March 19th, 2012

Would I buy the stock today if I didn’t own it?

I can’t believe it’s been two weeks since my last post.  Please accept my apologies.  I’ve been doing exactly what I said I would do in that March 2nd post, I’ve been “shooting fish in a barrel”.  And for the time being, I believe my fishing respite is coming to a close.

The market crossed above April’s high and is slowly climbing to what might be the next resistance at approximately 1435-1440, or a mere 2.5% above Friday’s close.  Last week, the market ended 2.43% higher for the week so the next resistance may be reached by the end of this coming week.

Why could 1435-1440 be the next resistance area?  Not because so many others are talking about it (and they may because they look at the same charts) but because that’s approximately the level of the higher of two alternative necklines of the 2007-2008 reversal top of the 2007-2009 Financial Crisis Crash.  The lower is where last year’s correction began and the extension of the upper neckline is where the market is heading next.

It would be nice to think that once the market recovers a trend will continue unabated for an extended time.  Unfortunately and disappointingly, that’s not the way market’s work.  The market has risen 16.49% since December 16 and needs to digest this extended move.

I’m guessing that the market was recovering from the 2007-2009 Financial Crisis Crash until the European Debt crisis and the Congressional Federal budget stalemate last year stopped it in its tracks.  Even though we will soon enter a consolidation there should be plenty of further room on the upside before a major correction along the lines of last year’s.  Too many stocks haven’t yet fully participated in the unbelievably beautiful, stealth bull market that’s occurred since the beginning of the year.  For example, even though many of the banks and other financial stocks have led the market higher so far this year, most are still just now crossing the necklines in their chart patterns indicating that there should be another an equal amount of appreciate left in their move.

The challenge up to now has been to put money back to work without severely increasing risk.  The next several weeks will present a different sort of challenge: determining which stocks you own are 1) consolidating previous gains, 2) late bloomers and will begin their move after the market correction or 3) will be forever doomed and should be sold.  Here are examples of some that I’m evaluating:

  • BR: I recently added this stock on the expectation that a strong market will help it cross above its long-term resistance into all-time new high territory.  Was I premature by not waiting for that cross?  I didn’t follow a discipline of buying only after a breakout and now wonder whether I will soon pay the price of that violation.
  • EMN: Purchased the stock in the hope that the “buyers’ remorse” correction had ended and it was able to realize the potential of its ability to cross into all-time new high territory.  Should I patiently wait for that realization or should the stock be abandoned while I can exit with a small profit.
  • EXPE: Another stock I purchased on the expectation that a strong market will help it cross above a long-term resistance level.  But now a market consolidates will probably hinder the stock’s ability to cross above the upper boundary of the ascending channel and the long-term resistance level.  Wait it out or sell?  That is the question.

I’ve always found that the simplest way of deciding whether to hold on to a stock is thinking the mirror image of the question: “Would I buy the stock today if I didn’t own it?

March 2nd, 2012

Stock Picking Now Feels Like Shooting Fish in a Barrel – Chapter 2

We hear a lot today about the individual investor being frightened away from the stock market.  We hear that the young, those who face the challenge of having to replace social security for their retirement have no interest in owning stocks.  Many today believe that owning stocks is risky, difficult and is nothing more than gambling.

However, the performance of the market and of individual stocks since the beginning of the year should have been an excellent testament to exactly the opposite.  Over the past several of months, I often feel as I did on July 23, 2009 when I wrote Stock Picking Now Feels Like Shooting Fish in a Barrel.  You should click on the link and read the piece but, for you who are too lazy, here are some choice quotations from it:

“This is a great time to be a stock picker! You don’t hear many say this these days but it’s exactly the way I feel. The market and economy felt like they were going you know where in a hand basket on March 9. But now that seems so long ago and with the vantage of the slow, 10-month market turnaround ….. picking stocks feels almost as easy as shooting fish in a barrel …… It’s not often that you can start with a clean slate (i.e., essentially a 100% cash position) …. we have little garbage to clean out and now have the pleasant task of finding new seeds to plant ….. Many stocks have charts that closely reflect the market’s bottom reversal pattern….”

