewhat uncomfortable stance. I’m going to assume the role of “contrarian” and throw out some caution.

I was as ecstatic as anyone yesterday watching all those green numbers flashing on my computer screen. But have you ever taken a look at the longer-term charts of some of the leading stocks many of which are also on the IBD 100 list? As you scroll through a stack of them, you’ll feel like you’re watching fireworks going off on the Fourth of July. The prices of many leading stocks have doubled, tripled and some have even gone up five-fold since Labor Day 2009. Here are a few examples (click on image to enlarge):

  • APKT (stock has run up over five-fold since Sept 1, 2009 when it was in the midst of forming its previous consolidation pattern. It’s to early to say what the recent movement is carving out, whether consolidation or reversal with the market’s future course probably being the deciding factor).
  • IGTE (has run up without any significant consolidation since its March 2009 low under $2; one is definitely overdue.)

Oh, if we had only had the foresight …. and the courage ….. to put our money into these stocks and a raft of other momentum stocks rather than watching a stagnant S&P 500 struggling for a year to break free of its consolidation trading range! If we only had hindsight! But we didn’t because no one can predict the future. All we can do is to find indicators that give us some warnings about what the future might hold and then, if the events materialize, we try to react appropriately.

A few days ago, I wrote in “IBD and Market Timing? I Don’t Think So” about the Market Security Meter. The market timing indicator did properly indicate that the best strategy was to exit the market in January 2008 and then reenter in June 2009, however, those calls confirmed, on the one hand, the market’s damaged and weak condition and, on the other hand, its full recovery.

Looking closely at the IBD 100 chart in the posting referenced above, it appears that the IBD 100 index peaked ahead of the general market as measured by the S&P 500. Perhaps if we focused on today’s market leaders and try to discern when they turn weak and roll over, that could serve as an early warning to approaching weakness in the broader market?

Towards that end I created what I call the “Bubble-30 Index”, an index composed of 30 of today’s leading momentum stocks including names like Priceline (PCLN), Netflix (NFLX), Chipolte (CMG). The list crosses many industry groups and includes several international stocks. When demand for these stocks dry up and the money flow reverses direction, this Index should send an alarm of an impending change in market sentiment.

Here’s what the indicator looked like last night (click on image to enlarge):

Greenspan warned on “irrational exuberance” back in 1996 but no one listened to and soon forgot his warning because stocks continued to run. If we had our eyes focused on the Bubble-30 Index of that day, confirmed by the Market Security Meter, perhaps we would have not been devastated in the Tech Bubble Crash.

The Bubble-30 Index, along with current readings of the Market Security Meter, are tools included in the Weekly Recap part of the Instant Alerts subscription.

October 22nd, 2010

IBD and Market Timing? I Don’t Think So

I was an avid subscriber to Investors Business Daily for many years and envied to returns they were able to generate through their top 100 stocks. They said that if I followed their CANSLIM methodology I too could generate comparable returns for my portfolio. But it wasn’t as easy as they claimed. My portfolio just wasn’t matching theirs.

But then the Financial Crises Crash hit towards the end of 2007 and the market imploded with a 57% decline. Fortunately for me, in my attempts to emulate their approach I realized that it was probably more important to time the market well that it was to pick stocks well. The amount of money that you lose during major down turns can almost totally wipe out any profits you made in the bull market leading up to the Bear Market. That’s especially true during the secular bear market we’ve unfortunately had to endure for the past 12 years.

IBD may be excellent at identifying stocks leading the market but they do so in a vacuum without any apparent concern for market timing, without giving any recognition to the fact that there are times when it doesn’t matter how good your stocks are they’re not going to be good enough, that upside momentum can lead to out-sized gains but downside momentum can also lead to out-sided losses:

While the Financial Crisis Crash S&P 500 collapsed the market by about 57%, the IBD 100 stocks were decimated by around 85%! Sure, they’re coming back but how good would their performance had looked had their approach be able to anticipate the coming crash and signaled that an exit was crucial. [No broker, advisory or newsletter service will suggest that probably because of the fear of losing subscription or fee revenue.]

