Stock Markets | Stock Chartist

February 7th, 2012

How Reliable Is Insider Buying as An Indicator

I don’t know whether insider buying should be considered a part of the fundamental or technical arsenal but as far as I’m concerned, it surely isn’t a very reliable indicator to use when deciding whether to buy a stock or not in a market that appears to be on the verge of breaking higher in a major way. The indicator I’m referring to is “insider buying”. SeekingAlpha just ran a piece entitled “4 Stocks With Heavy Insider Buying” and the stocks mentioned were: IEP (Icahn Enterprises), RDEA (Ardea Biosciences), HES (Hess Corp) and WEN (Wendy’s Corp). As Cramer would say, “Yes, you’re diversified!” …. but is it anything else?

According to the lead in the SeekingAlpha story,

“There can be many reasons why insiders might sell their own company’s stock: a big personal purchase like a house; cash to fund a charity; and many other reasons. Whichever the case is, insiders usually buy shares because they think the stock is a bargain and has upside potential. When mutual funds or hedge fund managers (and even everyday investors) see a lot of insider activity, it most definitely triggers a reason to take a second look at the company.”

My “stock chartist’s” view of each of the stock’s charts is the none contain sufficient evidence in the form of trend or pattern to make a compelling argument for buying any of them today. In other words, they may be great buys in the future but there are many other stocks available with better charts that are worth taking a risk on today.

IEP: “the most intriguing news is the fact that the chairman of the board reported to have bought 411,755 shares at $36.79 amounting to a total of $15,149,825. I believe this warrants a second look.” That may be true based on “insider buying” but it’s going to be a while before momentum builds sufficiently to cause the stock to break out of its 3 1/2 year horizontal symmetrical triangle. It would take a move above 41.50 and preferable 45 for a buy signal:
RDEA: “The chart shows a possible trend reversal for this stock, and perhaps best of all, a director just bought 876,828 shares at $17 amounting to a total of $14,906,076, and another director bought 426,470 at $17 amounting to $7,249,990.“ That’s a nice commitment but wouldn’t you be upset if directors lacked confidence in the firm on whose board they served and instead were dumping the shares? When you look at the chart, you see a stock that ramped up nicely after its IPO but then faltered during the financial crisis crash. It’s to early to tell whether the current pattern evolve into a buyable double-bottom?
HES: “the most intriguing is the fact that the Chairman of the Board and CEO just bought 91,250 shares at $54.79 amounting to roughly $5M.” I concur! I see little intriguing in the stock chart to warrant a purchase today.
WEN: “Recently there have been a total of nine directors buying up shares in the $4.75 – $4.87 range. Each director bought a total of 875,000 shares, a total of 7,875,000 shares amounting to roughly $37M.” Restaurant stocks have been hot lately but WEN hasn’t seemed to be able to participate. Perhaps it’s lack of participation and it’s absolutely boring chart (although filled with potential) pattern, low price and potential high volatility makes for an interesting speculative buy.

Bottom line: I’ll ignore insider buying and stick with good charts. Of the four, I’d put my money on WEN joining the rest of the Industry Group leaders.

Technorati Tags: insider buying, restaurant industry group

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:

What does “market timing” mean (or more correctly, what do I mean when I use the term “market timing?”) and
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.

Technorati Tags: market timing, tech stocks

February 1st, 2012

KISS in Market Timing Too

KISS is an acronym for the design principle articulated by Kelly Johnson, Keep it simple, Stupid! Variations include “keep it short and simple”, “keep it simple sir”, “keep it simple or be stupid”, “keep it simple and straightforward” or “keep it simple and sincere.” The KISS principle states that most systems work best if they are kept simple rather than made complex, therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.

Other forms of this maxim are “everything should be made as simple as possible, but no simpler” (Albert Einstein), and “”Simplicity is the ultimate sophistication” (Leonardo da Vinci). The principle is true whether applied to the design of an airplane, conceiving the theory of relativity or developing a market timing tool.

