January 14th, 2015

Homebuilders Building Foundation For Next Move

ImageSomething I learned long ago is that “industry group controls 30% of a stock’s price movement.”  So a logical place to begin the search for stocks with better than average relative strength but lower than average risk is by narrowing the available universe down to a select few Industry Groups.

One academic research study concluded that “a mutual fund manager’s success in identifying and emphasizing specific industry sectors in their portfolio was a far better forecaster of the fund’s performance than ability to pick individual stocks.”  Although the statistics were compelling on their own, they were even more impressive because the study found that managers with good industry-selection abilities were likely to continue to outperform their peers over many successive periods.

Through our Stocks on the Move scan, we’ve recently noticed that in addition to significant money flowing into REITs pushing their prices higher as discussed previously, the Scan also filtered out a significant percentage of stocks from a related industry group: homebuilders.  The Scan from a few days ago produced the following results:

Stocks on the Move Scan

A quarter of the stocks generated by that scan were REITs, or 13.3% of all REITs (REITs represent 6.3% of all listed stocks).  Homebuilders, on the other hand, represented only 4% of the stocks generated by the scan but those 7 stocks were a quarter of all the homebuilders (homebuilders represent only 0.4% of listed stocks).  Although homebuilders represented a small percentage of the stocks generated by the Scan, more homebuilders met the scan criteria.

One thing you should know about the Homebuilders Industry Group is that among all the groups, homebuilders tend to generate similar chart patterns and consistently move together.  In Chapter 15 of Run with the Herd entitled “Segmenting the Market”, I presented the following data on homebuilders in the periods leading up to and during the Financial Crisis Crash of 2007-09:

Homebuilders

The percentage price moves of all the homebuilders weren’t identical but they were in the same direction and on orders of magnitude similar relative to the average S&P 500 stock.  Over the six years to year-end 2005, the S&P 500 declined 15.0% while homebuilders appreciated anywhere from 404% to 1275%.  From the end of 2005 to the trough of the Financial Crisis, the average S&P 500 stock declined -49.3% while homebuilders lost anywhere from -62.3% of their value to over -90%.

It looks as if we’re facing a similar situation today.  After their huge 100+% recovery off the Financial Crash bottom, most homebuilders have been constructing a consolidation pattern throughout 2013-15.  But now members of the group are showing signs of being ready to exit across to the top of their respective consolidation patterns.  Using a typical “rule-of-thumb”, the percentage move following a consolidation should be approximately the same as the percentage move preceding it.  Using XHB, the ETF for the group, as a proxy that represents a move to approximately 65-70 (click on image to enlarge):

Homebuilders - 20150111

Five homebuilders whose similar charts clearly depict these consolidation patterns are (click on symbols for charts):

However, a word of caution.  If the market turns ugly and does enter what turns out to be a 25-30% correction then these patterns could turn from being consolidations into reversal tops and momentum reversing causing breakouts through the bottom boundaries.  These charts don’t predict … they only indicate that supply and demand has remained fairly balanced for nearly two years and, once it begins, momentum will generate an extended move in either direction.

Fundamentals like low interest rates, increased residential rental rates, increased consumer liquidity and savings from lower gas prices and improved job picture suggest that the breakout, when it does take hold, will be on the upside.

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January 8th, 2015

Money Flowing to REITs

imageThe market closed on Tuesday 2002.61, down for the fifth trading day in a row, a total of  the total of 4.2% since peaking at 2090.57 on 12/29.  One of the notable highlights of the day, however, was the stellar performance of REITs.

There is a universe of approximately 4000-5000 stocks from which investors to choose but the selection process is daunting since your goal is select a stock from among the 50% that will appreciate and outperform your benchmark index over your investment time horizon.  The best process for winnowing down the list to a more manageable number is by scanning the universe of all stocks against a number of criteria.

Readers and Members know that my favorite scan is called “Stocks on the Move” (I first wrote about this in “Stock Picking Now Feels Like Shooting Fish in a Barrel” just after the Financial Crisis bottom on July 23, 2009) and combines the following technical and fundamental criteria:

  • Price per share > $15
  • Relative Strength Indicator today > top 50%
  • MoneyStream Surge for past week > top 50%
  • EPS percentage change from 4 qtrs back > top 50%
  • Volume surge over past 5 days > top 50%
  • Daily Percentage Price Change > top 50%

[MoneyStream is a Worden Bros. indicator that grew out of joint venture with a large regional brokerage firm to develop a price/volume indicator similar to on-balance volume (OBV) and is interpreted in the same way you by looking for divergences between price and volume trends.]