The technique I described there was the “Stocks on the Move” scan; these days I run daily and it always delivers a long list of excellent candidates.  As I wrote in 2009, the scan parameters

“Sounds complex but the results filtered out with 135 amazing stocks.  I don’t mind saying I have a hard time deciding which of these 135 I’m going to add to my portfolio but I would feel comfortable and sleep well with nearly any of them (with the caveat that the market remains constructive by crossing above the neckline by Labor Day, as I expect it will). “

I present charts of the following stocks as examples in that July 22, 2009 post.  Note that by that year-end, the four stocks were up an average of 35% (the market had risen 16.88% of the period) and up over 100% by the following year-end (market up 31.82%):

As members to Instant Alerts know, I’ve bought I’ve bought 60 stocks for my portfolio since October 24, 2011 and today 75% of them show gains (four of over 20%) while I’m confident the remaining 25% will soon also show profits.

I don’t intend to boast; I mention this only to prove the point about how easy it is to find great stock to buy in at times like these.  If you buy stocks at the beginning of a bull run and are patient enough to ride them to the end of that wave then it should be relatively easy to generate some huge gains.  On the other hand,  it almost doesn’t matter what stock you buy or how good it’s chart appears to be, you’re facing significant risks and the probability of only small rewards when the trade is near the end of a market life cycle,.

In 2009, the Market Momentum Meter had turned Bull/Green on June 24, 2009, three weeks prior to the above post and the tool I use to time the market (the relative positions of four moving averages plus the Index itself as described in Market Momentum Meter) turned Bull/Green came on November 18, 2009.  We might again be at a similar inflection point, the beginning of a new market life cycle, because  Momentum Meter turned Bull/Green on January 31, 2012 and the moving averages are only 45-60 days away from a perfect bullish alignment.

Finding stocks to buy again feels like a bounty or riches, like shooting fish in a barrel.   The “Stocks on the Move” scan is again spitting out up to 200 stocks worthy of purchase (most of my 60 trades came from that scan).  As was true in 2009, many of those stocks presented classical bullish chart patterns or potential break out situations (click on image to enlarge) including:

  • ISRG on 11/3/11
  • SCSS on 1/27/12
  • EQIX on 2/2/12

At time like these, the challenge isn’t in separating the winners from losers, it’s in putting money to work quickly enough to take advantage of the market momentum move.

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February 24th, 2012

Wall Street = Lottery Recently?

The stock market always seems like it should be easy when “Monday morning quarterbacking”, when we look at what we could have, should have, would have done if we only could have seen the charts as we see them now in retrospect.  It’s always frustrating and disconcerting to see the opportunities slip by if only we had acted when we were afraid to act.  A perfect example is what happened since the market hit bottom after its 17.27%, 20-day mini-crash that began on July 8 and ended on August 7.

We continue to hear that the market is up a whopping 8.64% so far this year, an advance that’s respectable by most standards given the short period of time it took to log.  Add to this year’s huge move, add the advance from August 7 to last year-end and you get a total move of 21.8%.  Even more impressive was the 27.39% move in the Russell 2000 Index.

However, as I scroll through my charts, what stands out the most is the larger of stocks that have achieved huge run-ups since last summer.  Although 25% of stocks experienced declines, 42% had gains of 30% or more.  When you look at some of these charts, you can’t help but think “Bubble?”  Here are a few examples (click on symbol for chart):

  • BVSN (Broadvision): 265.10% – Internet Software
  • CIE (Cobalt Intl Energy): 232.46% – Independent O&G
  • PATK (Patrick Industries): 221.43% – Lumber, Wood Products
  • ACAT (Arctic Cat): 199.10% – Recreational Vehicles
  • KTCC (Key Tronics): 167.00% – Computer Peripherals
  • LF (Leapfrog Ent): 154.76 – Toys and Games

Ah! If we only had the guts to put it all on red or black or knew which number to pick or which team to bet on.  But we don’t need to.  It seems like the Street has been like the lottery or Las Vegas for the past several months and all we needed to do was to have the nerve to put some money into the market at the bottom last August and we would have felt like we were either extremely lucky or real geniuses.

