Archived Blog
Posted February 6, 2010 at 7:38 PM
- The inverse of a Cup & Handle Chart Pattern.
- The stock bounces off of a support level and moves higher on unremarkable volume.
- A "Rounded Top" forms and then subsequently moves lower on increasing volume producing "The Cup".
- The pattern is completed when a Bear Flag forms producing the handle.
- The breakdown occurs when the stock breaks the low of the handle on increasing volume.
Posted January 31, 2010 at 1:55 PM
The INDU is headed for 9700, which is a 10% pullback from the top at 10700. This is a healthy correction and has been needed for awhile. The volume accompanying the current bearish movement confirms the investment community is definitely participating. This retracement has not surprised us as we have adjusted our positions to take advantage of the move. We are longer term bullish, so in our opinion, this move is no need to panic. The analysts who are predicting a double dip recession are still alive and well however, we are not in that camp.
The SPX is the same story as the INDU. Look for 1030 and then 975 on the pullback and then hop back on board the “Bull Train”. There will be some buying opportunities as the index begins to bottom. As mentioned in last week’s post, do not underestimate the power of momentum. There were some that felt that the consolidation on Monday through Wednesday was a bottoming sign which was misguided. You have to expect periods of consolidation on the way down so don’t be fooled.
The COMPQ fell hard out of the Bear Flag on Thursday and Friday on increasing volume. We are targeting 2114 and then 2024. The COMPQ has posted impressive gains since the March 2009 bottom and it is not a surprise to see the index leading the major averages lower.
The broad market finished lower in January, which does not bode well for those that believe that 'how January goes so does the year'. We happen to believe that this move is a short-term bump in the road and will provide us with some outstanding buying opportunities going forward. The key to success in trading is to follow the market. Don’t fight it with your preconceived beliefs. Although, we have definite ideas about where we feel the market is going, we will submit to the market and follow it because in the end, the market is always right. We would rather make money than stubbornly trying to be right. We wish you a fantastic week ahead!
Posted January 31, 2010 at 1:52 PM
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Posted January 31, 2010 at 1:50 PM
• The inverse to the Bull Flag, the Bear Flag is a bearish continuation pattern that appears in a downtrend after a significant bearish move with volume.
• The Bear Pennant is very similar to the Bear Flag. The difference is that the consolidation is in the form of a small symmetrical triangle. The bearish entry is just below the lower trend line of the triangle.
• The stock will cease its fall as shorts cover their position. The stock should consolidate in a sideways to slightly bullish fashion with decreasing volume.
• The short entry is the break of the low of the flag. The target should be the initial move down added to the bearish breakdown point. Look for increased volume on the breakdown from the flag.
• The stock falls quickly on increasing volume and smart traders begin to take profits as the stock moves sideways to up on decreasing volume.
• The bearish entry at the low of the flag provides an excellent entry as the stock continues its’ move down on increasing volume.
• The projected target is the length of the initial move down to the flag added to the breakdown point out of the flag. Increased volume on the move will confirm the quality of the continued bearish sentiment.
Posted January 31, 2010 at 1:44 PM
ECONOMIC REPORTS
MONDAY 2/1
Personal Income, Personal Spending, Construction Spending, ISM Index
TUESDAY 2/2
Pending Home Sales, Auto Sales, Truck Sales
WEDNESDAY 2/3
Challenger Job Cuts, ADP Employment Change, ISM Services, Crude Inventories
THURSDAY 2/4
Initial Claims, Continuing Claims, Productivity-Prel, Unit Labor Costs-Preliminary, Factory orders
FRIDAY 2/5
Nonfarm Payrolls, Unemployment Rate, Average Workweek, Hourly Earnings, Consumer Credit
EARNINGS OF NOTE
MONDAY 2/1
ACV, APC, GCI, HUM, MNKD, PCL, SOHU, TUP
TUESDAY 2/2
AFL, ADM, CTRP, CMI, DHI, FISV, JDSU, MTW, MAN, MRO, MEE, MET, MYGN, NETL, PBG, SU, DOW, HSY, UPS, UNM, GRA, WHR
WEDNESDAY 2/3
AKAM, AMP, BDK, BRCM, CBG, CSCO, CMCSA, EFX, HMC, INSP, IP, MWW, NOV, NVLS, PFE, RL, BCO, TWX, V, WLT, YUM
THURSDAY 2/4
BEBE, BKC, CME, CI, DB, DO, GSK, HIT, K, MA, MCO, NOC, PENN, PBI, SLE, SNE, HOT, SUN, TM, UIS
FRIDAY 2/5
AET, AON, BZH, PC, TSN, WY
Posted January 31, 2010 at 1:42 PM
Cash is king! Liquidity in the form of cash tells us that the company can meet its’ obligations. The Cash Flow Statement is the third and last statement that we will touch upon. The statement is filed quarterly and year over year in concert with the Profit and Loss and Balance Sheet. The Cash Flow Statement is a measure of incoming and outgoing cash from its’ business operations for a specific point in time. The statement further defines the cash flow of the company that is indicated on the Balance Sheet. There are two methods of accounting that are used 1) accrual and 2) cash. Most companies use the accrual method which accounts for goods delivered as sales regardless of whether they have been paid for or not. The outstanding balance is shown on the Profit and Loss Statement under accounts receivable.