Yesterday’s “Stocks on the Move” scan filtered out only 108 stocks as compared to the average 250-300 stocks that appeared on the similar lists throughout December.  Notably, about half the stocks on yesterday’s list were REITs, primarily because among all stocks, they were the biggest price movers for the day, had the largest surge in volume and were the best performers relative to the S&P 500 for the day.

Adding to what makes these securities so interesting is the similarity of their charts. Many of these REITs have clearly trending higher appear to have recently crossed out of consolidation patterns, above upper boundary resistance trendlines.  Some of the 40 REITs making the cut yesterday included (click on symbol to see chart):

  • Retail
    • SKT (Tanger Factory Outlet)
    • SPG (Simon Property Group)
    • EQY (Equity One)
  • Residential
    • AEC (Associated Estates)
    • SNH (Seniorhousing Properties)
  • Office
    • OFC (Corporate Office Properties)
    • COR (Coresite Realty)
  • Healthcare
    • SBRA (Sabra Healthcare)
    • OHI (Omega Health)
  • Diversified
    • BDN (Brandywine Realty)
    • RPAI (Retail Properties of America)

January 6th, 2015

Forget Oil, Go Lithium

GigafactoryOil prices has tumbled more than 50% since the beginning of last summer so many investment advisers are recommending today that investments be made in the energy sector, arguing that the stocks have fallen so that many represent the best bargains in many years.

If you had been able to predict the oil price rout in July and sold short, you would have discovered that not all energy-related stocks and ETFs acted uniformly. Some actually went up (EEP up 12.49%, VLO up 1.68%) while others dropped anywhere from -5% to
-70%. For example, CVX decline -16.81%, COP declined -19.33, OIL -49.48, RIG -56.39 and CRK -73.99.

If you believe that oil prices can’t go much lower and will soon rebound then it would seem logical that buying an oil-related stock is a “sure thing”. But how does one select among the more than 300 energy stocks of all sizes, dividends, volatility, growth.

Oil Prices

Should you select those that performed the “best” over the past 4-5 months under the assumption that they will perform best in the future. Or, conversely, should you buy those that performed the worst because they could possibly bounce back the most. If you’re looking to put money to work, though a better strategy than catching one of 300 “falling knives” might be to look someplace totally different, someplace that will be “driving the future” rather than the energy that has “driven the past” (no pun intended).

Rather than betting on a recovery in oil prices, why not take out a stake instead in the industry making possible electric transportation – lithium, one of the most valuable natural resources of the new electronic world thanks to its unique and extremely valuable characteristics:

Lithium

As described in a recent Mauldin Economics report:

  • Lithium has such a low density that it floats on water and can be cut with a butter knife. When mixed with aluminum and magnesium, it forms lightweight alloys that produce some the highest strength-to-weight ratios of all metals.
  • Lithium tolerates heat better than any other solid element, melting at 357°F.
  • Lithium batteries offer the best weight-to-energy ratio, making lithium batteries ideal for any application where weight is an issue, such as portable electronics.
  • That same high energy density and low weight characteristic makes lithium batteries the best choice for electric/hybrid vehicles due to car gas mileage. A car’s biggest enemy is weight.
  • Lithium has a very high electrochemical potential, meaning that it has excellent energy storage capacity.

The lithium market is dominated by only three publicly-owned producers:

  1. Chemical & Mining Company of Chile (SQM);
  2. FMC Corp. (FMC);
  3. Rockwood Holdings (ROC)

Lithium Industry

In addition to its excellent dividend yield and relatively low (as compared to the pure-play ROC) price-earnings ratio, the SQM chart is most volatile and shows promise to bounce off the bottom of the horizontal channel it’s formed since late 2013 and attempt to cross above the upper boundary at 33, a 40% move.

SQM - 20150105

Tesla has just completed a gigafactory that exceeds all comparisons in the belief that the lithium-ion battery will be the power source for many more battery powered cars, drones, toys and power grid storage.  I’m hoping that SQM will benefit from that future.

January 2nd, 2015

BIIB’s Second Act

imageAre you one of those who missed the biotech burst, especially the 375% run-up from a leader like BIIB (Biogen-Idec) since its breakout on March 11, 2011?  You can’t make up the “opportunity costs” of not having bought but you have an opportunity in what may be left in the stock’s upside move by jumping on the stock as it looks to complete a easily identified year-long consolidation in the form of an ascending triangle, the first since beginning its run almost four years ago (to enlarge, click on image below).