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February 17th, 2012

The Gestation and Rebirth of “Buy and Hold”

As January ended, I reiterated a hypothesis that the market was following the script written at the end of the 1970′s secular bear market by writing in That Old 1978-82 Analog Again,

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.  I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

Compare the two secular bear markets, note the similarity and draw your own conclusions (click on image to enlarge):

  • 1969-1980
  • 1999-2012

Combining the two charts in sequence produces the now familiar view:

For the past 5-10 years we’ve been listening to the mantra “Buy and Hold is Dead”.  Just do a search on the term and you see books, videos, TV clips, articles and blog posts …. I’ve probably even wrote it here several times over the past 6 years of this blog’s existence.  Not to be just a contrarian but because I believe it might be true, I now offer a heresy.  If we are witnessing the death of the current secular bear market might we not also be seeing the rebirth of buy and hold?

If the market over the next several quarter into early 2013 is laying the groundwork for a new bull market might it not be the right time to load up on stocks with great growth potential that you’ll want to hold for several years through several corrections?  It begins not with the search for specific names but with a reorientation of mindset to accept the possibility that the market can and will exit the secular bear market by crossing above the previous highs and finally move into uncharted waters.

Let me know if I’m being a cock-eyed optimist or that it might actually turn out to be a plausible scenario.

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February 9th, 2012

Will the Market Soon Cross into All-time New-High Territory?

There’s no question about it, I’m definitely in the minority.  First I wrote a piece entitled “KISS in Market Timing Too” in which I compared my approach to a complex algorithm developed by Ciovacco Capital Management called the Bull Market Sustainability Index (BMSI).

I followed that up with a piece yesterday entitled Market Momentum Turning, But Will It Accelerate? in which I see each of the four moving averages that I use in my Market Momentum Meter market timing tool having turned up and soon approaching a perfect bullish alignment (50-dma>100-dma>200-dma>300-dma).

Now I see something written by Ray Barros in Green Faucet entitled “S&P Nearing A Top?” in which he lists the following six indicators that have convinced him that the market is just one step like the failure of Greece debt negotiations away from collapsing into a bear market. Those six technical indicators are:

  • Price – Structure: The 12-Month Swing and 13-week swing show we are in a sell zone. Figure 3 shows that since the Dec 2, 2011 that the up move has been on declining volume and range. In this context this is bearish.
  • Time: Kress Cycles suggest we are in a window when a top is likely.
  • Momentum: Figure 4 shows that this up move has been on declining momentum.
  • Sentiment: The sentiment indicators I use suggest the S&P is skewed to the upside.
  • Normalised Volume: We saw a sell setup with ‘below normal range’ and ‘normal volume’.
  • PoMo: For me, this indicator generated a sell signal today.

He even includes charts depicting each of the above as supporting evidence like the one below:

However, I looked at those charts and what struck me was that: 1) they were so complicated and there was so much to digest that I couldn’t possibly make heads or tails of them and 2) I wondered what those signals might indicate if we hadn’t been in a secular bear market for the past 11 years.

The answer to his question of whether the market is approaching a top is definitely yes!  I have little doubt that the market will approach the previous all-time high of 1576 sometime this year or next.  The correct question to ask is will the market soon scale to new heights and cross into all-time new-high territory?”  Since my Market Momentum Meter is turning bullish at these loft levels, I hope the answer is yes and I think the answer will be yes.

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February 8th, 2012

Market Momentum Turning, But Will It Accelerate?

Many decry the lack of volume, conviction on the part of most individual investors, the lack of excitement about a market that just doesn’t seem to want to turn lower but instead inexorably continues to move higher.  Beneath the surface and behind the scenes, however, something is happening.  Many aren’t aware of it because of their focus always on today’s “Breaking News”, earnings reports or press releases.  What most don’t see is the change that’s taking place in the form of a slow turnaround in the trend of market momentum as measured by the moving averages.

In a piece entitled “Sweet Dreams” way back on October 14, 2010, I wrote:

…… have you taken a look recently at how the four moving averages (50- ,100- ,200- and 300-day) are converging as they were all trying to squeeze through the neck of a bottle? (click on image to enlarge)

First, it’s important to note that sometime next week, the dreaded “Death Cross” of the 50-dma crossing under the 200-dma that we were so fearful of at the beginning of July will be reversed and, by definition, will become the “Golden Cross”.

