August 10th, 2012

GOOG to 1626?

There couldn’t ever have been a more interesting and exciting IPO than the GOOG (Google).  I last focused in on GOOG back on June 12, 2007 when I wrote:

As a precursor of its novel approaches to problems, whether technical or business, August 19, 2005 was GOOG’s on NASDAQ through a little-known Dutch auction process with the stated intention of attracting a broader range of investors than the usual IPO. Almost immediately, the stock started marching to new high territory…..The Google lesson is that the best strategy (and the one taking the most discipline and guts) is to stick with this sort of stock where, regardless of external market factors (note the S&P corrections in Aug-Oct 2005, May-August 2006 and Feb-Mar 2007) is early enough in its product and business life cycle that it only suffers relatively minor retreats.”

GOOG was 511 on that date and it traded five months later at 741.  But that was the end.  Since 2007, the stock has been stuck in a multi-year trading range of approximately 433-633 (excluding its major correction during the Financial Crisis Crash of 2008 when it fell briefly to 250):

The question today is whether GOOG will join other mega-cap tech stocks and break across long-term resistances like IBM, AMZN(click on symbol for chart)?  There are only two possibilities: the horizontal channel morph into a double-top carrying the stock back to its IPO price of nearly 10 years ago (or at a minimum to near the 2008 lows) or it will cross the resistance and launch a new multi-year bull move.

I’m guessing that it’s the latter.  With all the sidelines money that is going to need to find a relatively low risk home there aren’t many stocks along the lines of GOOG with a sufficiently large enough capitalization that can absorb the money flow.  As a matter of fact, if AAPL falters on the introduction of its iPhone 5, fails to introduce a new T.V. or has some other disappointments in its product rollouts then some of the money that has been riding the AAPL gravy train when Jobs was running the company may look to GOOG to again be the tech standard bearer.

AAPL has significantly outperformed GOOG over the past 10 years but it may be GOOG’s turn to play catchup.  If the market does successfully approach and then cross into all-time new high territory then I wouldn’t be surprised to find GOOG more than doubling to 1626 over the next couple of years..

January 6th, 2012

Is the Secular Bear Market Close to Ending?

A recurring theme among some reporters and bloggers is the possible breakout of the mega-caps.  I believe one cause for this line of reasoning is the persistent dream of an end to what is now the 12th year of the secular bear market.  A name that continues to come up as emblematic of this breakout thesis is WMT (Walmart).  Any stock chart aficionado salivates over the potential of a stock like WMT.  When stuck in a horizontal trading range for over 10 years there’s the potential of a huge move should a breakout above that huge wall of resistance is ever successful:

But WMT isn’t the only large-cap stuck in the secular bear market trap.  As a matter of fact, half of the 30 Dow Industrial stocks are below where they were on December 30, 1999 (WMT is down 12.8%). There are a number of large-cap stocks not part of the DOW that also have charts that have attractive potential should they break above their own multi-year resistance levels:

  • MSFT (Microsoft)
  • AMGN (Amgen)
  • QCOM (Qualcomm)
  • DIS (Disney)

What we’re all waiting for are stocks to breakout like IBM because when more do, we’ll be certain that the 12-year secular bear market will have ended:

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October 27th, 2011

AMZN: A New Game Plan

Sometimes, all we need the courage of our convictions in order to succeed (i.e., make money in the market). In July 2008, I put together something entitled “Amazon (AMZN): A Game” Plan”. The inspiration for the piece was the fact that AMZN “beat the Street’s consensus estimates” during the midst of the Financial Crisis meltdown. I took exception to the importance given to “consensus estimates” in a stock’s price trend; it may have impact for a day or a week but prices beyond that are influenced by much more than those hits and misses of consensus. I wrote at the time:

“Who’ll remember in a month, a quarter, a year or five years these “consensus estimates” or how they compared to actual results. On the contrary, everyone will remember only how these results compared to last quarter and same quarter last year (Have you ever seen a service that reports both actuals and “consensus estimates” for the past, say, 5 years! I haven’t). Instead, large misses from “consensus estimates” only shine the spotlight on how incompetent the professionals are and how difficult, if not impossible, it is just to get “fundamental analysis” right.”

