May 16th, 2013

Healthcare Providers and Suppliers

image

When it comes to stock selection I usually fall back on the following slogan: “50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own”.

I believe the stock market is in the early phase of a major secular bull market.  This is when you want to jump on a trend early and stick with your proven winners for the long haul and earn those large percentage gains.  To do this, you want to try to identify industry groups that contain many individual stocks.  Finally, you use charts to identify those stocks that have had large percentage moves in the (long-term) past but have been held back in consolidation zones for a number of years.

There are many stocks that meet these criteria but the few shown below are representative.  Granted, these charts cover eight years but they are similar to how the financial and homebuilder stocks look several years ago before their run.

In short, there seems to be something dramatic building in a wide range of stocks in the healthcare field over the past several years that could lead to a large number of breakouts across levels that could lead to significant price appreciation for some time:

 

  • HMA,HMA - 20130515
  • UNH,UNH - 20130515
  • AMSG,AMSG - 20130515
  • BKD,BKD - 20130515
  • HGR,HGR - 20130515
  • MD,MD - 20130515
  • BRLI,BRLI - 20130515
  • OMI,OMI - 20130515
  • LH,LH - 20130515
  • ESRX,ESRX - 20130515
  • DGXDGX - 20130515

May 8th, 2013

Auto and Truck Parts Suppliers

I believe I’ve finally made some sense of how to differentiate between the Weekly Recap Reports offered to Members, the Stock Chartist blog and the articles I begun to write for SeekingAlpha.com. I believe the answer was provided by Seeking Alpha when they made clear that their preference is for fundamental as contrasted with technical analysis.

Every investment decision begins with a clear vision of the market’s near-term direction, or what Seeking Alpha calls “Market Orientation”. My last two articles met the prerequisites of that category and were well accepted by the Seeking Alpha readers. Once you have a market point-of-view, the next step is stock selection.

If market timing indicates that the time is opportunity for new investments then the next challenge is choosing from among the 7000 stocks and ETFs. One can do attempt to narrow the search down to a few of the best stocks by, what Cramer calls, “doing your homework”. Or you can use my approach of finding stocks that appear to be ready to cross out of consolidation or reversal areas (i.e., patterns) by crossing above resistance zones (i.e., trendlines) focusing first among the Industry Groups that seem to be most desirable at the time to the “herd”, or Wall Street’s institutional investors. The approach I use for this final step is, of course, my various scans and a continual search through literally hundreds of charts.

Instant Alerts members have the benefit of both market and stock selection plus an inside view of how I manage my Portfolio.

Bottom line, the blog will now focus on individual stocks based on my own Industry Group and stock chart analysis. Some blog posts will focus on an individual stock while other posts might include several stocks. The following is the first:

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imageThe stocks of several truck and auto original and replacement parts suppliers have advanced smartly since the beginning of the year, like AXL, DORM, SMP, LKQ and DLPH. Even though these have significant momentum, I avoid them because these are now far above what I consider breakout entry points where initial positions can be safely established.

However, a few have recently or are about to break out of consolidation areas.  I consider them consolidations since there’s nothing to indicate that the market is anywhere near making a significant reversal.  Those stocks include:

  • BWABWA - 20130508
  • LEARLEA - 20130508
  • DANDAN - 20130508
  • WBCWBC - 20130508
  • THRMTHRM - 20130508

It goes without saying that these stocks and their charts were selected exclusively on the basis on a technical analysis of price action and timeliness of an investment. There’s no attempt to rank them as to prospective appreciation of each nor the time needed to achieve those gains. Investors should assess their own tolerance for risk and perform their own assessment of their suitability to be included in a portfolio.

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March 20th, 2013

Rocket or Breakout? What say you?

imageThe second most difficult challenge (after auguring the market’s future near-term direction) is to select the best stocks into which to put some money to work so as to maximize potential returns while keeping risk of loss acceptable.  Most of the time, whenever you hear or read a comparison between two stocks, “talking heads” like Jim Cramer usually  throw out such slogans as “buy best of breed” as the guide in making your choice.  However, although “best of breed” is subjective and is boiled down fundamental factors like sales and earnings growth, great management or higher profit margins.  Seldom does Technical factors such as stock volatility, institutional support or relative strength seldom enter a “best of breed” discussion.

