October 18th, 2012

Seeking Greener Grass

Something we learned long ago is that the big money pro’s are like sheep, they like to move in herds (hence the name of my recently published book, Run with the Herd).  They’ll move together bidding up the price of stocks in select industries until they reach unsustainable heights and then abandon them to move their money into areas that they previously ignored, starting the process over again.

To some extent, these money flows are truly based on strong fundamental factors but, at other times, it is a function of fashion and effective sales.  One large investor comes up with a believable theme and others buy into the story.   They begin pushing the stocks of companies up and down that supply chain higher.  The sales pitch story is told over and over so often that it soon most begins to resemble generally accepted truth that “goes without saying.”

Our voices in either agreeing with the herd or loudly shouting the absence of the kings clothing is drowned out and all we can do is run with the herd and make sure we get out of the way when they decide to abandon those stocks.  Demand for the shares outstrips supply in a continuously reinforced loop.  Until, that is, someone wakes up to the heights of those prices causing a mass and rapid exit from the stocks. That was true of the ethanol stocks, solar energy, Chinese internet and emerging markets stocks of the past.  I’m sure the future will not be much different than it has been in the past.

The market’s advance over the past twelve months has been driven mostly by the herd’s purchase of the beaten down stocks of construction and homebuilding, and bank and financial stocks. The S&P 500 advanced 21.4% since last October 17 but, during that time, only 209 stocks, or 41.8% have advanced as much (4 stocks were added during the past twelve months).  Of those 211 stocks, a disproportionate number were in the sectors most impacted during the previous  Crash, namely Financial and Banks and Construction and Homebuilding:

Ah, if we only had had the courage to buy those “falling knives” a year ago we would be know heading to a Caribbean island rather than getting our snow boots out of the closet or trying to find the tire chains in the garage.

Over the next twelve months, it’s likely that the herd will begin abandoning the winners of the past year and begin putting together equally compelling, timely stories about other industry in which the stocks are still at depressed prices, not having yet recovered.  In my sifting through the rubble of the past five year’s worth of markets, I’ve identified the following areas and stocks that were devastated during the housing/financial crisis crash of 2007-09 but haven’t yet been dramatically bid up (I’ve recently wrote about some of these here before but it’s worth repeating):

  • Oil and Gas (DVN, DNR, CHK, MUR, VLO, NE)
  • Coal (BTU, CNX)
  • Steel and Materials (A, X, NUE, ANR, TIE)
  • Defense (BA, GD)
  • Electric Utilities (ETR, AES, FE, POM, PPL)

These are all S&P 500 stocks.  The market’s moving higher will depend on whether stocks like these can find support.

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December 21st, 2010

Racing Against The Hedge Funds

I was interested to read that hedge funds have found the past year as trying as I did. The headline on Marketwatch.com was In risk-on, risk-off year, hedge funds come up short” and the lead paragraph stated that

“Several of the largest hedge funds lagged the return on equities and bonds this year as big market swings combined with massive monetary stimulus to disrupt trading strategies.?”

An index of managers compiled by Chicago-based Hedge Fund Research Inc. rose 7.11% this year, through the end of November and early December as compared with a 7.88% gain in the S&P 500 Index. Those hedge funds that only invest in equities returned even less at 6.89%. The article went on to point out the returns up to the beginning of December for some of the larger and better-known all equity head funds:

  • Viking Global Equities was up less than 3%
  • Paulson & Co.’s Advantage fund climbed 1.8% this year
  • Paulson & Co.’s Advantage Plus fund, which uses a small amount of leverage, gained 3.68%.
  • Brevan Howard Fund, a giant global macro hedge fund, returned 1%.
  • Moore Global, another global macro fund, was up 2.5%
  • King Street Capital, a big credit-focused fund, advanced less than 5%.
  • Och-Ziff Capital Management’s Master fund,gained 7.63%.
  • Oculus fund was up just over 6%.
  • Tudor BVI Global advanced 5.4%.
  • York Investment was up 5.8%.