The Cash Flow statement typically divides the accounting for cash into three areas 1) Operating Activities 2) Investing Activities and 3) Financing Activities. It is most favorable if the company is creating their cash flow from Operating Activities as opposed to the other two. The reason is that if the company can sustain its’ operations from daily operations as opposed to investment returns and financing, it shows company strength. Be careful to take note of how large of an impact that depreciation has on the Operating Activities bottom line. Depreciation does not actually contribute cash to the company; it is more of an accounting item.
So, what are we looking for as investors in the Cash Flow Statement? A company with a smaller percentage of capital expenditures, (which is found under Investing Activities) is spending less of the company’s net earnings to remain competitive. It is also prudent to look for a company that uses its’ cash to buy back stock. Stock buyback activity tells the investor that the company believes its’ stock is a bargain and if they feel that way, that is a good sign. The other outcome to stock buyback is that it reduces the outstanding shares and will therefore increases the earnings per share which should at some point increase the value of the stock assuming that the multiple remains constant. You can find this information under the Financing Activity section of the Cash Flow Statement.
Posted January 23, 2010 at 5:50 PM
Well, it appears we are getting our pullback as we had expected would happen. We are certainly grateful that we were generously hedged as indicated in last week’s blog. This may have taken others as a surprise but we were ready for it. Our positions are now bearishly delta. The task is now to determine likely targets for the move. It is difficult to accurately determine the magnitude and duration of a move such as this. The place to start is to find levels of confluence of indicators. These are areas where several data points line up to tell us a similar story. That does not mean that the market is going to co-operate. However, many times it does.
It is healthy that we have a pullback. We are longer term bullish, but this retracement is needed. We will simply follow it and make money. I am reminded of the analogy that the market goes up like an escalator and down like an elevator. The last three trading days certainly support that truism.
As the market approaches target levels, we will begin to take close note of how it reacts at those key levels. Typically, you will see the indexes put in narrower range trading days with less volume at support. Don’t be fooled. The market can do this several times on the way down. Look for the market to begin to stall and trade sideways. It is at times like this when you may be tempted to remove your hedge only to be whipsawed. The safest approach is to wait for upside confirmation before determining that the market has found a bottom. You may miss the exact turn, but who cares. Do not underestimate the market’s ability to follow through. Momentum can be a freight train and you don’t want to step in front of it. Just hop on board and ride it to the end of the line.
Posted January 23, 2010 at 5:48 PM
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Posted January 23, 2010 at 5:46 PM
•The Bull Flag is a bullish continuation pattern that is characterized by a large and relatively quick upside move followed by profit taking as represented by a tight sideways to slightly bearish consolidation on decreasing volume.
•A Bull Pennant is very similar to a Bull Flag; the difference is that the consolidation is in the form of a small symmetrical triangle. The upside breakout point is just above the upper trend line of the triangle.
•The resumption of the upside move occurs when the stock trades above the high of the flag on increasing volume.
•The consolidation is nothing more than profit taking and should be expected after a fairly large, rapid gain in the stock.
•The stock rises quickly with volume and smart traders begin to take some off the table which causes the pause. This is normal and expected.
•In my opinion, the Bull Flag is one of the most consistently bullish entries in trading.
•Once the stock breaks the high of the flag your target should be the length of the initial move in the trade (The Pole) added to the top of the breakout point.