For example, on January 26, 2012, Cramer’s theStreet.com had a piece on XLB, the basic materials ETF in which they claimed that “DuPont Company (DD) is the undisputed king of basic materials. From the 2009 rally, DuPont was the top performing Dow component.”  However, PPG (PPG) wasn’t mentioned at all.  PPG represented only 4% of the ETF as compared with DD’s nearly 10%.  But which was actually the better stock to have bought more than a year ago.  A comparison of the two shows that PPG actually appreciated 58% while DD declined nearly -3% (click on images to enlarge).

PPG - 20130319DD - 20130319 I’m now sitting on some cash trying to figure out if I should redeploy it in yesterday’s momentum stock leaders (who are still advancing nicely) or taking a gamble on stocks that have great charts and look like they may soon breakout and become tomorrow’s leaders.

In technically-based comparison like these, IBD’s rule is to only buy stocks that are within a few percentage points above what IBD labels their “buy point”, those breakouts or crosses above resistance trendlines which are top boundaries of a variety of chart patterns such as inverted hear-and-shoulders, ascending triangles or IBD’s cups-and-handles.  This comparison might match up LKQ (automotive parts), a stock that’s advance 370% since 2009 in a near straight shot and, perhaps, may continue to advance higher against, for example, Williams-Sonoma (retail home furnishings).

LKQ - 20130320WSM - 20130320

Putting aside fundamentals and basing the investment choice strictly on a technical basis, the choice rests on how one evaluates two factors:

  • Trading off the risk one perceives in buying a stock continuing to advance after having nearly doubled in each of the past four years vs. the risk that a stock will continue to languish for continued economic sluggishness.
  • How important the psychic reward might be for you to have found a new “high flyer” before others vs. piggybacking on a winner that others continually discovered over the past four years.

I’ve always tended to chose the breakout but what say you?  Would you catch the tail of a comet like LKQ or get on what you hope might be a future rocket?  And why?

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March 15th, 2013

Food Scarcity, Food Stocks and Market Correction

imageA oft-repeated refrain these days concerns the absence of significant inflation reported by the government.  However, those who frequent supermarkets complain about increases in food prices.  A recent page in the Financial Times included the following headlines; it’s enough to turn you into a survivalist, or “prepper”, begin building a bunker and store a food hoard (click on image to enlarge):

Food Prices

And what’s happening to the prices of companies in the food stuffs chain?  Not surprisingly their moving higher (being swept along with the rest of the market?).  We usually think of food stocks as safe havens to run to when the market gets shaky but, this time, there may be some strong fundamental drivers (along with major central bankers around the world flooding the market with their currencies) behind what could turn into dramatic food inflation and higher prices for the sector (click on symbols for charts; parenthesis are yield, volatility and relative strength):

Typically, these stocks have low volatility, offer dividend yields and, with reportedly a worldwide food shortage, may be perfect places to park some money as you sit out a market correction which could come during the “go away in May” seasonal market lull.

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November 28th, 2012

Head-and-Shoulders Patterns: AAPL and GLD Case Studies

In my book, Run with the Herd, I retell the coin toss experiment from Burton Malkiel’s book, A Random Walk Down Wall Street.  In it, he asked students to

“continuously toss coins with heads arbitrarily representing a move up in a stock’s price and, conversely, tails a move down.  All the price changes were assumed to be of equal magnitude and all were recorded in a line chart.  After an unspecified number of tosses, the students began to see patterns in the charts that looked similar to those of stock charts.”

One of the most talked about, recognized and perhaps most reliable stock chart patterns are the head-and-shoulders and its mirror image the inverted head-and-shoulders. What makes these patterns so important is that they fall into the reversal category (as contrasted with the continuation or trending patterns).  In these patterns, the price/value of the stock, index or commodity makes three different attempts to reverse the direction of the prevailing trend.  Characteristically, the price/value reaches approximately the same level the first two times and then falters; it succeeds in the third attempt and crosses the level reached the previous two attempts. The elements of the pattern include a shorter left “shoulder”, a longer middle “head”, and a shorter right shoulder; all are connected by a trendline at what is called a “neckline”.