What struck me the most was that AMZN stock had a history of gapping frequently around an earnings announcement. “The number of price gaps over the past nearly three years is impressive. Either AMZN is always pulling surprise out of their hat or Wall Street pros can never get it right”, I conjectured. I also included the following two-year chart with all those gaps noted:

Based on that repetitive behavior, I concluded:

AMZN is bucking up against the trendline extending out from its all-time high in 2000. Breaking through that resistance is a huge hurdle. It’s been building up to making a run into new all-time high territory since the credit crises set in last July (forming a poorly formed descending wedge).

Buying here at 78, given all the economic headwinds presents some risks. But a move to 110, the current all-time high represents a 37.5% move. But there’s no telling whether it will make it there or when, whether the breakthrough attempt will be successful or not and when and, if successful, how much of a secondary, post-breakout consolidation will it take before a huge upward move can get started (these often happen and can take any consolidation form).

So here’s my game plan. The 37.5% looks enticing but I think I’d pass it up and wait for the big move above 110.

On October 23, 20009, almost exactly two years ago, AMZN announced their 3rd quarter 2009 results and the stock gapped up 26.8% for the day to close at 118.49. The stock broke above my threshold should have been the signal to buy … but I didn’t and lost the opportunity for a 113% move to the high of 258!

AMZN today reported a 73% drop in third-quarter earnings and the potential for a fourth-quarter operating loss and the stock gapped and closed down 12.66%. Will this be a repeat performance? I think not. Rather than looking at that flawed measure of actuals vs. “consensus estimates, look at AMZN’s actual results:

AMZN is an extremely seasonal business with 4th quarter’s Christmas holiday shopping representing 35-40% of annual sales. The best way to see how the company is performing is on a rolling 4-quarter basis. The above chart indicates annual sales and EPS for 2005-2010 and rolling 4-quarter for each quarter in 2011. I shouldn’t have been a surprise to those high-priced Wall Street analysts that AMZN’s performance was waning. It’s been evident since the March 2011 quarter. And we don’t need management to tell us that it is nearly impossible for 2011 to beat 2010 and their statement that fourth quarter will be negative only raises serious questions about 2012.

Bottom line, all great runs ultimately come to an end and AMZN could now look like a great short candidate.

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December 14th, 2010

Large Cap or Small, the Argument Continues

It seems that the final few weeks of the year are always the time that financial commentators look at the relative performance of large and small cap stocks and conclude that this is the year that large will finally outperform small. At around this time last year, in “Large or Small, That Is The Question?” of December 7, 2009, I commented about a NYTimes article in which Mark Hulbert quoted a report of Jeremy Grantham’s in which they concluded that:

“…the performance gap between the weak and the strong has rarely been as pronounced as it has been since March’s market lows. The extreme outperformance of the more speculative stocks could make them vulnerable to another market shock…..’high quality stocks are about as cheap as they have ever been relative to shares of firms with weaker finances. It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term.”

The following week in “Large or Small, A Correction” on December 13, I responded that the 2010 game plan rests on:

“…..whether you’re looking for a market correction in the new year or a resumption of the bull market. As I’ve written before, I see both happening next year …. a correction first followed by new highs later in the year. The small caps, since they’ve had the greatest gains this year may have already consolidated and will lead the market higher next year. A quick and not overly steep consolidation after New Years will be concentrated in the large caps.”

Here we are, again in early December, and Paul Lim now writes in the NYTimes

“….many market strategists argue that the recent surge for small-cap stocks might turn out to be a good omen for shares of large domestic companies….The performance of small stocks could also be viewed as a sign of confidence that the global economy is on the road to recovery. And that means the bull market in equities that began in March 2009 could live on to a third year — which is another potentially positive development for blue chips….

  • Sam Stovall, chief investment strategist for Standard & Poor’s, says ‘in the third year of a bull market, investors prefer larger boats, as they expect the seas to become a bit more treacherous.’
  • James B. Stack, editor of the InvesTech Market Analyst newsletter and a market historian, agrees. ‘Historically speaking, as bull markets age, investors tend to grow more conservative. I’ll be surprised if we don’t see the S.& P. 500 perform as well or better than small caps in 2011.’
  • ‘Small-cap dominance could be ending if central banks around the world start signaling that they are confident enough in the recovery to start hiking short-term interest rates,’ said James W. Paulsen, chief investment strategist for Wells Capital Management.
  • ‘Frankly, I find valuations on large caps much more compelling than for small. From the standpoint of a contrarian investor, when you see something happen for 10 years, you shouldn’t expect it to continue to outperform over next 10 years.’ said Thomas H. Forester, manager of the Forester Value Fund.”

According to these pros, the deck certainly seems stacked against small caps. But they’re not technicians and don’t put much stock (no pun intended) in what this chart says (click on image to enlarge):

The two indexes (Small cap in black, large cap 500 in blue) moved surprisingly in unison until the “dash for trash” small cap bull market of 2009. While the S&P 500 was stuck in its 12-month horizontal consolidation trading range (which sure didn’t feel like a consolidation while we were going through it!), small caps were volatile but continually forged ahead. I have two takeaways from this analysis: Buckle your seat belts, folks, this could be a spectacular year if you’re in nearly any stock.

  • Small caps have formed a huge inverted head-and-shoulder and you know how these patterns have turned out to be among the most reliable among all chart patterns. By conventional rules of thumb, if this is truly an inverted head-and-shoulder pattern, the small caps just crossed above the neckline then the move might only be half over.
  • Large caps have been laggard and next year could play catch up with many of those stocks actually doubling by next year end.

As the year progresses, the question will increasingly be whether the market is expensive and overvalued, whether declines are corrections or peaks and when will it be time to take some money off the table. It’s times like these that a proven market timing tool like the one that my subscribers see in each of my correspondences will come in extremely handy.

December 14th, 2009

Large or Small, A Correction

Last week, in a comment about a New York Times article, I wrote:

“The S&P 500 Index, the solid blue line is hard to see when overlaid on the bar graph of the OEF, the S&P 100 Index because they’re almost identical. Granted, small-caps marginally outpaced large-caps during July-October but that advantage has eroded since.”

I find that I may not have been comparing sufficiently dissimilar indexes. Because the S&P constructs their indexes by capital weighting them, the S&P100, a subset of the 500 stock index comprised of the largest stocks looks identical. But when you compare with a true small cap index you find a more interesting divergence.

Investors use any of a multitude on indexes to monitor the market’s action. There’s the granddaddy of them all, the Dow Jones Industrial Average, an index of stock prices of the country’s 30 largest stocks. A broader gauge is the S&P 500 Index which combines the stocks of top 500 public companies. An even broader index is the Russell 3000 Index. Furthermore, the broader indexes are subdivided into subsets of like companies, like companies considered small-cap, mid-cap, growth or value.

I usually focus my market monitoring to the S&P 500 Index to the exclusion of all the others but something caught my eye this weekend and I need to correct what I wrote last week: participation in the market’s advance was actually becoming narrower over the past several months. Large-caps have continued to forge ahead while small-caps and, to a lessor extent, mid-caps have consolidated.

The “dash for trash”, when money was flowing into the stock of almost any small to mid-sized company forcing their single-digit prices to double and sometimes triple off their market crash bottoms, ended in September. If there’s going to be higher income tax rates next year as Congress moves to close the Federal budget deficit, then it makes sense to capture those small cap profits this year, at the lower rates. Here’s a chart of the S&P 600, an Index of small caps (click on images to enlarge):

Small caps broke above the neckline of the market’s inverted head and shoulders bottom in July with a two and a half month, 25% bull market spurt. Since mid-September, these 600 small cap stocks have been forming a symetrical triangle. By the way, the Russell 2000 Index, a broader index of smaller capitalization stocks looks the same.

By comparison, the Dow 30 Industrial Average hasn’t shown any indication of a consolidation:
The chart of the Russell 1000 Large Cap Index shows a similar pattern:

Interesting, but what does it mean, how do you play it? I guess the answer rests in whether you’re looking for a market correction in the new year or a resumption of the bull market. As I’ve written before, I see both happening next year …. a correction first followed by new highs later in the year. The small caps, since they’ve had the greatest gains this year may have consolidated already and will lead the market higher next year. A quick and not overly steep consolidation after New Years will be concentrated in the large caps.

That’s my guess. What’s yours?