Posted January 23, 2010 at 5:43 PM
ECONOMIC REPORTS
MONDAY 1/25
Existing Home Sales
TUESDAY 1/26
Case–Shiller 20 City Index, Consumer Confidence, FHFA Home Price Index
WEDNESDAY 1/27
New Home Sales, Crude Inventories, FOMC Rate Decision
THURSDAY 1/28
Initial Claims, Continuing Claims, Durable Orders
FRIDAY 1/29
Chain Deflator–Adv., Employment Cost Index, GDP–Adv. Chicago PMI, Michigan Sentiment
EARNINGS OF NOTE
MONDAY 1/25
AKS, AMGN, AAPL, HAL, OLN, VMW
TUESDAY 1/26
BHI, ELY, CNI, GLW, DAL, DV, DD, EMC, GILD, JNJ, NVS, NUE, SYK, TLAB, TRV, X, VZ, YHOO
WEDNESDAY 1/27
ABT, ATI, CAT, CTXS, COP, ETFC, FLEX, GD, GMCR, HES, LRCX, MUR, NFLX, NSC, OSIS, PJC, QCOM, RYL, STJ, SYMC, BA, SWK, UAUA, UTX, USG, VLO, WLP
THURSDAY 1/28
MMM, ALK, MO, AMZN, AZN, T, BLL, BMY, BC, CP, CAH, CELG, CHKP, CL, CY, EK, LLY, ETH, F, BEN, GNW, JNS, JBLU, JNPR, KSU, KLAC, LLL, LMT, MSFT, MNRO, MOT, NOK, OXY, OXPS, OSK, POT, PG, RMBS, RTN, RCL, SNDK, TROW, TSM, TDY, TWC, TYC, UA, LCC, WDR, XEL, ZMH
FRIDAY 1/29
ACI, CVX, FO, HON, MAT, NWL, PFS
Posted January 23, 2010 at 5:41 PM
The Balance Sheet is a financial statement indicating the strength of the company at a specific point in time. Most companies will report their Balance Sheet numbers quarterly with a year over year summary at the end of their fiscal year. Put quite simply, the Balance Sheet seeks to “balance” two factors. 1) That which is owned by the company and reflected by its’ assets and 2) that which is not owned comprising both borrowed money (debt and liabilities) and money generated through the equity of shareholders. The Balance Sheet equation is: Assets = Liabilities + Shareholders’ Equity.
Line items that appear under assets on the Balance Sheet can include the following: Current Assets including cash and cash equivalents, Accounts Receivable, Short Term Investments and Inventory. Current Assets fund the day to day operations of the company. If the company is deficient in this area, it will force them to acquire more debt or initiate a capital raise with additional equity. Long Term Assets include Fixed Assets such as buildings and equipment. It also includes Intangible Assets such as intellectual property and blue sky value like good will.
Liabilities include Current Liabilities, Long Term Liabilities. Current Liabilities include such items as Short Term Debt, Accounts Payable, Accrued Expenses and that portion of Long Term Debt that is currently due. Long Term Liabilities comprise items such as mortgages and business loans.
The final part of the equation is Shareholder’s Equity and that is the part of the company that is attributed to claims that the stockholders have on the value of the company. This value is typically arrived at by subtracting Total Liabilities from Total Assets resulting in the Shareholder’s Equity.
So, as investors, what are we looking for on the Balance Sheet to tell us that the company is worth investing in? An appealing investment would be a company with a large cash position that has been created from business operations, not from the sale of bonds or equity shares and little to no debt. We look for a steady rise in inventory to satisfy the demand for the company’s products. Net receivables should be low because that represents the company’s ability to bring cash in the door quickly and efficiently. Next week we will talk about the Cash Flow Statement.
Posted January 16, 2010 at 4:40 PM
We continue to be cautiously bullish but generously hedged in our positions. We are trend followers, yet the trend is not convincingly robust. That is ok because there are strategies that we employ for every market condition. We are currently selling premium which allows us to reduce the cost basis of our stock positions in addition to trading premium collection strategies that creates short term income. It may appear that when the market is not decisively trending, then the markets are futile. There is nothing further from the truth. The fact of the matter is that markets will generally channel 70-75 percent of the time. We love it when it trends because we can make money very quickly. A trader that only recognizes and trades the trends will end up being dormant for large periods of time.
