Category Archives: Momentum

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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January 9th, 2012

Golden Crosses are Necessary but Insufficient

An event occurred last week that was pretty much under most investors’ radar screen; it was a Golden Cross in the DJ-30 Index.  If you don’t know what Golden and Black Crosses are, you should take a look at this excellent description from Bloomberg:


The moving averages of the S&P 500 Index haven’t yet formed that Gold Cross and won’t for another 15-20 trading days based on the recent rate at which the 50-dma is ascending.

Having said that, a Golden Cross is a necessary but insufficient market timing indicator.  As I wrote on November 23, 2010 in Listen to One Opinion or the Sound of the Thundering Herd, when some saw the signs that the market was approaching a reversal (John Murphy of StockCharts.com wrote “A decisive close below the 20-day line would signal a deeper correction that could take it down to its 50-day average, recently at 1,164.”):

“…the balance of technical evidence is now weighing more on the side of a breakout on the upside from the 12-month trading range than there is of a new bear market.

I’ve established a new near-term target of 1320 sometime before the beginning of the “sell-in-May” escape. The projection is based on what I perceive to be continually strengthening upside momentum as measured by my moving average-based Market Momentum Meter. While Murphy is looking at 20- and 50-day moving averages, I’m focusing on the fact that the 100-dma is a day or so away from crossing back above the 200-dma.

It may sound insignificant but when that fact is combined with the facts that 1) the 50-dma long ago crossed above the 200-dma (the Golden Cross) and above the 100-dma, 2) each of the three are above the 300-dma, 3) all four moving averages are trending up and, finally, 4) the index itself remains above them all then, historically, this tends to be very bullish. Especially since the market is at the early stage of that alignment.”

Five months later, on April 28, the market was 15.5% higher and closed at 1363, not far from my target set the previous November.

As my subscribers know, the Market Momentum Meter is at an extremely critical juncture in an excruciatingly narrow range just 0.11% away from issuing a Red/Bear and 1.40% away from issuing a Green/Bull signal.

This past October, in A Bull Market Signal? I discussed the Golden Cross and wrote

”

The problem with the indicator is that it over-prescribes an “all-cash” positions, periods when investors who follow the rule are out of the market when they should actually have been fully invested.

The problem can be remedied by combining the 200-dma rule with another common indicator and moving into an all-cash position only when both selling rules simultaneously proscribe an all-cash, risk-off posture. Only when the signal of one of the rules confirms the other should you actually assume the worst.”

Don’t be miss lead anymore by the media, miss read the market yourself and miss out on the next momentum-based trading opportunity.  Learn more by clicking here or the subscribe button below.

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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, 2010

New Bull Run or Sellers’ Remorse Correction

A readers asked a very pertinent question: “Do you think time may be right for an update on MTI?” The answer is an emphatic yes, especially after today’s 3.3% gain in the S&P back up to 1060, an important level for multiple reasons.

Before translating this to the MTI, the Market Timing Indicator, let me point out what’s important for me on the charts. Last Friday, the S&P did experience a “Black Cross”, when the 50-dma crossed under the 200-dma. As I pointed out to my subscribers, not all Black Crosses are equal and this one was one was among the bearish ones. What makes it a signal to go all cash is that the moving average cross is aggravated by the fact that the Index itself was below the 300-dma. A combination of these two factors, according to 50 years of history has proven to be a time when it was more prudent for investors to be in cash than invested (click image to enlarge):

But today’s nice gain brought out all the “talking heads” asking the same question, “Does this signal the bottom?”. Doug Kass thought so and bet his impartiality and credibility last Friday (probably if he didn’t he would have lost his gig at Cramer’s TheStreet.com). I don’t think so:

  • The “Black Cross” hasn’t yet been reversed
  • The increase could be nothing more than a “seller’s remorse” correction back to the neckline/lower boundary breakout level (depending on whether you see a head+shoulder top or an ascending-widening-wedge). I was relieved that Carter Worth agreed with me on that.
  • This combination of Index and moving averages has occurred only 14 times over the past 50 years. Eight times, or 57%, it devolved into a worse situation (the 100-dma following the 50-dma and it, too, crossing under the 200-dma), 6 times the Index next crossed back above the 300-dma.
  • Even if the Index closes back above the 300-dma tomorrow, the Black Cross hasn’t been reversed and the all-cash signal remains in place. It would take a move above the descending 50-dma at around 1080-1100 for the red light to turn yellow.