As you might expect, as a chartist I believe that comparison between the randomness of coin tosses and stock chart patterns is a false one using the wrong logical argument (incorrectly using deductive reasoning rather than inductive reasoning).  But it is true, however, that the head-and-shoulder chart patterns are easier to perceive in retrospect and not as readily discernable in real-time.  Furthermore, when the pattern has evolved sufficiently in order to actually intimate its future likely outline, the practical question remains as to when might be the best (highest probability of being realized with the lowest risk of being failing) time to act on that perception.  Here are two cases in point:

    • AAPL: At the beginning of the month, I wrote a piece entitled “AAPL Gets a Cold, the Market Gets …..?” when the stock was at 563 in which I included a chart showing a partially formed head-and-shoulder pattern and wrote: “Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder topall the way down to 390 (nearly 30% from current levels).”Compare the chart in that post with the one below and you’ll find that AAPL is closely following the course outlined there:

      Although Robert Weinstein of Cramer’s theStreet.com wrote today that investors should “Put Away the Prozac, Apple’s Just Fine”, this emerging pattern continues to look to me uncannily like an emerging head-and-shoulders top [Cramer's Action Alerts Plus service has been a long-term AAPL investor with a 90+% profit].  There’s no way to tell whether the stock will follow-through but it pivots and starts declining again, I would order a refill from the pharmacy.

    • GLD: I wrote a piece at the beginning of the summer entitled “When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)” in which I included a chart of GLD with a pattern that looked like a descending channel and wrote: “I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.”

Today that channel has morphed into what might turn out ultimately to be an inverted head-and-shoulder pattern.  The hesitation in calling it that is that the pattern is developing after a major bull run rather than at the bottom of a major decline.  Consequently, this inverted head-and-shoulder will further morph a consolidation pattern or some type of reversal top pattern.

Bottom line, no matter how good these chart patterns may look a year from now, unless and until they cross their necklines, there’s no certainty that they won’t fail to deliver.  While getting in early will produce a greater return, the trade entails more risk that the stock moves in the opposite direction.  [In fact, even after a trendline is crossed, the stock will often reverse and test the trendline in what is called a "Buyers'/Sellers' Remorse Correction".]

 

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October 24th, 2012

ARMH: Patience Pays Off

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

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

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

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

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

October 10th, 2012

Assessing Market Opportunities and Risks

It’s been some time since I last posted because, well, because there wasn’t much new or much positive to write about.  As a matter of fact, the last time I wrote about the market was on August 29 in “Every Trading Range Is Not a Reversal Top“; the market is a mere 1.56% above the level at that close.

I pretty much fully invested now; I like most of the stocks I own since I’ve been cleaning house as this bull run has progressed.  There are a ton of stocks that look like they, along with the over-all market are struggling to clear an intermediate sort of resistance level (the market Index may actually be stuck in the claws of a tiny “buyers’ remorse” correction after having barely crossed above that resistance at 1420-1425.

One must always evaluate the market in two ways : what are the upside opportunities and what sort of downside reversal risks are there.  When I step back today from the market’s day-to-day noise, I see upside potential to the 1567 all-time high level.  However, I also see what I hope will be only short-term obstacles.

My longer-term optimism comes from the fact that the market has steadily crawled up the lower boundary of an ascending channel emanating from last year’s low connecting with this year’s March low.  The parallel upper boundary of the channel conforms nicely.

Furthermore, this spring’s correction can be interpreted as a flag pattern.  Traditional chart reading rules of thumb suggest that the consolidation pattern will be approximately midway between the trough of the channel and the peak.  If that turned out to be true, then the peak should be somewhere in the 1600 area (1410/1125*1280), or not far from the all-time high.

The fly in that ointment is volume which just doesn’t seem to be cooperating so far.  Since 2011, the 50-dma of daily volume of the S&P 500 stocks has been trending lower (with the exception of last summer’s correction).  Even more ominous is the divergence that’s emerged between the Index levels and the on-balance-volume.  For those who need a refresher, OBV is Joseph Granville’s indicator in which volumes on up days are added and volumes on down days are subtracted from a rolling total.  A declining OBV indicates that volume on days when the market closes lower tend to exceed the volume on days when the market rises.  A divergence indicates that a rising market isn’t supported by adequate volume.

