December 11th, 2012

Our Discipline: A Case Study in MED

As I’ve written here often, I believe the best approach for the typical individual investor is to manage their portfolios employing the following three steps: 1) a well-founded, unemotional approach to market timing, 2) the notion of industry group rotation and 3) diversification that spreads risk among a fairly large number of individual stocks (i.e., investing approximately equal amounts among stocks in the portfolio).

Put another way, the portfolio management effort down to answering the following questions: How much money should be put at risk in the stock market at any particular moment and, if new money is to be put to work, which stocks should be added to the portfolio? 

I solved the first question for myself several years ago.  I collected data back to 1963 on the daily S&P 500 Index and, by asking a series of “what-if” questions determined when it would have been better to have invested money in the market making an average return than having it sit idle on the sidelines.  Or, stated in the reverse, when would having money sit on the sidelines been better for long-term returns than had it been invested earning an average market return?  The analysis resulted in my Market Momentum Meter, an unemotional barometer of market sentiment, that allows me to shut my ears to all the media noise and hype about what they claim is “Breaking News” and focus instead on the truth about conditions conducive to momentum-driven markets over the past 50 years.  Following the Meter’s signals over the long run, investors could have avoided market crashes while still taking advantage of the bull market runs.  I can attest to the fact it helped me avoid the worst of the 2007-09 Financial Crisis Crash.

Once the Meter signals that it’s relatively “safe” to put new money to work in the market,  I use a two-step approach for finding the stocks best for carrying that risk.  I scan all stocks to find those that meet one of four different sets of criteria and, once having narrowed down the population of publicly-traded stocks, I look at their charts to find those that might have a good chance of crossing above levels that stymied their past advances (in other words, those that look like they could soon breakout across significant, long-term resistance trendlines). The first stocks to breakout are first in line as investment candidates.  The discipline requires me to sometimes be fairly active and at other times to do nothing but unemotionally watch the Portfolio run with the market or sit idle safely protected in cash.

The debate/negotiations in Washington has brought us again to a crucial market pivot point.  The Meter indicates that when market conditions look as they do today it might have been best for us to have money invested.  I have begun running those scans to begin finding those stocks that look like they’re ready to trigger Buy Points in their charts by crossing above key resistance levels.

While 75% of the stocks currently in the Portfolio show gains and 69% have outperformed the S&P 500 since their purchase, few have delivered the sort of results as has MED since its purchase last March.  I had never heard of Medifast when it dropped through one of the Scans and presented a compelling chart.  When I purchased the stock, I wrote in the Instant Alert to Members that the stock is “a product of yesterday’s Stocks-on-the-Move scan.  It has formed an inverted head-and-shoulders reversal pattern at what I hope will be the bottom of a multi-year descending wedge pattern.”  Since then, the stock has advanced 95%:

As the usual disclaimer says, “Past performance is no guarantee of future performance”.  But, I believe in the discipline and am using it today to find the next batch of stocks some of which, with some patience and luck, will hopefully deliver what turns out to be the outstanding performers over the next nine months or a year.

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August 6th, 2008

REITs and Retailers…. Now?

As I scan through my charts, I get a very mixed and confusing impression. On the one hand, my Market Timing Indicator is definitely clearly signaling a flashing red signal or “all-cash”. The S&P 500 Index has to go up another 5.0% before it turns yellow and 9.7% before it clearly becomes a green bull market signal. There’s a clear and present danger of another major leg down from here. I, along with many of my technical brethren, have been expecting a touchdown at around 1150, or 10.5% below yesterday’s close.

On the other hand, I see a number of groups (and some specific stocks) bucking the trend by moving to new high ground and several other groups making nice patterns that, under favorable market conditions, could become bases for sustained and extended runs.