Many of the talking heads were forced to find some explanation, any explanation, for the day’s strong move. There were explanations of strong Euro, weaker dollar, stronger than expected earnings reports starting next week, short covering. Right or wrong, I stuck with my discipline and was a seller into the close of today’s move up.

What I found most interesting is that many blamed computers for today’s run. While I was an early advocate of chart reading and technical analysis (I’m not going to divulge how long ago that was but, trust me, some of you were probably just in elementary school), it appears that now all the hedge funds and institutions have taught their computers how to read charts and generating huge volumes and increased volatility.

The computers are now stuck in equilibrium struggle. But once directional momentum begins, we’re going to see a quick and huge run as all the computers read the same chart patterns and start spitting out similar orders. Over the past several years those were sell orders; soon we’re going to see, I believe, a deluge of buy orders. That will be unbelievable if we’re patient and put up with the frustrating wait.

June 18th, 2010

Breakout and Crossover – Any Difference?

I’ve heard the term “break out” used with regard to the S&P 500 Index’s recent cross above the 200-day moving average and I’ve also heard the expression “cross above” or “cross over”. That got me thinking as the difference between the two terms. Are they truly interchangeable?

According to Investopedia, a breakout is (emphasis added):

“A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support.

Breakout

On the other hand, Investopedia defines a crossover as:

The point on a stock chart when a security and an indicator intersect. Crossovers are used by technical analysts to aid in forecasting the future movements in the price of a stock. In most technical analysis models, a crossover is a signal to either buy or sell.

Crossover

Crossovers do not necessarily require a price and an indicator; some of the better known crossovers only involve indicators. A couple of the best known have such notoriety they were given names like “Golden Cross” or “Death Cross” and involve the crossing of two moving averages.

As I understand, the major difference between the two, a difference that shouldn’t be passed over lightly, is that

  • a breakout is defined by a range or zone of prices where the trend of prices reversed course in the past through a shift in the balance of power between buyers and sellers brought about by a tug of war involving significant transaction volume. We assume that the battlefield where that struggled occurred (the zone or price range strewn with the carcasses marked by those past transactions) will likely again see unresolved battles continue in the future in the hopes of buyers and sellers for a different or a repeat of the same outcome.

    While the scene of some battles do sometimes change their location (i.e., sloping trendlines), I personally, discount the long-term implications and reliability of such breakouts as compared with those that take place in the same general area of previous reversals (i.e., breakthrough to new all-time highs).

  • the crossover is defined by algorithms or arithmetic calculations that define, measure or indicate, either lagging or concurrently, a momentum trend. When the current price crosses that indicator, it assumes that the prevailing momentum trend did or soon will change direction. The crossing of multiple, differently-constructed indicators implies similar outcomes.

In short, if you’re looking for a fairly reliable buy or sell timing signal, one that indicates the likely launch of a new momentum trend to different price levels, I prefer a breakout, the resolution of trading battle (so long as you identify the correct location of the next battle). If you want to see if a trend is continuing, go with cross overs.

June 1st, 2010

Market on Verge of Being Oversold

Unfortunately, nothing good seems to be on the market horizon. As a matter of fact, after ricocheting off the bottom of the 200-dma, the market seems to be in a free fall to the 300-dma at 1039.5, just 3% below today’s close of 1070.71. There’s only one silver lining for this dark picture from a technical perspective and that’s how precipitous the decline so far has actually been.

