October 24th, 2012

ARMH: Patience Pays Off

When the market has been as frustrating as it’s recently been, you are always on the lookout for something to reinforce your confidence and beliefs.  It came this week from an extremely surprising direction.  A stock chart that ultimately delivered on its promise.

When I purchased ARMH (ARM Holdings PLC) on February 29, I wrote to members of my Instant Alerts service that that stock “was captured in several of the previous “Stocks on the Move” scans and is a favorite of momentum traders.  The stock has been trapped in a 12-mos. consolidation pattern.  Whether you see a horizontal channel, an inverted head-and-shoulders or a cup-and-handle doesn’t really matter that much.  The point is that a breakthrough on the upside with a strong market as tailwind could lead to substantially higher prices.”

Unfortunately, that horizontal channel morphed into a descending channel or flag.  There were many times during the past eight months that I felt like I should sell the stock but I felt that, given time, the stock would come through with its promise of a strong upward push.

A large contributor to that confidence came from the favorable divergence between the stock price action and the volume trend.  As indicated in the above chart, OBV (or on-balance-volume, the running total from adding the volume on up days less the volume subtracted on down days) has continued to edge ever so slightly higher while the price fluctuated lower from the high- to low-20’s.  That divergence tends to suggest that demand for the stock has exceed supply even as the stock’s price has slipped.

This quarter, ARMH “reported a very strong quarter, coming in at $227M in revenues for the quarter against mean analyst estimates of $222M, up 20% y/y. Pre-tax profit of $108.5M was up 22% y/y.”  Was this an extraordinary earnings report and significantly improved over prior quarters?   I don’t profess to understand (nor do I really care) why the move took place at this time.  But I do believe that others who do understand the technology and care about the company’s financial performance (aka, “the Herd”) have been accumulating the stock for the past six months. That patience was rewarded by a 12-14% gain over the past two sessions.

February 3rd, 2012

Launching The Next Tech Bull Market

The big news today is that the Tech sector, as represented by the Nasdaq Composite Index, crossed into territory it hasn’t seen for more than 11 years (chart below is as of noon; actual close was 2905.66).  What this means is that the average Tech stock has surpassed the previous high set before the market’s collapse in the Financial Crisis Crash of 2007-09; new highs are breaking out in many tech stocks.

With the market measured in terms of my preferred benchmark, the S&P 500 Index) having risen by more than 22% since the October low, it’s probably a great time to ask the following two questions:

  1. What does “market timing” mean (or more correctly, what do I mean when I use the term “market timing?”) and
  2. With the market having gone up so far, it isn’t the time to jump in but rather the time to take profits and exit?

I’m not sure there are any “correct” answers to these questions …. and don’t let anyone who gives you an answer tell you that it is the correct one ….. there are only opinions.  So what I’m about to offer is my opinion and the discipline I intend to follow as hopefully the market enters into its next bullish phase.

To me, “market timing” means catching the beginning of a big wave and staying on until the end.  The most fun (read “fastest, easiest gains”) is in the earliest part of the ride; the hardest, roughest part is towards the end.  Earnings are multiples higher than they were in 2000 so, with the average tech stock now reaching heights it hasn’t seen in over a decade, I’d say this is the beginning of that ride.

That’s not to say that this ride won’t hit some bumps along the way.  There probably will be a retracement back to that resistance trendline at the 2007 high sometime over the next year in the form of a “buyers’ remorse correction” as many will second guess the advance in the light of some bad news (we can’t predict what that bad news might be but the “Talking Heads” in the business news media will create a story and claim that it’s the cause).  But that, too, will pass and the market of tech stocks will continue advancing.

Within the realm of possibility is seeing the Nasdaq Composite nearly double over the next 3-4 years and test its all-time high of 5132.32 made in March 2000.  It will take determination and iron nerves but it could also be extremely rewarding if you pick and stick with the right tech stocks and, if you make a mistake, quickly cut your losses.