Not surprisingly, I concur with many other commentators who point to the healthcare products and equipment stocks and some of the software and technology stocks. But there are a couple of other groups that you haven’t heard much about (so I’m probably sticking my neck and reputation far out in offering them). The reason you haven’t heard much about these groups from other quarters is probably because they actually are quite counter-intuitive:

  • Apparel Retailers and Manufacturers: I first mentioned this group May 10 in which a list several. With the one big exception of JCG, the others in the list have performed beautifully since. What makes this group so surprising as a potential buy is the recent news (see Barry Ritholz’s theBigPicture blog) about all the retail locations that chains are now shuttering. But we shouldn’t argue with the collective intelligence of the market (maybe a smaller pie mean larger slices for the remaining) so I now add the following to the list:
    • URBN
    • WMT
    • CHRS
    • MW
    • TLB
    • JNY
  • REITS like nursing homes, hospitals, residential and retail (especially the larger players): I wrote about the healthcare retail REITs on April 26. What makes this so unusual is that real estate (especially development) is worse than flat on its back; it’s nearly comatose. Perhaps its the relatively high yield in REITs compared to low yield available elsewhere that draws buyers to the group. To that list, I now add some of the residential REITs like:
    • AIV
    • BRE
    • EQR
    • AVB
    • ESS
    • ACC
    • AEC
    • ELS
    • HME

Needless to say, I may be early so you should risk nothing more than a little toe. If I am right, there will be many opportunities and signals to get in down the road.

July 25th, 2008

Amazon (AMZN): A Game Plan

I’m sorry to dump this on you but I have to get something off my chest. I don’t get this “consensus estimates” stuff. Well, that’s not exactly correct — I don’t understand the emphasis that the big boys place on “consensus estimates” to sometimes generate huge changes in prices for few days after earnings announcements.

I understand that institutional investors have to rationalize their decision through economic models to indicate if a stock is over- or under-valued thereby justifying their buy/sell decisions. Of course, they could refer to stock charts but that would make it look like they’re relying on black magic, tarot cards or some other form of arcane mysticism.

So if their models indicated AMZN’s (Amazon) fair value should be around 70 and the company announced results different from their estimates, the herd would see that as justification to stampede the stock. According to Reuters:

AMZN shares rose as high as 17 percent on Thursday as the online retailer’s strong second-quarter revenue and profit relieved a wary Wall Street that has been bruised by recent disappointing results from consumer companies. Some analysts calculated that Amazon’s earnings actually fell below Wall Street consensus estimates, but most gave them credit for an unexpected gain related to the sale of its European DVD rental business and slightly lower taxes.

“Overall we think this was an outstanding quarter for Amazon given extraordinarily low levels of consumer confidence in the U.S. and the UK,” wrote Bernstein Research analyst Jeffrey Lindsay, who rates shares “Outperform.” Deutsche Bank analyst Jeetil Patel forecast that shares would rise on Thursday, a day after Amazon’s results were released, because many on Wall Street had been expecting grim news — whether higher operating expenses, significantly lower gross profit margins or weakening revenue projections.

Instead, the world’s largest Internet retailer posted a 41 percent rise in revenues and earnings that beat Wall Street forecasts, even excluding a one-time gain from an asset sale.

Give me a break. Who’ll remember in a month, a quarter, a year or five years these “consensus estimates” or how they compared to actual results. On the contrary, everyone will remember only how these results compared to last quarter and same quarter last year (Have you ever seen a service that reports both actuals and “consensus estimates” for the past, say, 5 years! I haven’t). Instead, large misses from “consensus estimates” only shine the spotlight on how incompetent the professionals are and how difficult, if not impossible, it is just to get “fundamental analysis” right. See the clear story in AMZN’s chart:

This doesn’t tell a compelling story to me. “I wonder whether the previous quarter’s report, or the 2007 annual report, contained any surprises?” he says with sarcasm. Let’s step back and take a longer-term view:

The number of price gaps over the past nearly three years is impressive. Either AMZN is always pulling surprise out of their hat or Wall Street pros can never get it right. What if we pull back even further? what would the chart tell us then?

Now we’re talking. This chart shows AMZN since its IPO. I wish I’d had the courage to buy AMZN any time within 6 months of the IPO because it turned into one of the tech bubble darlings increasing from 1.50 (adjusted for splits) to 110! Remember all the debate as to whether Jeff Bezos was crazy or not for building all those huge warehouses? Yes, he was crazy, crazy as a fox.