Biogen Idec Inc. discovers, develops, manufactures and markets therapies for the treatment of neurodegenerative diseases, hemophilia and autoimmune disorders with such products as AVONEX, TYSABRI, FAMPYRA, FUMADERM and RITUXAN.  One of the reasons for the pause in BIIB’s upward trajectory was the uncertainties surrounding the company’s prospects as it faced expiration of its AVONEX patent at the end of 2013.  Articles like this one from May 2013 entitled “3 Bio Companies Facing The Patent Cliff” didn’t help.

But companies of BIIB’s caliber don’t just roll over when they face a challenge like major patent expirations.  It takes a while for them to regroup and for investors to regain their confidence,  Hence a consolidation in the form of an ascending triangle.  Apparently, the consensus among the majority of the stock’s investors is that BIIB has successfully weathered the storm with sufficient existing products and products in the pipeline that growth can be expected to resume.  Hence, a likely breakout from the consolidation pattern.

Some investors balk at buying and owning stocks with triple-digit price tags because of the fear of less volatility and more limited upside (BIIB is the 10th highest priced stock among the S&P 500 behind such leaders as NFLX (Netflix), ISRG (Intuitive Surgical), PLCN (Priceline) and CMG (Chipotle Mexican Grill).  But those concerns should be alleviated by knowing that BIIB ranks 71th among the S&P 500 stocks in 5-year average annual earnings growth of nearly 25%.

BIIB - 20150102

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May 16th, 2013

Healthcare Providers and Suppliers

image

When it comes to stock selection I usually fall back on the following slogan: “50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own”.

I believe the stock market is in the early phase of a major secular bull market.  This is when you want to jump on a trend early and stick with your proven winners for the long haul and earn those large percentage gains.  To do this, you want to try to identify industry groups that contain many individual stocks.  Finally, you use charts to identify those stocks that have had large percentage moves in the (long-term) past but have been held back in consolidation zones for a number of years.

There are many stocks that meet these criteria but the few shown below are representative.  Granted, these charts cover eight years but they are similar to how the financial and homebuilder stocks look several years ago before their run.

In short, there seems to be something dramatic building in a wide range of stocks in the healthcare field over the past several years that could lead to a large number of breakouts across levels that could lead to significant price appreciation for some time:

 

  • HMA,HMA - 20130515
  • UNH,UNH - 20130515
  • AMSG,AMSG - 20130515
  • BKD,BKD - 20130515
  • HGR,HGR - 20130515
  • MD,MD - 20130515
  • BRLI,BRLI - 20130515
  • OMI,OMI - 20130515
  • LH,LH - 20130515
  • ESRX,ESRX - 20130515
  • DGXDGX - 20130515

May 8th, 2013

Auto and Truck Parts Suppliers

I believe I’ve finally made some sense of how to differentiate between the Weekly Recap Reports offered to Members, the Stock Chartist blog and the articles I begun to write for SeekingAlpha.com. I believe the answer was provided by Seeking Alpha when they made clear that their preference is for fundamental as contrasted with technical analysis.

Every investment decision begins with a clear vision of the market’s near-term direction, or what Seeking Alpha calls “Market Orientation”. My last two articles met the prerequisites of that category and were well accepted by the Seeking Alpha readers. Once you have a market point-of-view, the next step is stock selection.

If market timing indicates that the time is opportunity for new investments then the next challenge is choosing from among the 7000 stocks and ETFs. One can do attempt to narrow the search down to a few of the best stocks by, what Cramer calls, “doing your homework”. Or you can use my approach of finding stocks that appear to be ready to cross out of consolidation or reversal areas (i.e., patterns) by crossing above resistance zones (i.e., trendlines) focusing first among the Industry Groups that seem to be most desirable at the time to the “herd”, or Wall Street’s institutional investors. The approach I use for this final step is, of course, my various scans and a continual search through literally hundreds of charts.

Instant Alerts members have the benefit of both market and stock selection plus an inside view of how I manage my Portfolio.

Bottom line, the blog will now focus on individual stocks based on my own Industry Group and stock chart analysis. Some blog posts will focus on an individual stock while other posts might include several stocks. The following is the first:

================================================================

imageThe stocks of several truck and auto original and replacement parts suppliers have advanced smartly since the beginning of the year, like AXL, DORM, SMP, LKQ and DLPH. Even though these have significant momentum, I avoid them because these are now far above what I consider breakout entry points where initial positions can be safely established.