The following statement was made in a post today entitled “Golden Crosses Can Lead To Golden Losses“:

“While both CCM [that's Ciovacco Capital Management] market models have jumped back into bull market territory, the Bull Market Sustainability Index (BMSI) is approaching levels that are typically associated with market corrections.”

Stick a statement like that in front of me and I had to find out more about the BMSI to see how it compares with my MMM (Market Momentum Meter) which members know that it is serves as the barometer of my market timing approach and is previewed here.

About the only similarity between my MMM and the BMSI is that both are depicted on a scale that runs from Red to Green. While my is a simple 5 traffic light approach, the BMSI looks like this:

But the similarity ends there. Where the MMM uses 4 moving averages and the underlying S&P 500 Index, the BMSI is constructed with 30 different indexes as follows:

Complexity doesn’t mean precision and precision doesn’t mean accuracy. It sort of reminds me of Cramer inferring in his “are you diversified?” segment that investors are safe and can generate high returns over the long run by merely diversifying their portfolio. Aggregating a large and diverse number of indicators doesn’t necessarily give a better market timing signal than do a combination of four moving averages.

I’ve back-tested the MMM back to 1963 and am convinced that it performs well. It got me out of the market in 2007, signaled reentry back into the market in 2009 and kept me safe through the fears brought on by last summer and winter’s worst European sovereign debt and US debt downgrades and budget debates. It’s just issued a new signal indicating ….. sorry, that’s for members only.

Technorati Tags: KISS, market timing

January 30th, 2012

That Old 1978-82 Analog Again

A post on Ritholtz’s Big Picture blog reflected a conclusion I recently reluctantly needed to begin facing. Regular readers know that for over two years I have been tracking the path of the S&P 500 Index in what I call “Reversion to the Mean” (last mentioned here on November 4). Briefly, the hypothesis was that the S&P has been growing since 1938 at an average annual rate of 7.5% and that it’s volatility around that growth rate was contained in a band of 40% above and below the mean growth rate. The chart depicting that trend, updated with today’s S&P close of 1313.01.

The market’s horizontal path since the end of the Tech Bubble in 2000 appeared to me to have an uncanny resemblance to the secular bear market of the 1970′s. Consequently, I used the end of that prior secular bear market as an analog for the malaise that we’ve been suffering through for the past 11, going on 12 years and wondered where the market might wind up if it exited this time exactly like it did in 1978-82? The result was the following chart:
In November’s blog I wrote:

“…the market has been tracking fairly closely to the exit process back in the ’70′s so far. If that track continues for the near-term, we shouldn’t expect the market to approach the all-time high of 1365 until 2015 and not successfully cross above it until 2017. Let your hearts not lose hope because if it continues following the track then it could reach 3000 by 2020.”

So here we are, two months later and the market is only around 4% away from 1365. With corporate earnings reports better than anticipated, we’re now beginning to read stories about expectations for expanding multiples and higher markets. In a Bloomberg article today:

“Multiples for the benchmark gauge rose as high as 13.82 this year. Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4, according to data compiled by Bloomberg. That’s more than 30 percent above its last close. “

The following chart in Big Picture was the coup de grâce:

This is exactly the analog I’d been following for close to two years. 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.

Technorati Tags: analog, reversion to the mean, secular bear markets

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.”

Technorati Tags: bulls and bears, moving averages, trendlines

January 13th, 2012

Cement, Concrete and Aggregate Group: EXP

As subscribers know, my searches for suitable stocks to buy follow a strict process: evaluate the market through the guidance provided by the proprietary Market Momentum Meter, drill down to find the Industry Groups and, finally, zero in on those stocks with the best chart patterns.

I can’t tell you the Meter’s specific reading because that’s available exclusively to members but I can share with you that there appears to a glimmer of hope, a prospect of a slightly more positive tone after nearly a year of frustrating horizontal action. So it’s appropriate to begin looking for some of the most promising Industry Groups.