It’s taken eight years to digest that growth (during which time AMZN formed a huge symmetrical triangle). One buying opportunity was when it broke above the upper boundary trendline of that symmetrical triangle in April 2007 followed by a huge breakaway gap.

But now AMZN is bucking up against the trendline extending out from its all-time high in 2000. Breaking through that resistance is a huge hurdle. It’s been building up to making a run into new all-time high territory since the credit crises set in last July (forming a poorly formed descending wedge).

Buying here at 78, given all the economic headwinds presents some risks. But a move to 110, the current all-time high represents a 37.5% move. But there’s no telling whether it will make it there or when, whether the breakthrough attempt will be successful or not and when and, if successful, how much of a secondary, post-breakout consolidation will it take before a huge upward move can get started (these often happen and can take any consolidation form).

So here’s my game plan. The 37.5% looks enticing but I think I’d pass it up and wait for the big move above 110.

May 10th, 2008

Hot Money to Retailers? JCG, ARO, PLCE, TRLG and more

There’s no question as to what’s working in the market these days and it’s worrisome (for most of this analysis I’m going to leverage off of some of IBD information):

  • The top 20 industry groups (out of IBD’s total 197 groups) and consist of 551 stocks (or 7.3% of all the stocks tracked by IBD) and fall in to the following Industry Groups:
    • various Oil&Gas and Energy (287 stocks)
    • various Transportation like rail and truck(44 stocks)
    • various Steel and Metal Ore (85 stocks)
    • various Machinery and Equipment (57 stocks)
    • various Building and Construction (33 stocks)
  • Even more revealing is that an unprecedented 37 of the IBD100 (as determined according to CANSLIM principles) were Oil & Gas stocks (for you math challenged, that’s 37%)!

But there’s no question about it, there’s a speculative bubble that’s been building in commodities, foods and energy and someday that bubble, as do all bubbles, will burst. You know there’s a bubble because two articles in the Sunday NY Times Business Section was about the bubble. Whether it was Neslon Schwartz in “A Peek Behind the Price at the Pump” explaining how the drop in the value of the $US has contributed to the bubble, or Ben Stein in “You Can’t Make This Stuff Up, or Can You?” writing that “bubbles always end, and almost always end badly. So will this one.”

So, even while we concentrate our holdings in Oil & Gas and watch the profits there offset the bigger sums we’re paying at the gas pumps and to heat our homes, it’s prudent to see what new sectors are emerging. The big question is actually, when the hot money leaves commodities, where will it pour into.

Paul Lim, also of the NY Times in his piece, “How to Tell if the Rally is Real“, tells us to watch for small-stock performance, growth stocks coming back into favor over value, the dollar strengthening and technology and consumer discretionary stocks outperforming the rest of the pack. And I think we’re beginning to see that in the Industry Groups that are moving up in rank.

I already wrote about the Homebuilders and related construction industry groups on March 21. But And the sector that seems to have made a dramatic rise in the rankings (in other words, stocks in the industry have had positive relative strength vs. the over all market) over the past couple of weeks are various retailer groups:

Most of these stocks have been beaten up and dramatically below their highs. I wouldn’t recommending you to buy many of them today; you may feel like you were “catching a falling knife”. But many have made significant percentage moves off their lows. Note that the Retail-Clothing/Shoe Industry Group is now ranked 35th, up over 100 positions from where it was just a month ago. Within the group, here are the ones that look furthest along in building a base and present the best charts (click on symbol):

  • TRLG (True Religion)
  • ARO (Aeropostale)
  • GYMB (Gymboree)
  • ROST (Ross Stores)
  • GES (Guess?)
  • TJX (TJX Companies)
  • PLCE (Children’s Place)
  • ANN (Ann Taylor)
  • SCVL (Shoe Carnival)
  • JCG (J Crew)

Of the whole lot, I think I’d go with TRLG (True Religion), JCG (J Crew), ARO (Aeropostale) and PLCE (Children’s Place).