However, a few have recently or are about to break out of consolidation areas.  I consider them consolidations since there’s nothing to indicate that the market is anywhere near making a significant reversal.  Those stocks include:

  • BWABWA - 20130508
  • LEARLEA - 20130508
  • DANDAN - 20130508
  • WBCWBC - 20130508
  • THRMTHRM - 20130508

It goes without saying that these stocks and their charts were selected exclusively on the basis on a technical analysis of price action and timeliness of an investment. There’s no attempt to rank them as to prospective appreciation of each nor the time needed to achieve those gains. Investors should assess their own tolerance for risk and perform their own assessment of their suitability to be included in a portfolio.

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April 5th, 2013

Gold (GLD) in an “Indecision Zone”

I was recently accepted as a “columnist” for the subscription portion of SeekingAlpha.com, a well-respected stock-oriented editorial site, and quickly got my first submitted article accepted.  Much to my disappointment, however, my second submission was wrongly rejected, I believe.  The rejection notice stated:

As a fundamental investing site, Seeking Alpha doesn’t publish articles based primarily on Technical Analysis.  Feel free to post this piece to your instablog.  Thanks!

Sincerely Yours,

SA Editors

As you might expect, this response raised my blood pressure on several counts.

  1. First, I thought that I had summarized most of the fundamental arguments, bullish and bearish, covering the subject of the future direction of gold prices.
  2. Second, I can’t imagine any site that doesn’t take technical factors into account when presenting content about stocks, markets, commodities and forex can do so without including a heavy dose of technical factors and opinion.
  3. Finally, why isn’t there a site that features articles contributed by vetted contributors focusing on technically-based market and stock opinions?  It might even be called www.stockchartists.com

In any event, the rejected article appears below. What say you? Should it have been rejected? Would you be interested in reading or even contributing to a technically-based content market opinion site?

========================================================================

imageI know both the bull and bear fundamental arguments surrounding gold, you’ve heard alll of them before.

  • The Bulls point to the fact that gold is both a commodity used by industry and consumers and, perhaps even more so, a safe haven alternative for fiat money and store of accumulated wealth.
    • Central banks around the world flooding the market with currency that eventually will lead to inflation and rising commodity and gold prices
    • A fixed world-wide supply of gold in a world of ever increasing demand
    • Increased demand resulting from the growth of ETFs
    • Increased demand due to increased wealth from emerging market consumers
    • Increased demand from governments beginning to accumulate
    • Continued political uncertainty
    • Finally, the price of gold is still only around 70% of its inflation adjusted peak price of $2300 reached during the 1970’s energy crisis.
  • The Bear’s argue that the price of gold has quadrupled with only minor corrections from less than 50 in 2005 when the GLD ETF was first made available.
    • Hedge funds are reportedly unloading their large cache of GLD
    • There will be better places to invest your money than gold as stocks and commodities continue to reflect an improved economic environment
    • The bull market for gold paralleled the secular bull market for bonds therefore a reversal in fixed income secular trend will also lead to reversal in gold prices.
    • QE and monetary easing will end soon and the excess money supply that the Fed pumped into the economy will begin to be drained
    • Governments are actually unloading their gold hoards

Rather than trying to second guess the experts and come up with my own prediction of gold’s future direction, I believe price action and trend best represents the consensus of how the world’s investors actually act on their beliefs. There’s no question that the price of GLD has stalled but what isn’t as clear is whether this the beginning of a reversal leading to sharply lower prices or whether this period could be actually represent the end of a consolidation pattern.

In the chart below, there’s not question concerning the top boundary of the pattern … it’s clearly defined.  There are two possibilities, however, for the zone’s lower boundary. The blue dashed line assumes the zone is a descending triangle reversal top pattern while the green dashed line assumes the zone is a flag consolidation pattern. We will be left in the dark as to which pattern interpretation is correct until GLD declines to approximately 137, or down another 7.4%, at which point GLD will likely find some support.

It’s said that “the longer the pattern the stronger the trend out of that pattern”. If the price stabilizes around 137 and then reverses, a major bull move could be launched that could finally carry GLD substantially above its previous high of 182. But if it again fails after that reversal at around 150, or today’s price, then a reversal top would be confirmed leading to further declines possibly to under 100. GLD is clearly in an “indecision zone” (click on image to enlarge) and I would wait to make any further commitments either way (bullish long or bearish short) until investors drive the price out of the zone one way or another.

