Archived Blog
Posted January 9, 2010 at 4:47 PM
The purpose of entering into business is to make a profit, so it only makes sense to keep a close eye on profitability measures. This week we are going to touch on two such measures and they are Profit Margin and Operating Margin.
Profit Margin is defined as Net Profits divided by Sales. Another way to look at this measure is that it tells us how much of each dollar of sales is actually kept. A high Profit Margin is an indication that the company is doing a good job of converting sales to bottom line earnings. It is a measure of efficiency. If a company can generate a higher Net Profit on the same amount of sales, then they are more efficiently producing earnings. For example, if “Company A” has a Net Profit of $20 million from $200 million of sales, then the Profit Margin would be 10%. Let's compare that with “Company B” that generated $30 million in Net Profit on $400 million of sales. Even though “Company B” is generating a larger Net Profit, it is taking greater sales to do it. “Company B” is less efficient than “Company A” and that is reflected in the Profit Margin. “Company A” has a Profit Margin of 10% and “Company B” has a Profit Margin of 7.5%.
Operating Margin is defined as Operating Income divided by Net Sales. Operating Income (Gross Income minus Depreciation) needs to be defined in order to arrive at Operating Margin. Net Sales is defined as sales after returns, missing and damaged goods. Net Sales is a metric that allows a more accurate picture of sales. Operating Margin tells us the amount of resulting revenue after variable costs such as cost of materials and employees. If the number is high, it is considered to be favorable. It is best to measure the company over time against itself in quarter over quarter or year over year comparisons. One time, nonrecurring expenses are not normally included in the Operating Margin calculation.
Posted January 3, 2010 at 5:43 AM
The DOW bounced off of the top of the sideways channel and is now poised to move down and retest the bottom of the channel at 10,200. We are expecting a definitive breakdown out of the channel and to begin testing a series of swing highs and lows that have been put in since August. However, until the index shows its' hand, we will sit patiently and just trade the stock where it want to go in the channel.
The SPX made an attempt to break out to the upside last week only to be rejected by several DOJIs and then a Bearish Engulfing pattern on Thursday. We suspect that the move back inside of the channel will result in a retest of the lower end of the channel at 1084. If the index breaks down out of the channel, which is what we feel that it will do, the next stop should be 1020-1030.
The COMPQ has been the leader all year and its move the last two weeks in breaking out of the rising wedge to the upside was very impressive. The index has also encountered several DOJI days and then a very convincing Bearish Engulfing pattern to end the trading for the week, month and year. Our sense is that the index will move down to test the top trend line of the rising wedge at 2240.
Stay nimble and follow the market. Trade what you see and define your levels of support and resistance. Let's make 2010 a very profitable year!! Robin
Posted January 3, 2010 at 5:42 AM
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Posted January 3, 2010 at 5:40 AM
•This pattern is formed after a downtrend and is the inverse of the Head and Shoulders and is a bullish reversal.
•The pattern is comprised of three lows, the left shoulder, the head and the right shoulder.
•The first low is the left shoulder on increasing volume and then bounces up to form a reaction peak before retracing on low volume to form the head.
•The stock then makes a second reaction high which will form the neckline with the first reaction high before moving down to form the right shoulder before moving up with volume to break the neckline.
•The downtrend is failing after the Head is formed on low volume and reacts back up to form the neckline.
•The right shoulder is a higher low which confirms that the continuing bearish trend is tiring.
•When the stock moves up to challenge and break the neckline it will usually be on increased volume which will confirm the reversal of trend.
Posted January 3, 2010 at 5:36 AM
ECONOMIC REPORTS
MONDAY 1/4
Construction Spending, ISM Index
TUESDAY 1/5
Factory Orders, Pending Home Sales, Auto Sales, Truck Sales
WEDNESDAY 1/6
Challenger Job Cuts, ADP Employment Report, ISM Services, Crude Inventories
THURSDAY 1/7
Initial Claims, Continuing Claims
FRIDAY 1/8
Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Wholesale Inventories, Consumer Credit
EARNINGS OF NOTE
MONDAY 1/4
None
TUESDAY 1/5
SONC, MOS
WEDNESDAY 1/6
BBBY, FDO, BLUD, MON, RT
THURSDAY 1/7
APOL, STZ, LEN, SCHN
FRIDAY 1/8
None
Posted January 3, 2010 at 5:33 AM
One of the key factors in the success of any company is the effectiveness of management. Decisions made on the management level can dramatically enhance or hurt the performance of a company. There are two measures that we will touch on today that can give us insight into how well management is performing 1) Return on Assets and 2) Return on Equity.