I use IBD’s Industry Groups rankings three ways:

The top ranked Industry Groups are those with the stocks currently showing the best relative strength performance.
The Industry Groups that have advanced the most over the past four months (granted, an arbitrary time horizon) to offer a preview of which might soon become the top performers in the near future.
The Industry Groups that have advanced the most above the 20-week moving average of their ranks.

The Industry Group ranked highest by IBD last Friday were 9 stocks comprising the Cement, Concrete and Aggregate Industry Group. Another fact that makes this group so enticing is that, as the graph below depicts, Friday’s highest rank put it 112 places higher than its 20 week moving average …. the greatest span of any of the 197 Groups. Plus, its rise in rank over the past 4 months was greater than any other Group. In short, this Industry Group performed better than any other when measured by these three conditions:

One typical stock in the Group is EXP (Eagle Materials), a manufacturer and distributor of gypsum wallboard and cement in northern Nevada, California, the greater Chicago area, the Rocky Mountain region and Texas:

If I were a fundamental investor, I could probably come up with any number of stories, rationales and explanations for why stocks in the group should be bought. Could it be because infrastructure spending will finally be evidenced? Is it because the construction drought might finally be ending? But I’m actually a Stock Chartist who looks at the pattern of price movements and sees that for the past four years, this stock as well as several others in the Group, has been stuck for the past four years. Whether one sees a double bottom or a horizontal trading range, it’s clear that the stock is now bumping up against a resistance trendline (or you may call it a “neckline”).

After such an outstanding climb, the odds are in favor of some profit taking now. But this is a stock and industry group that probably should be watched and bought on the dips (unless the market surprise us by losing the little momentum it’s trying to build by turning and collapsing …. then all bets are off).

Technorati Tags: Building, Cement, EXP

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.

Technorati Tags: gold crosses, golden crosses, moving average 200-dma

January 3rd, 2012

First Trading Day Facts

There’s always much said about the relevance of the year’s first trading day and what it might portend for the way the rest of the year ends up so I decided to do my own research based on the S&P 500 Index since 1963 and found what I consider to be some interesting factoids:

The market closed higher 36, or 78%, of 49 years since 1963.
Of those 49 first trading days in January, about half (26) resulted in a higher closing for the day.
When the first trading day resulted in a higher closing, 60% (16) of those years also followed with a higher closing.
Of the 23 first trading days that closed down, only 6 years also closed down.
The first trading day with the greatest gain was 3.59% in 1988; the market closed 12.40% higher that year.
The first trading day with the greatest decline was 2.80% in 2001; the market closed 13.04% lower that year.
The best correlations between the first trading day and the rest of the year was when the first days trading resulted in changes of 1% or more.

Of the 10 first trading days that closed higher by 1% or more, 8 were followed by higher year-end closes.
Of the 8 first trading days that closed down 1% or more, 6 resulted also in lower year-end closes.

Of the 31 years when the first trading resulted in a less than 1% change

9 resulted in a lower first day close and 22 with a positive close for the day but
more than half (19) of the years closed in the opposite direction as the first day of trading.

For whatever it’s worth, the Bulls must push for a positive close of 1% or more for Tuesday, January 3, 2012 to increase the probability that the year winds up on December 31, 2012 higher than it closed last week; an up close of less than 1% just won’t cut it. Those interested in the statistics can click here .

Technorati Tags: Higher close, higher year, January close

December 29th, 2011

Stock Market Malaise: Japanese vs. US Style

A reader lamented about the market’s dismal performance and wondered whether we aren’t victims of the American version of the Japanese Malaise (according to Dictionary.com, “a condition of general bodily weakness or discomfort, often marking the onset of a disease. A vague or unfocused feeling of mental uneasiness, lethargy, or discomfort.”). This feeling of despair is understandable, shared by many and is reflected in the public’s general attitude towards Congress and the Administration.