One of the factors contributing to the less than stellar performance of many hedge funds this year were this year’s violent market swings. However, this news came as a relief to me because my portfolio has outperformed the market and, apparently all these highly compensated hedge funds.

The following chart shows two indexes: the S&P 500 in red and the model portfolio my subscribers see in my Instant Alerts service:

Both indexes start at 1.0 with the launch of the service last March 17. As of last Friday (I issue a weekly Recap Report each Sunday), the portfolio was up 8.8% as compared with a 7.3% increase in the S&P 500. It was tough going until just after Labor Day when I reversed direction and started buying. You read about it here on September 2, when I wrote:

“I know I’m going to be criticized yet again for being too optimistic or pallyannaish but I’m looking forward to the possibility …. now perhaps 60/40% …. that the market also will hit and cross above the major, long-term descending trendline that stretches all the way back to October 2007.”

And two weeks later:

“…. the market timing indicator gave an “all-in”, 100% invested signal back on September 2 with the index crossing above the 50-dma ….. I’ve struggled against skeptics …. one of my harshest critics, continually asks me to explain to her why the market should advance in the face of continued bad economic news …… The only way I can respond is to say “stay tuned, the media will tell you why something happened after it happens … and then will call it news”…… the problem isn’t knowing which stocks to buy as much as knowing how much to invest and when. There are more great stocks out there to buy (like there were in March-May 2009) than money to buy them. What is in short supply is guts to do it.”

Finally, at the end of September, when asked why I buy stocks making new highs, I wrote:

“When the stock market is moving from a trough or consolidation into an uptrend and I have cash to invest, one of my primary means of employing that cash is to buy stocks making all-time new highs.”

That’s looking backwards; the question everyone wants answers to is what the future holds. I recently pointed to several areas where I’ve bought stock:

  1. Tech stocks will probably continue to be strong in the first half. See “Inverted Head-and-Shoulder Potential on NASDAQ Composite“; the NASDAQ composite is up 12.8% since that post.
  2. There’s “The Resurrection of Financials“. Have you seen what XLF has been doing over the past several days?
  3. Finally, how about “Steels: Your Second Chance“. The five steel stocks in that post are up an average of 4.84% over three trading days and none are down.

There will be new opportunities as the New Year rolls in so stay tuned and subscribe.

December 17th, 2010

Steels: Your Second Chance

I last commented on the steel producers on April 26, 2009 and wrote:

“A look at the group members’ charts shows why members in this group appear primed to again move into market leadership positions. Nearly every one of the stock has formed one reversal pattern or another and therefore qualifies to be among those I put in my watchlist of potential breakouts.”

That should be grade a pretty good call since many of those stocks did move up nicely until the market started stalling out. By the way, the foreign steel producers continued to move higher.

But the group has been fighting against some pretty strong economic and political headwinds in the form of a slow economy here and abroad (with the exception of the emerging economies), weak dollar and European debt crisis. But those winds seem to be calming and even perhaps changing direction such that we may soon see the wind at the market’s back. And just as the economy is showing signs of slow recovery, the Steel Industry Group against looks to be perking up, the last of the commodity group to show some signs of life and potential for price appreciation.

Many of the stocks in the group look like they are about to cross above the highs set soon after that April posting; on a long-term basis, many look like they’ll attempt to move into new high territory (a horizontal line on each graph at April 24, 2009 marks the previous post so you can see the subsequent move each stock made; click on image to enlarge):

  • SCHN
  • STLD
  • AKS
  • MTL
  • GGB

I could have added several more stocks but sufficient for you to get the picture.

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.

I’ve shared with my subscribers the steel stocks I selected to add to my portfolio.

September 20th, 2009

New Place to Mine for Winners

It seems as if it were longer but only two months ago I described stock picking then being as easy as “shooting fish in a barrel” since many stocks had formed classic bottom reversal patterns. I even included a spreadsheet of 135 stocks, labeled “stocks on the move” because they met certain specific criteria (click on article above for the criteria); they looked like horses at the starting gate waiting for the bell.