There’s sufficient cash on the sidelines waiting to be put to work and fixed income with it’s low rates isn’t the place to put it anymore.  ZeroHedge had an interesting piece this morning entitled “Are Businesses Quietly Preparing For A Financial Apocalypse?” about all the cash sitting on corporate balance sheets.  If the uncertainty coming from Presidential Election, Fiscal Cliff and continuing Eurozone saga then a good chunk of that money, both investor and corporate, could come into the stock market and make up for the volume drought.

While prices haven’t indicated a reversal process emerging yet, there sure are a lot of risks out there, both fundamentally and technically.

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August 16th, 2012

Scaling the Wall of Worry

Are we at a bullish or bearish pivot point?  If you’re looking for market advice from CNBC you’re looking at the wrong place.  The best way to get viewers is to create and stimulate controversy and that’s what CNBC does every single day.  You get a lot of different opinions but you can’t get just one straight opinion that you can act on.

A perfect example was how they juxtaposed, on two successive days earlier this week, Jeremy Segal of Wharton Business School articulating a bullish outlook followed the next day by Doug Kass of Seabreeze Partners pushing a bearish perspective today.  Interestingly, couched inside both opinions were opposing opinions on the impact of Romney’s selection of Ryan as his V.P. candidate:

  • First, they put on Jeremy Siegel who endorsed the Ryan selection because of Ryan’s budget-cutting efforts and suggested that, as a consequence, the market will advance to around 1500.
  • Kass came the next day suggesting than Ryan’s selection will lead to Obama’s reelection and driving the the market down to 1300 (interestingly, he started his pitch by using an invalid and inaccurate technical view  of the market) because of Ryan’s conservative history and his known hostility towards Bernanke.  Kass believes that the highs for the market have already been made.

So what is the average investor to do?  Which opinion should we embrace?  Or is watching merely a total waste of time.

If you’re obsessed with trying to guess the upcoming election’s impact on the market then you have to come up with answers to a series of difficult and highly subjective questions:

  • Is a Romney win looked on favorably or not? an Obama reelection?
  • Is the market already discounting the election of one or another candidate?
  • If there was a market bias towards one candidate vs. the other then would an upset create an adverse market reaction after the election?
  • How does control of Congress factor into the equation?
    • What if Congress is split?
    • What if Congress is controlled by the same party?
    • What if control of both houses goes to the opposing party?

And those are just the questions that easily roll off the top of my head.  Clearly spending much time trying to answer these questions is futile.  Making investment decisions today based on what you have figured out to be the correct answer to each of these questions is foolish.

There can only be four options that drive your investment decisions today based on your prediction of an event in a little more than 11 weeks.  Sell, buy, do nothing or ignore the  election and base your decision on what’s happening today.

My answer is always to “follow the herd” rather than make my own fundamental analysis.  I’m not proud; I want to do what the majority of the money sloshing around the market is doing today rather than trying to second guess whether they are right or wrong in going in the direction that they are.  I want to know how strong the market’s momentum is and the direction in which it’s driving.  As far as I’m concerned, there’s no doubt as to that answer.

For the first time since October 2009, the market next week as measured by an index of the 500 stocks comprising the S&P 500 Index will create a situation where the market’s current level will be above its average level over the prior 50 days  which will be higher than its level over the average of the prior 100 days which will be over the average of the prior 200 days.  Finally, they will all be higher than the market’s average level for the past 300 trading days.  The same will soon also be true for the index of stocks comprising the Dow Jones 30 Industrials and, for the Dow Theory followers, the DJ Transports.

On July 17, four weeks ago when the S&P 500 closed at 1357, I described the market’s consolidation flag and went out on a limb to say a cross above 1420-25 would lead to the market climbing to 1575.  Today, the market closed at 1415, or 4.27% above that July 17 close.  Hopefully, all the uncertainties and “Alerts” and “Breaking News” and “Earnings Season” jabbered about on CNBC didn’t scare you away from being in the market.  It didn’t scare the big money herd who have been accumulating stocks and, in the process, forcing prices higher.  They may reverse course but, I doubt it more ever day.

Come back often to check on the market’s progress.  Better yet, become a Member and see where I’m putting my money to take advantage of this advance … while it lasts …and the Industry Groups from which I select the stocks I buy.