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December 13th, 2011

Revisiting Semiconductor Industry and Stocks

There’s one industry group that stands taller than the rest in the amount of frustration and tears it’s brought to investors’ eyes over the last ten years.  Many thought the industry would recover after the excesses of the Tech Bubble was wrung out of those stocks with the Crash of 2000-2003.  Alas, the group has failed time and again in its attempt to climb above a wall of resistance.  Only a handful of individual members of the group have seen their stock come close, let alone surmount, the highs set in 1999 and 2000.  But hope springs eternal.  When the market regains its strength, this groups will make another attempt to break through the wall and, perhaps, this time successfully move out of the range.

Last May (see:What’s Happening to Semiconductor Stocks), I wrote:

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

 

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

That was the correct decision for many reasons.  The Semiconductor Group was able to march up to the target but then its struggle turned out to also coincide with the European debt crisis and the impact that had on our markets.  Here’s a more recent long-term view of the SMH (Semiconductor Holders etf):

SMH (Semiconductor Holders) 12/13/11

Looking at SMH can be a bit deceiving because the charts of each of the 17 stocks comprising the eft look so dramatically different.  Yet there are some similarities.  The most common is that all are close to another attempt at changing the prevailing descending trend.  One example is TXN (Texas Instruments):

TXN 12/13/11

TXN (Texas Instruments) 12/13/11

Another is BRCM (Broadcom):

BRCM (Broadcom) 12/13/11

A third is INTC (Intel):

INTC (Intel) 12/13/11

We are all short-term traders and these are all long-term views but …… if and when the semiconductor industry is able to cross above its major resistance level (if we live that long) then they should provide years of solid growth and capital gains.

May 20th, 2011

What’s Happening to Semiconductor Stocks (SMH)?

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

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

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

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

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

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

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

January 5th, 2011

Beware, Rotation Ahead

The market is clearly moving into the Mark-up from the Accumulation phase of its life cycle. Stocks that have been depressed or dormant for several years are starting to stir. If you’re one of those investors who has been hiding in fixed income or cash and have watch the market advancing inexorably are now probably looking to put some of that money to work in equities to take advantage of the next leg up.

The question you’re asking yourself is “What to buy?” Is it too late to buy stocks where the big money herd has already been, the stocks that have already appreciated 70%, 100% or even 200% over the past several months? Should you instead look in new pastures, stocks that are just now breaking out of well-formed secondary base patterns?

As always, the question you should be asking instead should be which stocks have the greatest potential for gain with the lowest amount of risk? Take, for example, these two stocks, RVBD (Riverbed Technologies) and JEC (Jacobs Engineering):

  • RVBD
  • JEC

RVBD is on everyone’s list of hot stocks and it’s appreciated 658% since the March 9, 2009 bottom. JEC has done literally “bupkas”; ever since its 70% decline in 2008 during the Financial Crisis Crash it’s been constructing (no pun intended) a symmetrical triangle base.

JEC isn’t the only stock still stuck in reversal patterns or secondary bases (extended 9-12 month consolidation patterns following significant moves higher). Over the past several weeks, I’ve been going through close to 2500 charts and found nearly 500 having similar characteristics. Alerting you to the Steels on December 12, I wrote:

“The market accounts for 50% of a stock’s move and industry group for another 30%. The steels are one of those groups where the stocks of industry members move pretty much in lockstep. With a strong market anticipated for 2011 and the group being one of those (along with financials mentioned earlier) that is beginning to move out of a multi-year long consolidation, it may be time to start nibbling at these stocks.”

This is what Wall Street means when they say “stock rotation”, when after running up a group of stocks (this time they included: industrial, rare and precious metals; technology, software and semiconductor; telecom; oil & gas, coal and other energy) the big money herd, now needs to find new, less risky, less inflated stocks to roll their billions into.

You won’t even notice as stock rotation takes place but one day you’ll wake up and notice that those names of yesterday will be mentioned more in terms of their declines than their increases and CEO’s in different industries will be the ones interviewed on TV.There are two keys to successful investing: 1) time the market (move to the sidelines when the market is in a free fall) and 2) set triggers to enable you to climb on early when the herd is rotating out of one set of groups into other.

It’s easy to rationalize and say that you’re going to go with a proven “winner” but that isn’t always the right move but one of my sell rules for reducing risk is to “Reduce exposure to an industry group if it falls out of favor.” It looks like that time may soon be approaching.