Fortunately, this time I did take my own advice and did buy some for my portfolio because as a group, the stocks have increased 16.7% to their highs during the period and 13.2% to last Friday’s close. Of the 135, only 5 declined, 5o increased less than the S&P 500 but 85 went up more (click here for the updated recap). The biggest winners, if you were lucky enough to have picked them were:

What’s upsetting and distressing is that only 5 of the 135 are on the Stocks on the Move scan today. As a matter of fact, the scan produced only those 5 stocks. So even though the Index continues to move higher, it’s more and more difficult finding stocks that look attractive at this point.

So what is one supposed to do now? Should I swap out my big winners (if you were lucky enough to have bought WYNN, you’d over 60% to Friday) and put the money elsewhere? If I have some cash waiting on the sidelines, is this a good time to buy and, if so, where should I put it?

Good questions and, unfortunately, the answer isn’t so good. I’m having a hard time finding stocks where the future reward currently exceeds the attendant risk. But when I do find them, they seem to concentrate in the familiar commodity-based Industry Groups of Energy (see “Mysterious Happenings in the Oil Patch (Stocks)“), Metals, Steels, Coal and Precious Metals.

Does it have something to do with the continued weakness of the $US? Probably, since many were expecting the dollar to rebound when it touched a level that seems to have been support since the early ’90’s. It didn’t hold and the dollar continues sliding to the levels it hit in early-mid 2008:

There’s a lot of debate around which is best for the US today, a strong or a weak dollar. We’ll let other duck that out. What I’ve thought for quite some time is that about the only way out of our huge debt position in the hands of other countries is to devalue our way out. What that means is inflation, higher interest rates and higher commodity prices (when expressed in terms of $US). Having said that, some of the stocks (ETFs) where the expected rewards and risks might still be in balance include:

  • OIL
  • REA
  • XME
  • PTM
  • X
  • CENX (or AA)

Plus, of course, the precious metals complex including: SLV, GLD, UGL, DGL, GDX plus the wide range of miners.

April 26th, 2009

Steel Industry Leaders: MT, TS, AKS, NUE, SID, MTL

Every weekend, I plug the IBD Industry Rankings into my tracking spreadsheet to see which Industry Groups seem to be moving up in rank and, thereby, gaining some relative momentum. What caught my eye this week was the Steel Producers Group comprised mostly non-US manufacturers. [Full disclosure: I have a large commitment in AKS, AK Steel, a U.S. group member.]

Here’s a chart of the Industry Group’s ranking since 2005:

The chart’s shaded area represents the Bear Market which I consider having ended on March 9. The blue line is the Group’s actual ranking; the red is a 20-week moving average. The blue has now firmly crossed its 20-week MA.

A look at the group members’ charts shows why members in this group appear primed to again move into market leadership positions. Nearly every one of the stock has formed one reversal pattern or another and therefore qualifies to be among those I put in my watchlist of potential breakouts. Most formed channels (could also be considered Double Bottoms) like:

  • MT (Arcelor Mittal)
  • TS (Tenaris)
  • AKS (AK Steel)

Some formed triangles:

  • NUE (Nucor)
  • SID (Comp. Sideurgica Nacional

MTL (Mechel) even formed a near perfect inverse head-and-shoulder bottom:

Other members with great charts include: PKX, AP, SIM, CPSL, GGB and STLD.

Have I made my point? These charts aren’t just a stock chartists dream, they represent something at work that’s fundamental and common to all these stocks. It doesn’t matter what the specific chart pattern is for an individual stock, big money investors are regain confidence in the industry, absorbing whatever supply there might be and are causing these stocks to turn.

For those with short memories who can’t remember further back than the Financial Crises Bear Market, let me remind you that these stocks were leaders from 2003 to mid-2008. The group consists of 16 companies, many of which appreciated from 5- to over 10-fold during those five years. Since their 2008 peaks, most have declined more than 70-80% over the past 12 months.

There’s no quaranty they’ll be able to quickly recoup those losses and again move to new all-time high territory but if the world economy begins to rev up again, especially in those BRIC countries (there’s a term we haven’t mentioned recently), then these will soon be big movers again.