At the end of 2007, I developed a market timing indicator that signaled a major decline was probably immanent. I have since translated the indicator into a simple “Market Security Meter” similar to the Homeland Security’s Terror Alert system:

O.K., so it’s not that original but it works. And what does the MSM indicate now? Yesterday it was indicating Pause (a caution light). But I know for a fact that as of today, if the market closes ends about where it is now (1182.11 at 12:40) the signal will change color and flash a different signal. Every time I send an Alert, subscribers to the service see the current MSM indicator; when it changes or is about to change, I send out a special alert.

Having a successful process for picking good stocks gives you a terrific advantage but avoiding the kind of damage as suffered by the IBD 100 list during the Financial Crisis Crash gives you a true edge for getting far ahead over the long run.

April 23rd, 2009

Only 1.1% of Stocks in Clear Up Tends

As regular readers know, I put much stock (no pun intended) in the alignment of the S&P 500 Index and four of its moving averages: the 60-, 90-, 180- and 300-day MAs.

Nearly a year ago in “Precursor to a Healthy Bull Market” (May 2, 2008), when we were all so innocent about the severity of the emerging Bear Market, I described the typical arrangement of these moving average in Bull vs. Bear Markets. On May 2, 2008, the Index was about to cross above the 180-day moving average just as it hopefully is on the verge of doing soon. Back then, the Index and 180-day MA were 1413 and 1427, respectively. As to today’s close they were 843 and 943, respectively. I inserted the following chart to demonstrate that difference:

While that arrangement of MAs measures the strength of the Index’s trend, it does the same for individual stocks. Stocks whose prices are above all their moving averages which, in turn, are arranged from fastest to slowest are stocks in clear uptrends; the same can be said that stocks clearly in a downtrend have a mirror images of the arrangement. I wrote last may, rather naively:

“Before we can become complacent about moving to new high ground, it’s going to take quite some time for this reversal to be completed. The Index could lurch ahead to 1500 but that could be followed with some backfilling. The Index could crawl slowly uphill dragging the moving averages behind it. It took 5-6 months for the averages to flip from the Bull to Bear configuration. We should expect another 6-8 months for it to right itself back to Bull (remember, things happen much quicker going down than they do going up)…..While we can celebrate a recovery in the making, it’s not here yet. A 7-8% recovery (from 1410 to 1520) can help the portfolio regain some of its health, we’ll have to be patient for the easy gains until sometime after the election.”

On October 1, in “When’s the Bottom and What to Do Then“, as the market was on the verge of accelerating its descent from 1161 that day to the low of 676 on March 9, I hearkened back to the May 2 and wrote:

“It takes a long time for the averages to flip and until they do, whenever that might be and for reasons unknown to us now, the market remains vulnerable…That was written just before the Index crossed over – for only one day – the 180-day moving average. We cautiously rejoiced and heard talking heads say that I bottom had been put in. And we know what has happened since May 2….I’m just as much an optimist as the next bull, I love buying stocks and I hate the state of this economy and the financial system. But I just can’t own stocks now and don’t know when I will be able to again.

Back to the original question: ‘Suppose the market does get to 1050, 1000, 950, ….. What will you do then?’ My direct answer is ‘I’ll buy the strongest stocks (best momentum) whenever and for whatever reason the market proves that it’s stopped declining. I’ll know the time is right from the index relative to its moving averages and how those moving averages are aligned.’ Sorry, I can’t make it any simpler or plainer.”

So the obvious question for this inquisitive mind was “how many stocks are now in clear up trends and how many in down trends as measured by their MAs?” Out of 5294 stocks in my Telechart system (excluding ETFs, companies subject to acquisition and other delisting), the answer shouldn’t come as a surprise given the the fact that stocks, on average, have been cut in half over the past 16 months:

  • Stocks in clear Bear trends: 860, or 16%
  • Stocks in clear Bull trend: only 60, or a mere 1.1%

Stocks in clear up trends include such familiar momentum names (many are IBD 100 stocks) as:

  • AZO (Autozone)
  • JOSB (Joseph A. Bank)
  • GHL (Greenhill)
  • PEGA (Pegasystems)
  • HOTT (Hot Topic)
  • GMCR (Green Mountain Coffee Roasters)
  • GHDX (Genomic Health)
  • SMG (Scotts Miraclegrow)
  • NFLX (Netflix)
  • QSII (Quality Systems)
  • SIGA (Siga Pharma)
  • CENT (Central Garden & Pet)
  • BPSG (Broadpoint Security Group)
  • KIRK (Kirkland’s)

I’ve been monitoring and reporting the effort of stocks to become healthy again (number of stocks closing above their 90-, 180-, 300-day MAs and the number of “golden cross” stocks) and of the market’s effort to cross above its 180-day (the “green light”). Even though the market has just scored a 23%+ move, we still need to be cautious.

February 23rd, 2009

The All Too-Human IBD 100: TNDM, MDAS and CPA

I know all of you are looking for a clear statement of the market’s near-term direction but, with my sincere apologies, you’re unfortunately not going to find it here. And that’s why I haven’t been posting recently. I just can’t see anything constructive to write about and those positive things that I do see are in precarious base building patterns (e.g., symmetrical triangles). These stocks include FCX (click symbol for chart) and the other fertilizer stocks.

But look how disappointing these symmetrical triangles have been when seen in the S&P 500 Index and other stocks, like X, AKS (click symbol for chart) and other metals stocks.

You can also see the confusion surrounding the market the difficulty IBD is having in populating its IBD 100 list, it’s list of the “leading stocks”. The stocks IBD selects for the list are supposedly ones that they assess currently have the best fundamentals, the strongest institutional support, the most favorable technicals (momentum, charts, etc.).

I wouldn’t want to be the analyst with the job of assembling the list (although they claim it’s done exclusively through algorithms buried deep inside their computers and never touched by human hands) because they have to come up with the 100 stocks that currently outshine all the rest. They can’t have say “Excuse me, but I’m going to leave 80% in cash.” They have to have 100 stocks come rain or shine. You can tell how much of a stretch it actually is by looking at a chart comparing the IBD 100 Index and the S&P 500 Index (I included a scan of that chart back in September 27, 2008 and it’s gotten considerable worse since .. I would have include update but don’t now have access to a scanner).

But some of the specific stocks included in the list are truly baffling. In the past 20 weeks since last October 1, the list has included 358 different stocks for an average turnover of 3.58. Each of these stocks has remained on the list an average of 5.58 weeks with about half staying on the list for three weeks or less:

  • 101 for only one week
  • 47 for two weeks
  • 31 for three weeks

The only stocks on the list each of the past 20 weeks was AVAV. But what is most striking are some of the stocks recently added. I understand that IBD is well-respected and I’m just a blogger but I just don’t get it from looking at the charts of some of these stocks. There’s nothing compelling (according to my selection criteria) to warrant their being considered a “leading stock”. The most egregious include:

  • TNDM (Neutral Tandem): the stock has been on list for past 3 weeks and is now ranked number 2. The stock was a 2007 IPO. Other than the fact it’s at the top of a downward sloping channel, there’s nothing that makes it interesting from a chart perspective.

  • MDAS (Medassets): Was an IPO late in 2007 and has been in a downward sloping channel since. It has also been in the 100 List for three weeks and ranks 8th. The only thing this stock has going for it is the beginnings of a extended head-and-shoulders bottom pattern (possible neckline shown as dashed line) but it could take another year for the stock to go much above 19.

  • CPA (Copa Holdings): A regional airline that more than tripled after its IPO at the end of 2005 and has since declined close to its IPO price. IBD must know something or expects something “very exciting” to happen since its chart has no compelling action but it was still added to the list this week at 27th.

There are many more examples but the only reason for even writing about these is to show that even IBD has a hard time in this confounding market.

December 10th, 2008

Birds of a Feather: ISYS and TSYS

Today’s market gave me nothing new to add to what I wrote yesterday. Today’s decline matched yesterday’s increase but on slightly less volume. I would guess these two days of trading are given some sort of name in Japanese Candlestick charting (like Evening Doji Star or something else equally obtuse … you can tell I’m not a big Candlestick fan) other than they were mirror images of one another: equal range, open at one end and wind up at the other.

So what does one do one days like today (other than feel stupid for having made some purchases yesterday and hoping I won’t regret that some more tomorrow), I go trolling for interesting stocks. Today, my filter was: 1) “Golden Cross” stock, 2) move favorably relative to S&P 500 since the October 10, 2007 high. I came across two that like like cousins if not brothers.