Return on Assets is an indication of how effectively a company can achieve a return relative to the amount of total capital invested. The formula for ROA is Net Income divided by Total Assets. The higher the number generated by the formula the better. If management through the myriad of decisions and resources available to them can achieve a high return, then that management team is performing well. It is best to compare performance against the company itself quarter over quarter or year over year. It is also prudent to compare performance to other companies in the same or similar industries.
Return on Equity is similar to ROA in that it is a measure of management performance and their ability to generate a return. ROE measures how well the company can yield a return in relation to the shareholders equity or stock holdings. The formula for ROE is Net Income divided by Shareholder’s Equity. The higher the number generated by the formula the better. As with ROA the measure is most meaningful by comparing the company over time against its’ own performance as well as a comparison against other companies in similar industries.
When considering whether or not to invest in a company, management effectiveness should be a crucial part of your due diligence and these measures will help you in that decision. Robin
Posted December 27, 2009 at 1:54 AM
The DOW continues in its sideways channel and moved up to the top of that channel this past week on weak volume. The trend is tired and ready to retrace. The stochastics has moved back into the overbought area and the index is at the top bollinger band. I feel that this move is merely end of the year window dressing and we are overdue for a pullback. If we break down out of the channel, look for 10,100 as the first level of support followed by 9700 - 9800. The upside resistance appears to be very stout and in my opinion, not likely to be challenged soon.
The SPX closed above the recent channel top but on very unremarkable volume. We shall see if the index will continue higher, but I feel that any upside move will be short lived as we are due to pullback soon. The "January Effect" may allow the small caps and value stocks to shine, but that should not carry beyond the end of January. I don't feel that the pullback will be massive, maybe 5 to 10 percent.
The COMPQ convincingly broke to the upside with apparently no signs of indecision. However, it was not a quality move based upon the lack of participation as measured by volume. It will be interesting to see if we get follow through into 2010. My next comments will be coming to in the New Year. Stay in tune with the market and follow it. If you go where the market goes, you will prosper in 2010. Best, Robin
Posted December 27, 2009 at 1:52 AM
Posted December 27, 2009 at 1:49 AM
•The Head and Shoulders pattern is a bearish reversal that is found at the top of a trend and is comprised of three tops.
•The first top is the left shoulder and is usually formed on increasing volume.
•The stock then pulls back to form a low and then thrusts higher than the first shoulder to form the head on lower volume.
•The stock then pulls back again to form another low before moving up for one final time to form the right shoulder.
•The downside trigger occurs when the stock pulls back and breaks the trend line drawn between the two lows, called the neckline.
Head and Shoulders Psychology
•The head which is a higher high is formed on diminished volume which shows a lack of conviction on the move.
•The stock then forms the right shoulder after the second reaction low and volume picks up as the stock breaks the neckline.
• The second reaction low between the Head and the right shoulder forms what amounts to a double bottom with the first reaction low between the first Shoulder and the Head.
•The stock moves down off of the right shoulder and breaks the neckline (double bottom).
ad which is a higher high is fo
Posted December 27, 2009 at 1:41 AM
ECONOMIC REPORTS
MONDAY 12/28
None
TUESDAY 12/29
Case-Schiller 20 City, Consumer Confidence
WEDNESDAY 12/30
Chicago PMI, Crude Inventories
THURSDAY 12/31
Initial Claims, Continuing Claims
FRIDAY 1/1
Market Closed for New Years
EARNINGS OF NOTE
MONDAY 12/28
None
TUESDAY 12/29
None
WEDNESDAY 12/30
None
THURSDAY 12/31
None
FRIDAY 1/1
None
Posted December 27, 2009 at 1:39 AM
Continuing our discussion from last time, the next metric of significance is the PEG (Price Earnings Growth) Ratio. While one can measure the value of a stock based upon its’ PE as discussed last week, it is valuable to know if the company is growing and that is what the PEG Ratio tells us. The PEG equals the PE divided by the annual Earnings Per Share growth. The resulting number will project an undervalued company if that number is low. The PEG can be represented in various time periods such as annually or for a longer period such as 5 years. The measure is comparative so one can derive perspective in terms of valuation when comparing the company against its’ own past performance as well as comparing against other companies in a similar industry or sector.