August 3rd, 2012

PEP vs ZMH: Technical vs Fundamental Analysis

We’re all often warned that we should be carefully about information we find on the internet.  Sometimes it’s true, sometimes it’s strictly opinion, sometimes it’s offered with some ulterior motive and sometimes it’s just inaccurate opinion.  Take for example the daily email midday alerts from Cramer’s theStreet.com.  The one today included a piece entitled “Katz: Two Names Continue to Impress.  The headline worked because it caused me to open the link.

Katz leads off with the following statement:

“In the second quarter, I recommended PepsiCo (PEP_) and Zimmer Holdings (ZMH_). Both companies recently reported better-than-expected earnings for that quarter, but their stocks followed very different trajectories. PepsiCo shares rallied to a recent high of $72.76, while Zimmer’s share price declined a bit to $58.70 based on a modest revenue shortfall and some market-share loss in the U.S. I continue to like both names, with a particular emphasis on Zimmer in light of the stock’s recent price decline.”

Katz goes on to repeat each company’s fundamentals like products, market share, sales and earnings growths and dividends history.  While he likes PepsicCo from a fundamental perspective, he is disappointed in Zimmer’s financial performance and marginal market share erosion.

But comparing PEP and ZMH is truly like trying to compare an apple to an orange.  They are in radically different industry groups and their stocks have dramatically different volatility and dynamics.  The only thing linking them is the performance of the stock market (remember, “the stock market drives 50% of a stock’s performance”).  Since he mentions only in passing the stock performance of each and that’s essentially all that we’re interested in, I’ll offer the two charts (click on image to enlarge):

PEP

ZMH

What’s interesting about these two charts (as contrasted with the long-winded fundamental analysis presented in theStreet.com offering), is that:

  • The stock market action impacted both stocks similarly
  • Both stocks have completed a right triangle and currently are at the neckline
  • Where they differ significantly is in volatility.  As expected, PEP has been about half as volatile as ZMH, a trend that might be expected to continue as the market soon breaks into new high territory.

TheStreet.com piece states that “This is a free preview of commentary that originally appeared in Real Money – the premium investment information service from TheStreet that delivers investment strategies from a veteran team of Wall Street pros, including Jim Cramer.”

With information like that above, why would you want to subscribe to their service?  I, for one, would rather rely for my investment decisions on seasoned technical analysis.  By the way, if your bullish you’d put your money into ZMH and if bearish into PEP; at this stage of the market’s correction, my bet would be with ZMH

July 17th, 2012

Market’s Path to 1575

“Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are…..investing is a marathon, not a sprint, and do not let the bear market turn you into a sprinter.”  all you can do is That quote is from Vitaliy N. Katsenelson’s The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere in Barry Ritholtz’s popular Big Picture blog.  And how true it is.  It’s been incredibly difficult harvesting any capital gains for so long and it feels like the recent boring market when one ignores the drama of the political and economic background grinding out day in and day out.

But all that may soon change.  The market has carved out, for reasons that continually bewilder those of the fundamental analysis persuasion, a fairly clear consolidation pattern that it is trying desperately to break out of:

For this to truly be considered a flag, volume on the breakout needs to expand and the advance has to cross above the previous high at 1420.

But if everything works out as we hope, then the outlook is extremely promising.  According to traditional charting rules-of-thumb, the consolidation pattern should be at about the midpoint of the range from the trough to the ultimate peak.  The move from an October, 2011 low at the end of the Congressional and the beginning of the EuroZone budget stalemates to March 2012 peak was approximately 26.5%.  Advancing a similar 26.5% from the June bottom of this recent consolidation would carry the market to about 1575.

Whether it’s coincidental or not, the 1575 target happens to also be about the market’s all-time high as measured by the S&P 500.  As we hear all the negative news still flooding the media (to which must be added the impact on consumer prices from the devastating impact of the heat wave on crop yields), it seems hard to believe that the market can advance to those levels.  However, all that negative sets us up for positive surprises.

Whenever I try to balance the news I hear against the market’s action I fall back to a chart I’ve frequently featured here: The Cycle of Market Emotions.  I ask myself what emotional state does it feel that most market participants are experiencing today.  Today, you can’t argue that most players continue to express feelings of fear, desperation, panic, despondency, depression and, sometimes, “hope” than they do emotions of optimism, excitement, thrill or euphoria.  These range of emotions are actually bullish because they signal that the market is closer to a bottom than a top.
The market’s ability to continue advancing above 1365 will give me the confidence I need fully commit the remainder of my cash reserves.