  • ISYS (Integral Systems): has increased 105.7% since October 7, 2007 (remember the S&P 500 is down 43.12% over the same period). ISYS is ranked #6 on the IBD 100 list. But what I find most interesting about ISYS is that it’s now stuggling to break into new all-time high territory, a strong momentum indicator and one of my primary stock selection criteria during the Mark-up Stage of the market’s life cycle. While the market is at the bottom of its range since the 2000 Tech Bubble Crash, ISYS is at the top. Note the favorable volume action this year as represented in the OBV (click on chart to enlarge):

  • TSYS (Telecommunications Systems): hasn’t had as dramatic a Credit Crises increase – only 67.56% – but its chart is still compelling. TSYS isn’t on the IBD 100 list – yet. It’s accomplishment this year has been to break out of a multi-year symmetrical triangle. Its struggle now is to break through a resistance trendline at its “surrogate” all-time high. I say, “surrogate” because other than the first few months after its 2000 IPO, when it was caught in the downdraft of the Tech Bubble Crash, this trendline represents its all-time high. TSYS has had a favorable OBV since the 2003 Crash bottom(click on chart to enlarge):

I’m not saying these stocks are ripe to buy now; I would put them on my watch list. If we in fact are in the bottom building process, these stocks will probably be among the leaders and movers (stocks with outstanding upside momentum) when the market complete the transition and begins an unequivocal leg up.

October 21st, 2008

A Key to the IBD 100 "Black Box"

I discovered something really exciting while working on my book that I want to share with you. The chapter deals with identifying momentum-driven stocks at the cusp of a bull market, the time when you’re not absolutely sure whether the previous Bear Market has hit it’s lowest point and before the base/bottom patterns for individual stocks have had a chance to fully form. The period we’re now in feels like that.

When describing the earliest stages of the Accumulation Phase of the typical market life cycle (see “Early-Stage Momentum Stocks“), I wrote, “the common denominator of the early leaders in the early phases of the last bull market (2003-2007, as the Tech Bubble Crash was bottoming out), however, were stocks that formed “Golden Crosses” (where the 90-day moving average crossed above the 180-day moving average and closing price higher than both).” As of yesterday’s close, about 230 stocks have completed “Golden Crosses”.

Even more interesting, however, is that many of these “Golden Cross” stocks overlapped stocks in the latest IBD 100 list. Actually, the following 36 stocks in IBD’s top 100 leading stocks also formed “Golden Crosses”:

Consequently, these 36 stocks are blessed by two authorities: IBD and by the action of herds who are relentlessly driving these stocks to higher prices (at least in this Accumulation stage of the Market Life Cycle).

I’ve always wondered how IBD’s “black box” kicks out their top stocks. I know they focus on relatively new issues (IPO’s within the past 3 years), stocks that make new highs and stocks with positive relative strength (moving better than the market). But we may have come across a third – stocks that have formed a “Golden Cross”, where the 90-day moving average crosses above the 180-day moving average (or, conventionally, where perhaps the 50-day MA crosses above the 200-day MA).

I’m not saying that IBD actually uses this metric. What I am hypothesizing is that the factors leading IBD to select highlight these stocks (“institutional ownership”, the “I” of CANSLIM) are the same factors that bring about “golden crosses”.

October 20th, 2008

IBD 100 Trying to Find Its Footing

I don’t know if you’ve been watching but IBD has done what looks like sweeping housecleaning of their list of the top 100 stocks. Clearly the move reflects the general tumult and upheaval going on in the market in general but I don’t remember when the list had so many changes and so much churning. This past Friday, for example, 22 new stocks were added the list of top 1oo leaders. In the previous list, 60 new stocks were added to the list and of those added, 38 had never been on the list before. Even more startling, 39 of the stocks added that week failed to return the following week.

Evidently, IBD is having as much difficulty finding momentum and follow-through as we are. They scanned their 197 Industry Groups and found their top 100 in 77 of those groups with the various Industry Groups in the Health and Financial sectors leading the way:

It was reassuring to find a healthy overlap between the stocks in IBD’s 100 and those on the “Golden Cross” lists I’ve been tracking. Clearly those are the stocks that are in the process of building a head of steam to generate the momentum needed to carry them higher when the market completes the base building process.

Yes, I’m cautiously coming around to the view there’s a high probability that we’re experiencing “bottoming” now rather than a consolidation leading to another leg down. It’s going to take time and we won’t get a powerful move outside the current range until early next year. Here’s a current view of this dismal market (as of 12:30):

I’ve extended this the S&P’s chart with what might be possible trajectories for each of the four moving averages. If the market doesn’t deteriorate further, then the base building process (in other words, the pause for market psychology to heal and turn more constructive) will have keep the index within the range circled on the chart. Note that the horizontal axis are months, so the process could take 3-4 months.

What I’m anticipating is that all the lines to start turning positive: 1) the index begins crossing above each of its lagging moving averages, 2) the 60-day moving average turn and cross above the 90-day, then the 180-day, etc. This should be sequential with each of the other averages performing cross overs so that, ultimately, their ranks reverse and the index should be above them all. That’s when a bull market is back in force.

There’s no need to jump to be the first since there could be some new surprise to throw the process off-kilter again. When the market’s healthy, bad news is taken as a bump in the road; when it’s sick, bad news is just another excuse to cascade down to a new low level. Let’s let the market heal itself before putting all resources back to work.

I’ve personally started nibbling by buying small positions in some of the stocks I’ve mentioned here recently (it takes a lot to hold a trader on the sidelines).

September 27th, 2008

IBD 100 Performance

Something you won’t see in Investors’ Business Daily expressed explicitly is the extent to which the index of stocks making up their top 100 stocks over timer, stocks they call the “leaders”, have declined significantly during this market crash. While the S&P 500 his declined 22.47% since August, the IBD 100 has declined approximately 39%. Even more strikingly, the S&P 500 has declined 14.86% since the May recovery peak and the IBD 100 has declined 35%, or 2.5 times as much.

So while IBD’s parameters has selected a variety of stocks that have increased an exceptional 165% vs. 35% for the S&P 500 since the Index’s inception in May, 2003, the momentum stocks IBD focuses on are extremely volatile. You make terrific money when the stocks and the market are going up but you also run the risk of taking huge losses when both lose their momentum.

That’s why I think it’s wise for any momentum player to add “market timing” as a tactic into their investment strategy. Imagine if you had moved into cash in January, 2008 when the MTI (Market Timing Indicator) had flashed its alert. You would have captured the profit of the move up to that point and now be sitting on a pile of cash ready to pounce on the new momentum-driven stocks when the MTI flashes a green light.

When will that be? I don’t know when but I’ll let the market tell me when. We’ll get some early alerts as the S&P 500 Index bridging the gap with its moving averages. Stay tuned here and you’ll have plenty of time to start building your shopping list. In the meanwhile, keep your chin up as you wallow in the self-pity of your losses. You’re in good company. Just look at IBD’s recent performance.

May 3rd, 2008

Oil & Gas Stocks in IBD 100, plus VLO a Short?

Four Industry Groups comprise 55% of the IBD 100 list this past Friday; their representation was 28% at the beginning of February:

I’ve written about the Oil&Gas stocks among the IBD 100 since all the way back in 2005. As a matter of fact, on January 28, 2006 I wrote:

“When I compare the charts of individual Oil & Gas stocks and the “ranking” of those stocks as a percentage of the total IBD 100 list, I see an inverse , albeit imperfect, correlation. That is, the number of these stocks to hit the list seems to increase and peak about two-three months ahead of the prices of the stocks themselves beginning to plateau.”

It’s only logical since one of the components used by IBD to arrive at their rankings (for both individual stocks and Industry Groups) is price change relative to the market, RSI’s. Stocks and Industry Groups that have been out-performing the market, consequently, rise to the top. However, this is no indication that near-term future performance will continue to the same degree. I think what we might be seeing is an interim peak in the energy stock complex.

As a matter of fact, take a look at this previous Oil&Gas darling, VLO (Valero). If you were exclusively a chartist, you’d see a long-term (nearly 3 years) head-and-shoulder top formation and, on a break below 47, sell the stock short (perhaps buying puts is a safer strategy):

What makes this even more compelling (as a possible short) is the stock action of competitors in this group like SUN, ALJ, DK and TSO. They’re down huge. Although down about 33% since the peak early in 2007, VLO may have another leg down to the low 30’s.