Another metric used for valuing a stock against the market as well as itself is Price/Sales. The formula is the stock’s price per share divided by its’ revenue and is usually represented by the TTM (trailing twelve months). This measure is more accurate when comparing companies in similar industries and sectors. The measure does not account for how efficiently the company is operating because expenses are not included in the calculation.
Finally, this week we will touch upon one additional valuation metric, Price/Book. This measure compares the Market Value of the company as reflected by the share price of the stock divided by its’ Book Value which is defined as its’ Total Assets less liabilities and Good Will or blue sky value. If the company exhibits a lower number, it can be indicative of an undervalued company although, further investigation may reveal that the company may have internal problems.
We hope that your Holidays have been joyful. Best, Robin
Posted December 20, 2009 at 5:36 AM
The DOW is still channeling. The ADX shows the trend to be without further impetus. Overhead resistance is strong and even with extaordinary volume on Friday, the best that we could do was a "Spinning Top" at the lower end of the range. I think that the index is getting ready to pullback. The first clue would be if it broke 10,170. There are several swing highs and lows that could act as targets if the DOW began to retrace. The primary downside target is 9100. I really feel that the next 1000 points to the upside are going to be tough to achieve.
The SPX tells a similar story as the DOW. The downside target is 850-950 if the index breaks down. We are stalled out to the upside from the consolidation trading from 2004 at the 1125-1175 level. Should the index break through that area, the next target would be 1325.
The COMPQ could retrace to 2025-2050 if it breaks down out of the current channel. The upside target is 2375 - 2550. Stay nimble and follow the market. When the indexes break out of their sideways trading (and they will) be ready to take advantage because it should be a good move. I am inclined to think that the move will be down in a correction. Keep in mind that healthly markets correct so let it do what it is going to do and be there to profit. Robin
Posted December 20, 2009 at 5:34 AM
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Posted December 20, 2009 at 5:33 AM
Double Bottom
•This Chart Pattern is a bullish reversal pattern that appears at the bottom of a downtrend and is characterized by a definitive bottom followed by a bounce and then a retracement to a second bottom that ceases its decent at or very close to the first bottom.
• The stock’s volume should be diminishing as it makes the second bottom and then moves boldly up on increased volume ideally exceeding the peak of the bounce off the first bottom.
Double Bottom Psychology
•This pattern is the inverse of the Double Top and appears after a downtrend.
•Buying pressure enters the stock at the first bottom and begins to push the stock higher.
•Shorts begin to cover on the bounce off the bottom as new buyers come into the stock.
•As the bounce falters and begins to retrace back to the first bottom , buying once again enters the picture as the investment community determines the level to be a good buying opportunity.
•As the stock comes off of the second bottom, it should do it with increased volume and surpass the middle peak.
Posted December 20, 2009 at 5:31 AM
ECONOMIC REPORTS
MONDAY 12/21
None
TUESDAY 12/22
GDP – Third Estimate, Existing Home Sales
WEDNESDAY 12/23
Personal Income, Personal Spending, PCE Prices, Michigan Sentiment- Rev, New Home Sales, Crude Inventories
THURSDAY 12/24
Initial Claims, Continuing Claims, Durable Goods Orders, Durable Goods Orders- ex Auto
FRIDAY 12/25
Market Closed for Christmas
EARNINGS OF NOTE
MONDAY 12/21
CAG, WAG
TUESDAY 12/22
None
WEDNESDAY 12/23
None
THURSDAY 12/24
None
FRIDAY 12/25
None
Posted December 20, 2009 at 5:29 AM
I am beginning a series on key stock market information to help you become a more effective retail trader. We will begin by investigating Financial Statements. We will look at the Balance Sheet, the Income Statement and the Cash Flow Statement as well as other key metrics and financial ratios. We will also look at valuation measures that help give insight into the perceived value of a company.
It may make sense to first talk about the measures that are used to typically try and determine the value of a company. Market Cap is a term used to describe the size of a company. Market Capitalization is defined as the OUTSTANDING SHARES x THE PRICE PER SHARE. OUTSTANDING SHARES are defined as shares held by not just the public, but also insiders. The FLOAT is the total shares available for public trading.
So, if the number of shares OUTSTANDING is 1 million and the price per share is $50, then the MARKET CAP for the stock is 50 million. Stocks are usually categorized into Large Cap, Mid Cap and Small Cap. Large Cap is over $10 Billion, Mid Cap is from $2 to $10 Billion and Small Caps are between $300 Million and $2 Billion.