Also note that the four moving averages are transforming themselves into a bullish alignment so long as the Index itself remains above them all for the next month or so. That’s pretty monumental because it is a solid confirmation that a bull market is in place.

A few days before I’d written this piece, Europe’s Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF); six months later (May 2011), our stock market was 16% higher.

But the situation in Europe appeared to continue deteriorating. It became evident then that due to its severe economic crisis, Greece’s tax revenues were lower than expected making it even harder for it to meet its fiscal goals. Following the findings of a bilateral EU-IMF audit in June, further austerity measures were called for while Standard and Poor’s downgraded Greece’s sovereign debt rating to CCC, the lowest in the world.  Simultaneously, our stock market seemed to hit a wall; it cratered in August 2011.

The market now seems to be again trying to squeeze through the neck of that same bottle.  Last week, the Black Cross again turned back to Gold and  all four moving averages finally turned up this week.  Within a month or six weeks, the four moving averages will right themselves and we’ll see them in a perfect bullish alignment again.  Note the similarity between the 2010 above and what it looks like today:

I wrote to my members at the end of January that

“Going back 50 years, there haven’t been many periods when this convergence [of moving averages] has existed outside of market turns and that’s why I believe the market will soon begin trending higher. Obviously my anticipation isn’t based on an astute distillation and analysis of domestic or international economic and financial data. This prognosis is based on my read of the history of market psychology and behavior.”

The convergence continues to unfold.  Psychology is changing to match the more positive economic news.  We have begun adding to our positions with focus on select Industry Groups.  If there won’t be another surprise to hit us from left field (not intended as a reference to the elections this November) then we should continue putting cash to work as momentum begins really accelerating.

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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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January 25th, 2012

“The Great Convergence”

In last week’s Recap Report recently sent to subscribers, I wrote and included the following chart:

“….. at the risk of being labelled melodramatic …. I see “The Great Convergence” coming to a head and finally getting resolved with the 18-month struggle between bulls and bears with (I hope it’s not just wishful thinking but an actuality) the bulls finally gaining the upper hand and finally being able to break into new higher ground.”

After today’s close and after closing higher for 20 of the last 23 trading days, the market is now up 10.01% since December 19.  Even more important is to note that today’s close was at 1326.06, almost exactly the level many chartists have touted as the breakout point that confirms an exit from this summer’s bear market and the continuation of last year’s bull market run off the lows.

It should also be noted that it’s almost exactly where the descending trendline connecting the 2007 and 2011 peaks is today.  However, rather than thinking in terms of points (e.g., 1325 or 1326) we need to think of a zone.  Every single trader doesn’t simultaneously decide to buy or sell which in turn causes a reversal at a single point.  Furthermore, the Index is composed of 500 different stocks in every economic sector and each of these stocks will have their own underlying market dynamics.  Market psychology does change when the market hits various levels but a change of psychology happens over time.

What the above chart indicates is a change in market psychology that’s been on-going since the bottom of the Financial Crisis Crash (see “Revisiting Housing and Banking With a New Ending” of a few days ago).  The ascending trendline since the bottom (higher lows) and the descending trendline from the pre-crash peak (lower highs) results in this “Great Convergence”.  The best momentum indicator (in my book) of moving averages across multiple time horizons are turning constructive adding to the conviction that a clear-cut signal to put, as they say in Wall Street, “risk back on”.

I believe there needs to be a 4-6% consolidation of this 10%, 23-day run and we’re going to look at it as a buying opportunity.  But if the market continues to zoom ahead another 2-3% without that correction, then it’s “damn the torpedoes, full speed ahead.”

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January 24th, 2012

The Outlook for FXI and Chinese Stocks

From the EconomicTimes of India:

“China’s economy is showing signs of slowing, with foreign investment falling for the second straight month in December and home prices dropping in most cities, the government said Wednesday.

The latest indicators came a day after data showed the economy expanded 9.2 per cent last year, narrowing from 10.4 per cent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.”

From USAToday:

“China’s gross domestic product grew at its slowest pace in more than two years in the fourth quarter, and the worst may be yet to come, as weak exports and government tightening ripple through the world’s second-largest economy.

In the final three months of 2011, China’s GDP — the total value of goods and services — increased 8.9% from a year earlier. That was a fourth-consecutive quarter of slowing growth and the slowest expansion since the second quarter of 2009, when the economy grew 8.2%, the Chinese government said Tuesday.

