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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April 5th, 2013

Gold (GLD) in an “Indecision Zone”

I was recently accepted as a “columnist” for the subscription portion of SeekingAlpha.com, a well-respected stock-oriented editorial site, and quickly got my first submitted article accepted.  Much to my disappointment, however, my second submission was wrongly rejected, I believe.  The rejection notice stated:

As a fundamental investing site, Seeking Alpha doesn’t publish articles based primarily on Technical Analysis.  Feel free to post this piece to your instablog.  Thanks!

Sincerely Yours,

SA Editors

As you might expect, this response raised my blood pressure on several counts.

  1. First, I thought that I had summarized most of the fundamental arguments, bullish and bearish, covering the subject of the future direction of gold prices.
  2. Second, I can’t imagine any site that doesn’t take technical factors into account when presenting content about stocks, markets, commodities and forex can do so without including a heavy dose of technical factors and opinion.
  3. Finally, why isn’t there a site that features articles contributed by vetted contributors focusing on technically-based market and stock opinions?  It might even be called www.stockchartists.com

In any event, the rejected article appears below. What say you? Should it have been rejected? Would you be interested in reading or even contributing to a technically-based content market opinion site?

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imageI know both the bull and bear fundamental arguments surrounding gold, you’ve heard alll of them before.

  • The Bulls point to the fact that gold is both a commodity used by industry and consumers and, perhaps even more so, a safe haven alternative for fiat money and store of accumulated wealth.
    • Central banks around the world flooding the market with currency that eventually will lead to inflation and rising commodity and gold prices
    • A fixed world-wide supply of gold in a world of ever increasing demand
    • Increased demand resulting from the growth of ETFs
    • Increased demand due to increased wealth from emerging market consumers
    • Increased demand from governments beginning to accumulate
    • Continued political uncertainty
    • Finally, the price of gold is still only around 70% of its inflation adjusted peak price of $2300 reached during the 1970′s energy crisis.
  • The Bear’s argue that the price of gold has quadrupled with only minor corrections from less than 50 in 2005 when the GLD ETF was first made available.
    • Hedge funds are reportedly unloading their large cache of GLD
    • There will be better places to invest your money than gold as stocks and commodities continue to reflect an improved economic environment
    • The bull market for gold paralleled the secular bull market for bonds therefore a reversal in fixed income secular trend will also lead to reversal in gold prices.
    • QE and monetary easing will end soon and the excess money supply that the Fed pumped into the economy will begin to be drained
    • Governments are actually unloading their gold hoards

Rather than trying to second guess the experts and come up with my own prediction of gold’s future direction, I believe price action and trend best represents the consensus of how the world’s investors actually act on their beliefs. There’s no question that the price of GLD has stalled but what isn’t as clear is whether this the beginning of a reversal leading to sharply lower prices or whether this period could be actually represent the end of a consolidation pattern.

In the chart below, there’s not question concerning the top boundary of the pattern … it’s clearly defined.  There are two possibilities, however, for the zone’s lower boundary. The blue dashed line assumes the zone is a descending triangle reversal top pattern while the green dashed line assumes the zone is a flag consolidation pattern. We will be left in the dark as to which pattern interpretation is correct until GLD declines to approximately 137, or down another 7.4%, at which point GLD will likely find some support.

It’s said that “the longer the pattern the stronger the trend out of that pattern”. If the price stabilizes around 137 and then reverses, a major bull move could be launched that could finally carry GLD substantially above its previous high of 182. But if it again fails after that reversal at around 150, or today’s price, then a reversal top would be confirmed leading to further declines possibly to under 100. GLD is clearly in an “indecision zone” (click on image to enlarge) and I would wait to make any further commitments either way (bullish long or bearish short) until investors drive the price out of the zone one way or another.

Bull and Bear Gold Case

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November 29th, 2012

Head-and-Shoulders Patterns: FDX Case Study

The key point in yesterday’s discussion of the GLD and AAPL head-and-shoulders patterns can be summed up in the post’s last paragraph:

“……. no matter how good these chart patterns may look a year from now, unless and until they cross their necklines, there’s no certainty today that they won’t fail to deliver.  While getting in early will produce a greater return, the trade entails significant risk that the stock actually winds up moving in the opposite direction.”

The point perhaps not made emphatically enough is that even though head-and-shoulders stock chart patterns appears on the surface to be similar to the results of a series of random coin tosses there is a major difference between the two should the price/value cross the neckline.  The result of coin tosses merrily continues on a random path, the path in the prices/values in stocks, indexes and commodities subsequent to a cross of the neckline usually becomes impacted by a feedback loop know as “momentum”.

When they see new highs or lows being set as the price/value crosses the neckline, investors expect, even anticipate, a continuation of the prevailing trend.  That predisposition causes them to place trades (either buy if a cross above or sell if a cross below the neckline) in anticipation of being able to close those positions some time in the future at a profit.  Coin tosses have no connection with the future but investors do.

The trading rule, therefore, is that investors should wait to commit to their prospective position until momentum is launched and the signal in the form of a neckline cross is evident.  [This presumes that a neckline is something obvious and concrete but that's the topic for the next post.]

Let’s look at another example of that trading rule.  One advisory service recently substantiated their large position in FDX (Federal Express) by arguing that FDX was restructuring their operations so that their Express division is “refined” and their Ground operation “will lead to better margins and more market-share take against UPS.”  Somebody has to perform good fundamental analysis but it’s not clear whether individual investors are equipped or has the time to uncover and evaluate such information.  Large institutional investors (what I call “the heard”) do and what we can do is to follow their footprints in their hunt for big game.

If only a small percentage of the herd know or arrive at the same conclusion as the above the FDX analysis then price action in FDX shares will not be impacted dramatically.  If the analysis is correct and is reflected in operating results, the rest of the herd will join the chase and price momentum will begin.  If its efforts, the FDX shares will languish at best and fall at worst.  I would want to buy the shares only after, and not before, sufficient numbers of investors begin to believe in the FDX transformation and the shares begin to rise.

FDX stock has been restrained from continuing its uptrend by a resistance trendline (“neckline”) for over 5 years.  It isn’t relevant to the trading strategy whether you envision an emerging inverted head-and-shoulder pattern (square 1) or the longer-term ascending triangle (square 2).  To believe the story, you have to “show me the money”. You need to see the shares cross above the resistance trendline (the “neckline”) to have confidence that the uptrend momentum is sufficiently sustainable before foregoing other opportunities and putting your good money into FDX stock.  As my slogan says, “fundamental analysis is subjective, momentum is a fact.”

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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