December 5th, 2010

Hold or Sell: A Nice Problem to Have

A few weeks ago, in “My ‘Sell Rules’ Discipline“, I very confidently stated that

Stocks with momentum that have appreciated substantially will tend to continue moving up. Stock retreats brought on by market consolidations may actually be an excellent time to the position size of winning stocks. In short, decisions to sell stocks should be the exception rather than the rule…”

What I didn’t expect was that I’d be faced with the quandary of whether or not to sell a strong momentum stock so soon. But the strong market over the past several weeks have placed several recently purchased stocks in exactly that situation.

As subscribers to my Instant Alerts know, as of Friday, 85% of the 85 stocks of the stocks in my portfolio show gains since their purchase and 75% have appreciated more than the S&P 500 since their acquisition.

The reason I bought most of these stocks was: 1) the market was clearly approaching an “all-in” signal and 2) these stocks were trapped by “New All-Time High” or “Stocks on the Move” scans. They were breaking across long-term resistance trendlines with many moving into all-time new high territory. Several have had stellar moves in a short time:

Take CEVA as an example (click on image to enlarge):

CEVA has been like a rocket since crossing above its resistance trendline into all-time new high territory gaining 69% while the S&P 500 has risen 12%. According to my “Sell Rules”, its sale would be dictated by a market correction, abandonment of the industry group by the “herd” or some event endemic to CEVA itself …. something other than the fact of its astronomical rise.

Some could argue that I should have avoided being “piggy” and sold all or a portion of the stock on October 25 at a 25% or November 5 at a 50% gain; now at 69%, continuing to hold it would clearly be suicidal.

How about ICO? After purchasing it on August 5 at 5.04, a sale on October 12 would have netted nearly 20% or on November 19 a clean 40% gain. Continuing to hold it with a 59% gain would again be no less than marching off to the slaughter house.

One technical “rule of thumb” for identifying price objectives is to place the breakout level (neckline, resistance trendline, etc.) at roughly the midpoint between the trough and a peak. In CEVA’s case, with a trough at around 5.75 (measured from the March 2009 lows) and the breakout trendline at 12.75, the price objective could be around 28.25 (12.75/5.75 x 12.75 = 28.25); for ICO, the price objective would be around 12.5 (5/2 x 5). Of course, the tough part is picking the trough and breakout points that’s why I prefer broader “zones” instead.

Am I acting foolish? What would you do? If you had sold, what would you have done with the proceeds? If you sold Monday (all or a half), what would you do with the money? I think what I’m going to do is go back to the charts and come up with some price targets …. assuming the market continues advancing into 2011.

July 7th, 2009

But Which Semiconductor Stocks?

When the market’s trend turns back up again, which industry group will lead? Well, if you read or hear many of the “talking heads”, the near unanimous, uproarious answer seems to center on tech and, more specifically, the semiconductor industry.

Most of us who’ve been in the market for a while know that the industry’s performance has been anything by lackluster since the Tech Bubble Crash of 2000-2003. For example, INTC (Intel), one of the icon of that period, is still just 25% of its value nine years ago; the same for TXN (Texas Instruments; BRCM (Broadcom) is only 14% of its value then.

With each recovery since – in 2003 and 2005 and, now, 2009 – the hope lands again on the semiconductor industry. But how has the sector recently performed history. One way to measure their performance is to look at the industries’ ranking among the 197 IBD Industry Groups:

  • Semiconductor-Equipment
  • Semiconductor-Manufacturing
  • Semiconductor-Equipment

What these graphs show the performance of the three industries relative all the others. What you see is that the groups remained at the top for only a few months before other groups started displacing them in their top ranking. But if you were to look at the charts of individual stocks, you’d see that most have much repair work left. There are over 170 stocks in the three groups combined. So which look most likely to deliver extended moves and significant percentage appreciation. There’s many to pick from but here are a few that I’d take a flier on:

  • VSEA (Varian Semi)
  • LRCX (Lam Research)
  • FORM (Formfactor)
  • ASMI (ASM International)
  • NVDA (NVDIA)
  • ASML (ASML)
  • TRID (Trident)
  • DSPG (Dsp Group)
  • MU (Micron)

Only my humble opinion but these are the stocks I’m going to be focusing on when the next upleg begins.