For all of 2011, China’s economy expanded 9.2%, compared with 10.4% the year before.”

And finally, from The Guardian in the U.K.

“China’s economy is also “unstable, unco-ordinated and ultimately unsustainable”, a verdict delivered not by some capitalist running dog on a Canary Wharf trading floor, but by none other than premier Wen Jiabao. Nevertheless, any appraisal of China’s prospects must begin by admitting that the Middle Kingdom is the most astonishing development success story in the world today, and that its three decades of 9%-plus growth have been achieved in the face of widespread scepticism from foreign observers.”<

When we look at a chart of FXI, the ETF of Chinese stocks, we see a classic inverted head-and-shoulder or ascending triangle or any of a number of bottom reversals:

From the above chart it appears that the Chinese market would rebound in sync with the US market ….  should that come to pass.  The extent of that rebound, however, is bound by different constraints than the US market when viewed from a longer-term term perspective:

This short-term inverted head-and-shoulder may signal the beginning of a Chinese market recovery but a complete reversal of its long-term downtrend would also require a cross above a long-term descending trendline stretching back to the heydays of 2007 followed by a cross above the top boundary of what now looks potentially like a multi-year ascending triangle at 46-47.

The near-term inverted head-and-shoulders supports a move to 47 but moves above that need more umph and momentum to overcome their local economic and international trade challenges.

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January 18th, 2012

The Challenge of Assembling a Watchlist

Since the market looks like it’s firming (my opinion and, yes, I’m aware that many believe the market is actually topping out and will soon be making its final leg down to new lows), now’s a good time to begin assembling your watchlist of stocks that may be ripe for the picking as soon as a bull market begins unequivocally.  I’ve assembled four such Watchlists for members of Instant Alerts, each based on one of the following four scans:

  • 5-yr Highs(scan run on December 23): a truly momentum-based scan that produced a list of 51 stocks that crossed into all-time new-high territory .  The premise is that a stock that has made “all-time new highs” has a low risk of reversing course and is likely to continue making new highs.
  • Relative Strength (scan run on December 30): another momentum-based scan that produced 22 stocks that had a the top 10% relative strength vs. the S&P over the past year plus were in the top 10% in shares traded over the previous five days.
  • “Stocks on the Move (scan run on January 7): a scan that produced 53 stocks based on a combination of both fundamental and technical indicators as follows:
    • Price > $15
    • Price % change today > top 25%
    • Relative Strength Indicator (RSI) > top 50%
    • “Moneystream” Surge for past week > top 50%
    • EPS % change for past 4 qtrs > top 50%
    • Volume Surge today > top 50%
  • Momentum (scan run on January 13): another stab at a combined fundamental and technical scan that produced 128 stocks
    • Earnings Growth Rate over 5-years – top 25%
    • Sales Growth Rate over 5-years – top 50%
    • P/E Ratio – top 50%
    • Price > $10
    • Volume ($) for the day – top 50%
    • Relative Strength vs. S&P 500 past year – top 50%

You would expect that the same names would appear on multiple lists because the criteria overlapped to some extent. Interestingly, that didn’t happen.  While 254 stocks appeared on all these lists, there were 237 unique stocks …. only 17 names appeared multiple times.  In other words, each scan produced pretty much different names.

To see how this list compared to stocks that have performed well, I produced another scan: stocks whose four moving averages (50-, 100-, 200- and 300-dma’s) were in a perfectly bullish alignment from the fastest on top to the slowest at the bottom.  Out of 5100 stocks,  436 met this criteria.

You would expect that many if not all the stocks in the previous scans would be on this broader list of stocks with favorable price momentum but this wasn’t the case:

  • Only 89 of the 237 stocks in the previous scans, or 37% had bullish price trends as indicated by their moving averages.
  • Fully 80%, or 347, of the 436 stocks with bullish price trends weren’t caught in the previous technical/fundamental scans.

There actually was little correlation or overlap between the different scans.  It’s actually very difficult to narrow the field down:

The conclusions I draw from these statistics are that:

  • scans are a good place to begin but there’s no substitute for good judgmental chart reading and
  • good market timing always trumps stock selection.

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