The INDU broke out of its sideways channel in mid to late December and smartly traded up from the 10,500 level to 10,700. It appears that the index may want to go sideways again for awhile. The slope of the bullish move has flattened. If you investigate a one year chart of the INDU, you will see that the index has had a varied trajectory on this amazing move. From the low on March 6th until the close on March 26th there were only six bearish sessions and they were slight. The move was parabolic. The slope changed from that point until early May when we experienced the first of two small corrections. The index then burst upward from July 13th mimicking the move from March. The INDU spent the month of July on a tear until early August when it began a series of stair step moves up until the recent consolidation in November and December. The slope of the INDU since Mid November has been relatively flat. Volume has been unremarkable and we are currently at an inflection point as pointed out in previous market analysis.
We know that the market is going to do what it wants to do. Prosperous traders realize and embrace that knowledge. We apply strategies that optimize current market conditions, but we can develop a market bias in anticipation of what is likely to happen in the near term. We pointed out in a recent post that institutional money appears to be pulling out of the market and into money market funds while retail investors are removing money from those funds and one could suspect that it is finding its way into the stock market. Our feel is that the more sophisticated investor is anticipating a pullback in the markets. It is anyone’s guess as to the magnitude and duration of such a move. I can tell you that we are prepared to take advantage of that move when it occurs. Best, Robin
Posted January 16, 2010 at 4:38 PM
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Posted January 16, 2010 at 4:35 PM
- This is a falling and converging channel pattern. It looks like the beginnings of a triangle as both trend lines are falling and converging.
- The lower trend line is putting in lower lows but not at the pace of the upper trend line. The pattern has bullish implications as the stock will usually break to the upside out of the channel.
- The pattern can be found in both bullish and bearish markets.
- When in a bearish market, the pattern is defined as a reversal pattern.
- When in a bullish market, the pattern is a continuation pattern.
- The stock is putting in lower lows but at a slower rate than the highs.
- Volume is diminishing indicating a lack of conviction in driving the stock lower.
- When the stock breaks the upper trend line it will usually be on increased volume as the stock breaks out of the channel to the upside.
Posted January 16, 2010 at 4:32 PM
ECONOMIC REPORTS
MONDAY 1/18
None
TUESDAY 1/19
Net Long-Term TIC Flows
WEDNESDAY 1/20
Building Permits, Core PPI, PPI, Housing Starts, Crude Inventories
THURSDAY 1/21
Initial Claims, Continuing Claims, Leading Indicators, Philadelphia Fed
FRIDAY 1/22
None
EARNINGS OF NOTE
MONDAY 1/18
None
TUESDAY 1/19
Citigroup (C), CSX (CSX), Fastenal (FAST), Forest Labs (FRX), IBM (IBM), New Oriental Education & Tech (EDU), Parker Hannafin (PH), TD Ameritrade (AMTD).
WEDNESDAY 1/20
Bank of America (BAC), Bank of NY Mellon (BK), Brinker (EAT), Covidien (COV), eBay (EBAY), F5 Networks (FFIV), Hudson City Bancorp (HCBK), Logitech (LOGI), M&T Bank (MTB), Morgan Stanley (MS), Seagate Tech (STX), SLM Corp (SLM), Starbucks (SBUX), State Street (STT), U.S. Bancorp (USB), Wells Fargo (WFC), Xilinx (XLNX).
THURSDAY 1/21
American Express (AXP), Burlington Northern Santa Fe (BNI), Capital One (COF), Comerica (CMA), Cosolidated Edison (ED), Continental Airlines (CAL), Fifth Third Bancorp (FITB), Freeport McMoRan (FCX), Goldman 'Government' Sachs (GS), Google (GOOG), ICICI Bank (IBN), International Gaming Tech (IGT), Intuitive Surgical (ISRG), ITT Educational (ESI), KeyCorp (KEY), PNC Financial (PNC), PPG Industries (PPG), Precision Castparts (PCP), Southwest Airlines (LUV), Synaptics (SYNA), Union Pacific (UNP), United Health Group (UNH), Western Digital (WDC), Xerox (XRX).
FRIDAY 1/22
Air Products (APD), BB&T Corp (BBT), Exelon (EXC), General Electric (GE), Harley-Davidson (HOG), Huntingon Bancshares (HBAN), Johnson Controls (JCI), Kimberly Clark (KMB), McDonald's (MCD), Schlumberger (SLB), SunTrust (STI).
Posted January 16, 2010 at 4:25 PM
There are three financial statements pertaining to measuring a company’s financial health. They are the Profit and Loss, the Balance Sheet and the Cash Flow statements. Today we will talk about the Profit and Loss statement. The P&L measures and details a company’s revenues and expenses over a set time period such as quarter over quarter or year over year.