Some of the focus shifted this year away from Japan’s failures to concerns with monetary and fiscal concerns in Europe. But since we’re approaching the end of a year without any clear stock market direction and the prospect of an exciting and frustrating Presidential election campaign, it’s easy to return to the Japan’s condition isn’t contagious. Darell Whitten addressed that question on iStockAnalyst in August in which he summarized the U.S. variation of the malaise in these terms:

the failure of Keynesian and Monetarist policies to put the U.S. economy back on a sustainable, employment-creating growth path while government debt continues to pile up. A probable outcome of such a malaise of course is a decade of lost growth—declining nominal GDP, persistent deflationary pressures, declining disposable income, persistently high unemployment/underemployment and long-term bond yields below 1%.

According to Whitten, Japan’s problems began in 1990 and 1991 with the collapse of their stock and property markets with the near meltdown in the financial system continuing today. Japanese politicians, financial authorities and central bankers were at first sanguine about the crash in stock and property prices but, as time wore on, found themselves doing the same thing over and over while expecting a different result.

Japan has been slipping in and out of deflation while nominal GDP has actually shrunk to early 1990 levels despite 18 fiscal stimulus programs, a zero interest rate policy) and quantitative easing leading to an explosion of net government debt (from just 20% in 1993 to over 120% of GDP by 2011), even as the private sector was awash with excess cash not being recycled back into the economy. The irony is that Japan continues to suffer from “excess” savings that are not being recycled into the domestic economy. Companies have never been more cash rich and individuals hoard huge cash savings that are transferred overseas.

It does all sound vaguely familiar? The major differences seem to be that 1) American’s have never been great savers so the US debt has been financed primarily from overseas and 2) the $US, debt and stock market are still the preferred international “safe haven”. That might explain the difference in the slopes of the Japanese and US stock markets … so far (click on image to enlarge)!

December 27th, 2011

The Mid-term Election Year Cycle: Redux

Many hang their hat on old Wall Street sayings like “As goes the first week of January so goes January” or “As goes January so goes the year”. Another Wall Street rule of thumb is the “Mid-year election year” cycle. A year ago, in “Mid-term Elections in 2010 and the Stock Market“, I wrote about the Election Cycle Power Zone from a firm called Alpha Investment Management. Alpha’s research came up with the following interesting statistics:

“The Power Zone is 15-months long, beginning 30 days before the mid-term elections. This 5-quarter period has not been down since 1931 (Dow Industrials’ Total Return)…..The average return has been 25.5% plus dividends. The average daily return since 1931 has been 7.7 times greater than the average daily gain for all other trading days. A $1,000 investment in the Dow only during the Power Zone (31% of the time) appreciated to $68,200 as of the end of 2009. A $1,000 investment in the Dow during all other trading days (69% of the time) grew to just $1,800 since 1931…..If there is any time to be invested in the stock market, it is this.”

Since the end of the most current mid-term election cycle that began on October 1, 2010 is quickly approaching, it’s appropriate to see whether this rule-of-thumb is true or whether it’s another that has to be thrown into the trash heap because of this unusual and volatile market.

We were savoring the truth of the mid-term election cycle this past April and were confident that the market would soon hit 1430 by year-end, a level that was the rule’s average 25% above the previous September 2010 close of 1141.20. By the end of this last April, the market had already run up 19.49% to 1363.61; advancing another 6.0 over the remainder of the year to meet the average didn’t seem like to much of a stretch. But then Europe blew up in our faces (click on image to enlarge).

Mid-term Election Cycle 2011

The market closed at 1131.42 on September 30, 2011, the exact anniversary of the “official” start of the cycle on September 28, 2010, for just shy of a 1% decline. What had started out looking like a rule-of-thumb with a long history of accuracy was stolen in a brief 4 months by the European financial crisis.

We’re not in the business of predicting but with just 4 trading days left in the Cycle (and the year for that matter), it looks like the recovery since September could bring some respectability back to this rule-of-thumb. With last Friday’s close of 1265.33, the market was a disappointing 10.9% above where the Cycle began and far short of the average but still higher.

Perhaps the Mid-term Election Year Cycle needs to have a qualifying clause added to it: