May 29th, 2012

Perhaps Investor Sentiment Is Still Sufficiently Bearish

You know why you feel frustrated?  It’s because the market for the past year has remained almost exactly level.  Today’s close at 1332.42 is almost literally at the same level as the 1331.10 close on May 27, 2011.  And, interestingly enough, reading the post I wrote that day entitled “May 2011 = August 2010” feels like stepping into one of those carnival perpetual mirrors, where all you see looking at one is another mirror encapsulating another mirror into perpetuity:

“the current game plan (i.e., view of the market’s near term projection) goes back to January 20 in a piece called “Pivot Points and Sell-Fulfilling Prophesies”….[in which] I wrote: ‘the market is edging ever closer to a zone (1300-1350) that has seen six pivots since 1999. As a matter of fact, the last pivot was in 2008 … here we are, four months after that post and, as expected, the market stalled out just about where I thought it might (today’s close was 1325.69). We’re back to the original question: Where to from here?”

Here we are two years after that original 2010 post and the market is again struggling to convincingly cross above the 1350-1360 zone:

I had hoped the market’s course between February and May 2011 would be similar to the May-August 2010 path but. “…. wouldn’t rule out the possibility that this one would be followed by a rise to at least 1550”, or 15-20% above that day’s close.  The conclusion was based on a recent AAII Individual Investor Sentiment Survey indicating that the last time AAII members were as negative as they were (25.6) was in August 2010.

The results of last week’s AAII Individual Investor Sentiment were that 38.7% investors were still bearish.  Not as strong a contra-indicator as the 25.6% last year at this time but also not that the majority were ragingly bullish.  Consequently, I remain optimistic and hope that the market will cross 1360 and, eventually, 1390 this year and deliver the long-awaited significant tell that marks the launch of the assault on the 1567 all-time high made nearly five years ago.

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 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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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.

September 30th, 2010

Why I Buy Stocks Making All-Time New Highs

I was challenged the other day by my focus and emphasis on what appears to be a narrow range of stocks. The stocks I buy (and therefore the ones that appear in the Daily Alerts sent to subscribers) are often stocks that are making “all-time” (because of the constraint in my system, usually actually 5-year) new highs.

Whenever the market is accommodating and the time is right to begin putting your hard-earned cash to work, it always boils down to a question of selecting those stocks with the greatest potential having the lowest risk. There are potentially 5-7000 stocks to pick from (US and ADRs) plus up to 2000 ETFs. You can’t start with symbol A (Agilent Technologies) and work your way through to ZZC (Sealy Corp). There just aren’t enough hours in the day or days in the week to look at all those charts (or listen to conference calls, read annual reports and do all the other homework that Cramer requires). Another approach is just going to a relatively reliable source like IBD and throwing darts at their list of top 100 picks.

I spent many years watching the performance of the IBD 100 list and wanted to emulate that in my own portfolio … who wouldn’t. I dissected the IBD picks, tried to emulate the CANSLIM process and decided I was basically trying to “reinvent the wheel”. I discovered that a large percentage of the IBD 100 was actually comprised of stocks that had recently (within the prior 5 trading days) made all-time new highs. The interesting thing was that many making it to the list for the first time, did so when they made that all-time new high and once they were added to the list they tended to stay on the list …… and, more importantly, continued making all-time new highs. These stocks had momentum.

Among the current IBD 100 stock list, 43 are on the all-time new highs list (remember, my definition is making a new high for the first time in 1250 trading days, or roughly 5 years). Stocks meeting that definition on the current list include:

If I were to expand the definition to include stocks that may have made an all-time new high sometime with the last two weeks but have retraced a bit, then about 20-30 more could be added to the list. My take away from this was:

  1. IBD’s approach sounds like a combination of technical and fundamental but it’s mostly a momentum-focused strategy.
  2. There can be all sorts of fundamental reasons that a stock is selected like institutional following, earnings growth, sales growth, good industry, etc. But when you boil it all down to what the effect of all this is on a company’s stock, it’s to cause demand to outstrip supply and its price moves up.
  3. I could sidestep the whole process by scanning for those stocks that were making all-time new highs. Since that list would have new additions all the time, continuous scanning was necessary.
  4. A great strategy (if you get out of the way in a market downdraft) is to “buy high, sell higher”.

What IBD didn’t do well was to tell me when the sell those stocks (see “Tech Stocks In Parabolic Moves: When to Sell“). Also, because IBD always had to have their list of top 100 stocks, they didn’t do a very good job of telling me when the market was in free fall and, no matter how good the company or the stock, you were going to lose money owning it (that’s why I developed my own Market Timing Indicator … more on that later).

When the stock market is moving from a trough or consolidation into an uptrend and I have cash to invest then one of my primary means of employing that cash is to buy stocks making all-time new highs. Let me give just one example, OPLK (click on image to enlarge):

Millions of investors around the world are looking at this chart, waiting to see if it crosses 22.25, an all-time high going back ten years. Some are technicians and others are fundamentalist (like Cramer) who will cook up some story for making it sound like there are outstanding business and financial reasons for owning the stock. No one knows where the stock will be in 2015, but we can be fairly sure that if and when it does cross 22.25 it may attract a following (i.e., increase in average trading volume). At that point, no one who’s owned the stock since 2001 will be losing money on it.

There may be some hesitation or retreat as buyers who were in for a quick flip will cash out for a 20-30% profit but afterwards the stock will continue moving ahead. So there’s plenty of time to jump on board. If the market doesn’t tank in the interim, those who hold for the long run could see some really huge percentage gains further out in the future.

December 22nd, 2009

Nasdaq 100 Jewels Beginning to Appear

I happened to catch Carter Worth of Oppenheimer & Co. on Fast Money tonight and I was amazed to hear him agree with me or, as he might see it if we ever had a chance to meet, that I agreed with him. It’s fascinating how two experienced technical analysts can look at charts and arrive at identical or, at least, similar conclusions.

Carter anticipates a short, shallow correction followed by a continuation of the bull market. What was even more striking to me, however, were his specific stock recommendations: IBM and AMGN. Not only did he see some upside opportunities in those charts but, dare I say, he liked them from a fundamental perspective also. For example, he pointed out that while IBM is at the same price it was at its peak 10 years ago, today’s P/E is around 11 as compared to the over 40 P/E back in 1999 (unfortunately, I failed to note the actual numbers). Amgen presented a similar technical and fundamental picture.

Carter may have been constrained by the broadcast schedule but, without those constraints, I had seen the same thing for some time and would even go father and say that the one area of opportunities in the next leg of the bull market (after the correction we both see coming in the coming New Year) is among nearly any of the large-cap Nasdaq stocks.

Scrolling through long-term charts (10 years or more of weekly and 9-day price/volume bar charts) of the Nasdaq 100 stocks and underscores one or more of the following common bullish characteristics:

  • 54 of 100 are have “bull crosses” alignment in their moving averages (price>50>100>200>300-DMA)
  • 74 have “golden crosses” in their moving averages (100>200-DMA)
  • 41 of 100 have 300-DMA that are upward sloping
  • about to break into new all-time high territory
  • successfully testing recent past resistance levels as support levels
  • breaking above extremely long-term downward sloping resistance trendlines
  • stocks in the group have out-paced the S&P 500 Index in that: 29 exceed their levels when the S&P peaked in October, 2007, 64 have better performance than the S&P since the S&P peaked and 54 have performed better than the S&P since the March 9 bottom

Contrary to the views of some readers, I am not a perma-bear. Actually, I usually remain optimistic much longer than I should and actually have a difficult time of restraining myself from buying stocks. But there are times when caution is warranted and the market’s recently being locked in a 2 percentage point channel is one of them.

But I would be remiss in not mentioning that the Nasdaq Composite has recently broken above a similar horizontal channel indicating that some NASDAQ 100 stocks have already begun climbing.

Some components of the Nasdaq 100 look awfully compelling, like ORCL:

and AMZNand IBM

It’s exciting, about as exciting as it felt back in March with all those clear reversal bottom patterns (remember, “shooting fish in a barrel”?). So far, however, it’s only a prospect, a possibility rather than a strong momentum ride on which to piggyback. After the correction Carter and I are expecting, however, this will be the place I begin mining for new opportunities.

October 7th, 2009

Five Stocks Making All-time New Highs

Life used to be so simple 9 months ago. All stocks were on sale for rock bottom prices and hundreds, if not thousands, were in the starting gates waiting for the starting gun (if you remember the analogy. All we had to do was find stocks that had formed clear reversal patterns, pick the ones with the highest volatility and buy a bask full of them and we would make a huge profit with little risk.

But finding stocks with momentum or a potential for momentum is harder now. Few stocks are still forming reversal patterns and the risk is that they breakout just as the broader market or, more correctly, the stocks that have been driving the market up to now, start running out of steam. [See yesterday’s report on media stocks.]

Alternatively, we could hitch a ride on the stocks that have had huge runs over the past four or five months and hope they aren’t the ones who’ll run out of steam first. Remember, for example, Diedrich Coffee, Vanda Pharmaceuticals or Dendreon?

As a true chartist, I much prefer looking among stocks making new highs and the more significant the new high the better (for example, all-time new high is better than 2-year which is better than 1-year new high). Here are several that meet the criteria:

  • CERN
  • NPK
  • PETS
  • CHKP
  • MNRO

But I give you these with a word of caution. Keep your thumb on the market’s pulse and make your own assessment as to its health and strength. Any guesses in which life cycle stage the market is in now?

I think the market is transitioning from the accumulation to the mark-up stage. That transition will be completed and the exciting mark-up stage will be launched after the consolidation correction we will have to contend with, probably most of next year (see “Two Market Consolidation Models: 2004 and 1933-35“). Or in which emotional stage it’s in?

I feel we’ve just experienced a huge relief rally, are waiting for a test to see whether “it’s for real” and then the market will move into the “optimism” state.

Since the easy pickings are over, the easy money has been made, market timing is again going to be important. If you buy stocks today, even if they’re breaking out to all-time new highs, don’t get wedded to them. The market has to mature and it’s about to experience some turmoil as it evolves into the next stage.

August 15th, 2008

New High List:: EL, DMND, GENZ

Our number one priority should always be taking the market’s temperature because, as you’ve read here before, ““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.” It’ll be horizontal markets like these that test your mettle as a trader or investor. The market was at today’s close on June 26, March 17, January 22, August 23, 2006 and, yes, even February 27, 2006! So if you feel like you’ve been running a treadmill and getting nowhere then you’re lucky because at least you’re still in the game.

But that’s not to say that traders can’t dream and hope. So I still look at my various scans (New Highs, Momentum, RSI, Price Gaps) to see if there might not be a stock or two with an interesting chart to take a flier on. And today following appeared close to the top of the list:

  • EL (Estee Lauder): I’ve been in and out of this stock several times over the past 18 months looking for the big break out that would clear prior resistance levels (see previous comment on May 13). Yesterday, it jumped. Rather than the previous close-up view, here’s a longer term chart that shows a compelling story:

  • DMND (Diamond Foods): The stock offers two momentum stock characteristics. Not only does it fall in the category of a relatively “new IPO” having first started trading in August, 2005 but it also is now charting virgin, all-time new high territory. Everyone who’s ever owned the stock has a profit.

  • GENZ (Genzyme): The stock is riding the wave carrying many biotech stocks into a new high territory. If you don’t want to play individual stocks, the biotech etf’s, BBH and IBB also look like they’re going to enter into virgin, all-time new high territory.

Remember, the light is still flashing red. Any of these can’t be considered long-term positions until the market flashes a green-light, bullish signal. And when might that be? Not until the S&P 500 Index clears 1360 with conviction, or another 5,2% to go on significantly improved volume.

July 25th, 2008

Amazon (AMZN): A Game Plan

I’m sorry to dump this on you but I have to get something off my chest. I don’t get this “consensus estimates” stuff. Well, that’s not exactly correct — I don’t understand the emphasis that the big boys place on “consensus estimates” to sometimes generate huge changes in prices for few days after earnings announcements.

I understand that institutional investors have to rationalize their decision through economic models to indicate if a stock is over- or under-valued thereby justifying their buy/sell decisions. Of course, they could refer to stock charts but that would make it look like they’re relying on black magic, tarot cards or some other form of arcane mysticism.