The statement comprises four basic parts 1) Sales or revenues 2) Cost of goods or cost of sales 3) Gross Profits and 4) Expenses. The Net Income or earnings is calculated by subtracting the total expenses from the total revenue. The company creates top line revenue or sales and then subtracts returns and damaged merchandise to arrive at Net Sales. Cost of goods is then subtracted from Net Sales resulting in Gross profits. Operating Expenses are then subtracted to reveal the Operating Profit of the company. Other income is added back in and then Interest, Taxes, Depreciation and Amortization is debited to finally arrive at the bottom line Net Profit.
From an investor’s perspective, the question may be asked, “What are we looking for in the Profit and Loss Statement”? The answer is that the statement can reveal how healthy the margins are and whether or not the company is growing its earnings. At some point in the future earnings will translate to stock price. Each sector and industry will have a multiple of earnings that is generally attributed to those companies in that sector and industry. When doing a comparative analysis of a particular company, an investor can compare the company to its peers and sometimes be able to pinpoint when a company appears to be undervalued. The P&L statement can help uncover such opportunities. Next week we will touch on the Balance Sheet.
Posted January 9, 2010 at 4:55 PM
The Dow Jones Industrial Average, SPX and the COMPQ all experienced increased volume on the move to the upside this week. Our sense is that the move is not quality. However, with that said, the market is always right and we are bullish until we’re bearish. That means that the amount of hedge we employ is commensurate with our degree of bullish/bearish bias. After the large upside candle on Monday, the INDU put in four very indecisive trading days with a Hanging Man, Doji, Hanging Man, and Hanging Man Tuesday through Friday respectively. The index is currently at the upper Bollinger Band and at a long term resistance level. We continue to be Trend Followers and are "Long the Market” but ever so slightly. We are looking for a breakdown to occur soon. When that happens, we will adjust our positions to take advantage of the move. All of the indexes have room to move in the recent channel and we will not be definitively bearish until the broad based indexes break down out of the trading range with increased volume.
There is indication that as recently as late December, institutional money had been flowing into money market funds to the tune of almost $4.5 billion. At the same time, retail investors have pulled out of money markets by nearly $2 billion. One could speculate that this shift in allocation in the face of a rising stock market is driven by retail investors who may not be as savvy as the institutional money. This may be a classic handoff from the smart money institutional investors to the less informed retail investors at the top of the market. Please realize that we recognize that there are numerous very smart retail investors, but we also acknowledge that there are many who are not. Those less sophisticated retail investors are many times the ones left holding the bag at the top of a move and “shaken out of positions” at the bottom only to see the market turn bullish. So, buyers beware!
We continue to expect a retracement in the markets. Even with the recent injection of volume this past week, the market is overbought and exhibiting signs of weakness. The key is to follow the market and stay nimble enough to adjust when the trend changes. Robin
Posted January 9, 2010 at 4:53 PM
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Posted January 9, 2010 at 4:51 PM
- This is a rising and converging channel pattern. It looks like a triangle with the trend lines converging as both the upper and lower trend lines are ascending.
- The pattern has bearish implications as the lower trend line’s slope is steeper than the upper trend line and usually breaks down out of the channel bearishly.
- The pattern can be found in both bullish and bearish markets.
- When in a bullish market, the pattern is defined as a reversal pattern.
- When in a bearish market, the pattern is technically a continuation pattern.
- The pattern is putting in higher highs and lows but the highs are slower to develop as the lows are more dramatically higher.
- Volume is diminishing as the stock moves higher showing less conviction on the move.
- When the stock breaks the lower trend line it should be on increased volume.
Posted January 9, 2010 at 4:49 PM
ECONOMIC REPORTS
MONDAY 1/11
None
TUESDAY 1/12
Trade Balance
WEDNESDAY 1/13
Crude Inventories, Fed Beige Book, Treasury Budget
THURSDAY 1/14
Initial Claims, Continuing Claims, Retail Sales, Retail Sales ex-auto, Export Prices ex-ag. , Import Prices ex-oil, Business Inventories
FRIDAY 1/15
Core CPI, CPI, Empire Manufacturing Survey, Capacity Utilization, Industrial Production, Michigan Sentiment
EARNINGS OF NOTE
MONDAY 1/11
AA, HELE, WDFC
TUESDAY 1/12
INFY, KBH, LLTC, SVU
WEDNESDAY 1/13
None
THURSDAY 1/14
BGG, INTC
FRIDAY 1/15
JPM