Bull and Bear Gold Case

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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 15th, 2013

Food Scarcity, Food Stocks and Market Correction

imageA oft-repeated refrain these days concerns the absence of significant inflation reported by the government.  However, those who frequent supermarkets complain about increases in food prices.  A recent page in the Financial Times included the following headlines; it’s enough to turn you into a survivalist, or “prepper”, begin building a bunker and store a food hoard (click on image to enlarge):

Food Prices

And what’s happening to the prices of companies in the food stuffs chain?  Not surprisingly their moving higher (being swept along with the rest of the market?).  We usually think of food stocks as safe havens to run to when the market gets shaky but, this time, there may be some strong fundamental drivers (along with major central bankers around the world flooding the market with their currencies) behind what could turn into dramatic food inflation and higher prices for the sector (click on symbols for charts; parenthesis are yield, volatility and relative strength):

Typically, these stocks have low volatility, offer dividend yields and, with reportedly a worldwide food shortage, may be perfect places to park some money as you sit out a market correction which could come during the “go away in May” seasonal market lull.

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February 15th, 2013

Bullish Technical Gold Outlook

imageHave you ever heard of the “fear industry”?  That’s what Philip Pilkington called those economists and writers who are the leading voices among what can be called “goldbugs”, those who believe that gold is the only safe haven among all asset classes.  In his recent blog post on Naked Capitalism entitled “The Fear Industry – Austrian School Propaganda and the Gold Market“, Pilkington writes

the sheer scale by which the fear industry has taken off is, to be frank, quite surprising. We have all seen the likes of Peter Schiff as a regular guest on the American business news spouting vague talking points about the impending dollar collapse and gold reaching $5000 an ounce…..What is so interesting is that the fear industry grows larger and larger at a time when the make-up of their key market – the gold market – has fundamentally altered its composition…..the fear industry’s most successful year was actually in 2011 and this in turn is reflected in the fact that the gold price reached its record high in the summer of that year……the fear industry has probably stretched itself too thin and it is likely that we saw its peak last year.  From here on in it will probably be diminishing returns and we’ll likely hear of more and more scams as people within the industry compete for ever scarcer resources…… the end game is just around the corner….”

On the flip side of the coin, there’s Trustable Gold who at the beginning of the year in “Gold 2013 – What is the trend for the gold price in 2013 and beyond?” summarized forecasts from various trusted sources:

  • “Bloomberg in November 2012 forecasted a level of US dollars 1,925.- per ounce of gold.
  • The bullion bank ScotiaMocatta forecasts a rising gold price in 2013 and would not be surprised to see a gold price above US$ 2,200.- per troy ounce of gold.
  • BNP Paribas estimated in November 2012 gold to reach US dollars 1,675 per ounce in 2012 and US dollars 1,865 per ounce in 2013.
  • Members of the London Bullion Market Association forecast a gold price of US dollars 1,843.- by September 2013.
  • The global bank HSBC predicts a very similar gold price of 1,850 US dollars per ounce of gold in 2013.
  • The CEO of Newmont Mining estimates that the price of gold in 2013 may increase to US dollars 2,550.
  • In November 2012, Deutsche Bank updated its forecast on the gold price to US$ 2,000.- by next year, i.e. 2013.
  • Credit Suisse expects a gold price of US$ 1,840.- in 2013.
  • In October 2012 private bank Coutts predicted gold prices to reach US$ 2,000.- in the coming months.

At the risk of being lumped with the “goldbug” crowd, I took another look at gold’s long-term trend to see whether I can add anything new to this debate from a technical perspective about gold’s future direction.  I believe I’ve discovered something interesting:

GLD - 20130215

Since it began trading in 2005, the gold ETF, GLD, has had three consolidations in its secular trend higher, each of which lasted around 2 1/2-3 years.  The secular trend channel ascends at the rate of approximately 20%/year and can be clearly seen through the upper trendline connecting the 2006, 2008 and 2011 peaks.  A parallel line connects the 2008 trough with a point slightly lower than the current price, 155.54.

I believe we may be at or very near the end of the most recent 2 1/2 year consolidation and, if the secular trend can be trusted, a new bullish leg will begin shortly.  Extrapolating the channel suggests that the target of this next push higher would be in the area of 240-270 (or gold prices of 2400-2700) towards the end of 2014.

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