Another metric that is used by many investors to reflect a more accurate value of a company is its ENTERPRISE VALUE. EV more closely depicts the value of a company because it takes into account not only its cash and equity but also the debt of the company.
The final measure that we will explore today is the P/E Ratio. This is a valuation measure that is based upon comparing a stock’s price divided by its earnings per share. PE is many times expressed in relation to its last four quarters or sometimes as its (TTM) trailing twelve months as well as forward projections into the upcoming twelve months.
This is a good start and we will continue our discussion next week. Best, Robin
Posted December 13, 2009 at 2:48 AM
The DOW remains in a sideways channel and has been so for the last 19 sessions. Volume has been unremarkable and as we approach the end of the year, one begins to think that this unprecedented rally off of the March lows is too tired to continue the trek higher. Looking at a 10 year chart of the DOW reveals massive upside resistance from most of 1999 through late 2001 as well as 2004 and 2005. In my opinion, a push through 11,000 would be significant and probably unlikely at this point. I see the index going sideways to down in the near term. We will know more if the DOW breaks out of its’ current Box. I will be ready to take advantage either way it decides to go.
The SPX tells a very similar story as the DOW. The current trading range has spent the last 23 days in “The Box”. The high in the range is 1119 and the low is 1084. I am watching closely and expect a break soon. I tend to think that we will break down out of the range, but will be prepared to follow the trend whichever way it decides to go. There is also long term overhead resistance from 1100 to 1200 from late 2001 to mid 2002 as well as 2004 and 2005.
The COMPQ is also at an inflection point at current levels. The index has been in a box for the last 9 trading days and is bumping its head against significant upside resistance and will probably continue sideways to down in the short term. If the index does break to the upside with increasing volume, that would be notable.
Posted December 13, 2009 at 2:47 AM
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Posted December 13, 2009 at 2:45 AM
- Chart Patterns are a “Historical Map” of the stock from a Macro perspective as represented by recognized patterns on a chart.
- The revealed pattern will allow the trader to identify the likely future direction of the stock.
- There are two broad categories of Chart Patterns 1) Reversal Patterns and 2) Continuation Patterns.
- It will take some practice to become competent at pattern recognition, but once achieved, it will be a skill that will serve you well.
- The stock market is traded by human beings. Even in an attempt to remove emotion and psychology from the market through program trading the human element is present and visible on the chart.
- Programs are designed by humans and buy/sell triggers are input to reflect specific market conditions such as perceived support or resistance.
- As chartists, we can see the psychology of the market through Chart Patterns as well as other technical analysis tools.
Reversal Chart Patterns & Psychology
Reversal chart patterns are those that denote the end of a trend and the beginning of a new trend.
When combined with other indicators that confirm the reversal, Reversal Chart Patterns become quite powerful in predicting a turn in the market.
Double Top
This is a bearish reversal pattern that appears at the top of a trend and is characterized by a peak followed by a pullback and then a second peak that stalls at the level of the first peak and then retraces.
Double Top Psychology
- The buyers at the top of the first peak were victims of buying from the “smart money” as they sold to the “dumb money” at the top of the trading range.
- These unfortunate buyers will usually hold, refusing to take a loss and waiting for the opportunity to unload the stock at a break even.
- When that opportunity presents itself, at the second top, selling pressure increases and drives the stock lower.
- Other knowledgeable traders who know that the “Double Top” will present an opportunity to short and will do so thereby increasing the downward move.
Posted December 13, 2009 at 2:43 AM
ECONOMIC REPORTS
MONDAY 12/14
None
TUESDAY 12/15
Core PPI, PPI, Empire Manufacturing, Net Long – term TIC Flows, Capacity Utilization, Industrial Production
WEDNESDAY 12/16
Building Permits, Housing Starts, CPI, Core CPI, Crude Inventories, FOMC Rate Decision
THURSDAY 12/17
Initial Claims, Continuing Claims, Leading Indicators, Philadelphia Fed
FRIDAY 12/18
None
EARNINGS OF NOTE
MONDAY 12/14
TTWO
TUESDAY 12/15
ADBE, BBY
WEDNESDAY 12/16
HOV, JOYG
THURSDAY 12/17
DRI, FDX, GIS, NKE, PIR, RIMM, RAD, WGO
FRIDAY 12/18
KMX