So if their models indicated AMZN’s (Amazon) fair value should be around 70 and the company announced results different from their estimates, the herd would see that as justification to stampede the stock. According to Reuters:

AMZN shares rose as high as 17 percent on Thursday as the online retailer’s strong second-quarter revenue and profit relieved a wary Wall Street that has been bruised by recent disappointing results from consumer companies. Some analysts calculated that Amazon’s earnings actually fell below Wall Street consensus estimates, but most gave them credit for an unexpected gain related to the sale of its European DVD rental business and slightly lower taxes.

“Overall we think this was an outstanding quarter for Amazon given extraordinarily low levels of consumer confidence in the U.S. and the UK,” wrote Bernstein Research analyst Jeffrey Lindsay, who rates shares “Outperform.” Deutsche Bank analyst Jeetil Patel forecast that shares would rise on Thursday, a day after Amazon’s results were released, because many on Wall Street had been expecting grim news — whether higher operating expenses, significantly lower gross profit margins or weakening revenue projections.

Instead, the world’s largest Internet retailer posted a 41 percent rise in revenues and earnings that beat Wall Street forecasts, even excluding a one-time gain from an asset sale.

Give me a break. 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. See the clear story in AMZN’s chart:

This doesn’t tell a compelling story to me. “I wonder whether the previous quarter’s report, or the 2007 annual report, contained any surprises?” he says with sarcasm. Let’s step back and take a longer-term view:

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. What if we pull back even further? what would the chart tell us then?

Now we’re talking. This chart shows AMZN since its IPO. I wish I’d had the courage to buy AMZN any time within 6 months of the IPO because it turned into one of the tech bubble darlings increasing from 1.50 (adjusted for splits) to 110! Remember all the debate as to whether Jeff Bezos was crazy or not for building all those huge warehouses? Yes, he was crazy, crazy as a fox.

It’s taken eight years to digest that growth (during which time AMZN formed a huge symmetrical triangle). One buying opportunity was when it broke above the upper boundary trendline of that symmetrical triangle in April 2007 followed by a huge breakaway gap.

But now 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.

June 5th, 2008

Obama Bear or Bull Market

Did I write “Obama Bear Market”? I’m sorry, I must have hit the wrong keys, I meant to write “Obama Bull Market”. Kidding, of course. But the Market made an pirouette and swirled around above the 90-day moving average. So elegant, a sight to behold:

So are we going to now going to attempt to cross up over the 180-day moving average again, the same as on May 19. But let’s hope that, if it is the case, this time the Market will be able to remain above the line for more than a day. Do you want the good news first or the bad?

O.K., the bad news is that volume continues to be anemic. For any sustained upside move, most say that we’re going to have to see some really big, breakout, follow-through sorts of volume. That wasn’t the case on May 19 and we know what the consequence was.

But on the good side, two of the moving averages have turned up and the downward slop of the two longer moving averages have flattened out; all that’s need to turn them up is for the Index itself to stay above the averages for a week or two.

Another positive note is that the number of new highs is expanding and broadening. If you had purchased any of the 49 stocks I mentioned in previous blogs (see recap up to May 16), as I have, only 4 were down today. From the day I wrote about them, 34 of the 49, or 70%, are up; that’s not a bad average in baseball or the stock market.

And everyday, new ones pop up for the list. Unfortunately, I’m trying to stay cautious (since the MTI is still in Amber-light territory (that’s somewhere between a Yellow-light and Red-Light) so commit cautiously, trying to hold on to some cash. But it’s getting harder since the stocks I have bought (the one’s you know about from the list) seem to be working. For example, here are some I culled from my scans of New Highs, Momentum and RSI:

  • TRA
  • TSM
  • GW
  • VVC
  • MVL
  • SYNT

Finding new stocks to buy isn’t the problem. The real challenge is knowing if and when to sell the movers (like some of the oil stocks). Is a double on ANR in less than 6 months a sufficient justification to sell or do you stick with a winning horse until it shows signs of aging? If anyone has any successful strategies, share it with the rest us, please.