I’m encouraged by the fact that there haven’t been any crossovers among the four moving averages and they’re still in a bullish alignment (50-, 100-, 200- and finally the 300-dma) although they have begun to turn down or flatten out. I other words, the decline from the April peak has been so swift and deep as compared to the ascent leading up to it that the moving averages haven’t been able to turn down, let alone cross under each other. (click on image to enlarge)

Remember, the downside target of the ascending broadening wedge described in an earlier post is the 950 range. That also happens to be the area of the necklines for both the Tech Bubble Crash bottom in 2003 and the Financial Crises Crash bottom of 2009. It does sound too pat, neat and symmetrical for it to work out just like this but it does set up a technical support level target for this correction’s eventual destination.

Now that the Index has crossed under the 200-dma what happens next is up in the air. Over the past nearly 50 years, the index has

  • crossed back above the 200-dma 41% of the time,
  • continued to decline and crossed below the 500-dma 33% of the time and
  • waited for the 50-dma to follow and cross below the 100-dma 12% of the time (the remaining 11 outcomes, or 14%, produced single instance occurrences)

Although the lower probability outcome, I feel the next milestone will by the index crossing below the 500-dma on its way to the 950 area.

History tells us that time is more important than the steepness of the change for causing market momentum and psychology to change direction. A correction will not extend into a bear market which, in turn, will not become a crash unless the market takes long enough for the moving averages to change direction and begin to cross over themselves until their alignment turns negative. Without time, they become very oversold.

Market sentiment, like a ocean liner, doesn’t turn on a dime. It takes time for the majority of market participants to turn from being constructive about the big picture to being pessimistic. As negative as everything sounds today, the indicators don’t seem to be saying that yet.

August 18th, 2009

Did the Earth Shake Today?

What you see above is today’s minute-by-minute values of the S&P 500 Index. There’s no error; all of the decline today took place within the first 15 minutes of trading. The gap down represented less of a change in trend or momentum than an instantaneous revaluation of US stocks based on what happened in overseas markets, especially China, overnight and in the early morning.

Athough we tend to think the Index reflects the health of the market (I have often said the the market represents an average 50% of a stock’s price movement), today’s abrupt repricing of US equities in response to the action of world markets as reflected by the Index may not be telling the whole story. For example, here are the same minute-by-minute charts for some of the favorite momentum stocks in yesterday’s spreadsheet list:

  • VRX (Valeant Pharmaceuticals)
  • CRI (Carter’s Inc)
  • SXCI (SXC Health)
  • NVEC (NVE Corp)
  • CKSW (Clicksoftware)
  • CREE (Cree Inc)
  • KIRK (Kirkland’s)
  • LFT (Longtop Financial Technologies)
  • VNDA (Vanda Pharmaceitucals)

There was a dash for the exits in the first 15-30 minutes (fueled, I suspect, by the desparate and unconscionable alarmists at CNBC) but then sanity returned and many stocks recovered nicely. Was there a tectonic shift under the footings of the recovery? I don’t believe so … not yet. A couple of weeks ago (see “Difference Between Correction/Consolidation and Reversal” of August 7), I wrote:

“Today, the Index bounced up against what could potentially be the top of what we might later understand to be the traders’ remorse correction or consolidation. The market might straddle the 300-day MA like it straddled the 200-day. It could end back at 950 just about the time that a traffic jam is created as the 4 moving averages converge with the neckline. That could be around Labor Day or mid-September and could be a glorious day because it would technically mark the true beginning of the Next Bull Market…..As the bears begin playing their dirges at the death of the bull market, look to see what sort of pattern the Index is making before selling all your stocks, buckling up and reaching for air masks. This plane isn’t going down yet; I hope it won’t land for quite a while.”

Anticipating this mornings dive doesn’t make it feel any less painful. Even though the market took a beating in early morning trading, I believe it’s still tracking along the 300-day moving average heading towards that 950 convergence around Labor Day. In addition, As uncomfortable as it feels, I’m sticking to that game plan unless and until I find that the 950 support level is broken.