Browsing articles from "March, 2014"

Six Common Trading Myths

Mar 31, 2014   //   by Profitly   //   Market, Profitly  //  Comments Off on Six Common Trading Myths

Ryan Detrick is a Senior Technical Strategist at Schaeffers Investment Research. And although I caution against trusting everyone on financial television, this guy is great. He is a frequent guest on CNBC, Fox Business, and Bloomberg Television. Be sure to follow him on Twitter or StockTwits @RyanDetrick or read his market thoughts at www.schaefferstradingfloor.com.

Ryan recently wrote a guest post for seeitmarket.com (http://www.seeitmarket.com/market-masters-trading-myths-revealed-13562/) about six of the most common trading myths. Not only did he describe the myths, he went on to give hard examples of why they are just that, myths.

For example, have you heard of the saying, “Sell in May?” That has been a popular saying for years, but now May is actually up on average since 1980. Ryan points out that times change and traders must adapt if they want to remain successful. That is why Tim buys and sells stocks, rather than just shorting like he did to make his first million. Being able to adapt to different trading environments will both keep you successful and give you more opportunities. Adapting will help you stay ahead of the game.  Ryan says that “Adapt or die” is one of his favorite trading rules.

Here are the six myths that Ryan debunks.

#1 Light volume is bearish

This is one that has been around for a while and became even more prevalent since the financial crisis. Since at least September 2009 the bears have been saying volume is light, and this is a warning. But here are the facts.  Overall, NYSE volume is indeed lower than historical standards:

NYSE-volume-chart

However, there’s a catch. This volume didn’t just disappear, people adapted to the types of securities available. Have you heard of options and futures?  Traders have moved to those securities as well. Take a look at equity option volume and you’ll see quite the different picture.

equity-option-volume-since-2000

Now what about the fact that stocks are more expensive than five years ago?  Of course volume is lighter now when Apple is $500 versus when Bank of America was around a buck.  You can’t buy 500 shares of Apple the same way people used to buy 500 shares of Bank of America (that’s $250,000 vs. $500)! To gauge this, Ryan looks at all stocks in the S&P 500 Index (SPX) and finds their daily average dollar volume (this is the stock price multiplied by the stock volume). Then, to smooth things out, he takes a 21-day moving average of the results. Below is a chart of what he found.

spx-average-volume-chart

Total-dollar volume is certainly less than during the peak of the financial crisis. But it’s also well above the bull market from 2003 to early 2007. You must ask the question: If total-dollar volume is higher now than the last bull market, how in the world can bears say lower volume is bearish?  Not to mention spikes in volume tend to occur during pullbacks, like when Tim shorts a pump and dump or a company comes out with poor earnings results.

#2 Copper is crashing, which suggests a slowing global economy and a warning for stocks

Many people look to “Dr. Copper” for predictions in major trends in the global economy. So now that copper is breaking down to multi-year lows, Ryan checked to see just how accurate this Doctor is. As it turns out, when copper makes a new 2-year low, the S&P 500 doesn’t tend to do too bad.  Three months later it is about flat, but a year out it jumps 17%. Check out this table:

equities-performance-after-copper-price-low

Here’s a chart as well, and it sure makes it hard to say this is bearish for the S&P 500.

copper-2-year-price-low_equities-chart

#3 Big up days are always bullish

I didn’t even know this one, but there is quite the funny statistic about huge up days (or a rise in prices) in the market….they usually happen in bear markets! Last year, when the S&P 500 had a great year returning roughly 30%, it saw just three days gain more than 1.5%. Compare this with 2008 when the index dropped 38%, and the market saw 43 days gain more than 1.5%.  Slow and steady usually wins the investing race.

historical-stock-market-up-days-above-1.5-percent

#4 The Dow is up five years in a row, and this has to be bearish as we’ve gone ‘too far, too fast’

The 10-year annualized return on the Dow is about 5%. In fact, bull markets don’t end until closer to 15 to 20 year runs and an annualized return of closer to 15%. That would mean we are only about half way through the bull market run!

dow-jones-10-year-return-annualized

Everything isn’t perfect though (as it rarely is), and the 5-year annualized return is getting up near previous peaks. In fact, we are now above the peak in 2007, but well below some other peaks. This can be classified as a potential near-term warning, but not a signal this bull market is dead either.

dow-jones-5-year-historical-return-annualized

#5 This year looks a lot like 1929, so we’re going to crash

You’ve probably heard a lot about this one.  Turns out the chart today looks just like the chart in 1929 before the crash (we wrote about this here: http://blog.profit.ly/2014/02/20/the-scary-chart-being-shown-around-the-internet/). Well, like we said in our blog post, Ryan reiterates that it isn’t quite that simple. Yes, on a daily chart, things look a lot alike, but when you look at the percentage returns, there is a different picture.

dow-jones-current-vs-1929-crash-chart

dow-jones-percent-return-current-vs-1929-period-chart

That same chart that is causing so much fear doesn’t look so similar now, does it?  The rally into the ‘29 peak was a historic blow-off top.  I’m not saying this current one isn’t getting ahead of itself, but the second picture is a more ‘apples to apples’ comparison according to Ryan, and we’d have to agree.

#6 Earnings predict the stock market

This trading myth was picked up by thereformedbroker.com as well. Last year the S&P 500 gained nearly 30% while earnings jumped less than 6%. Earnings gained 6% in 2002 and the index lost 23%.  There was a huge 37% jump in earnings in 2010 while the S&P 500 gained just 12%.  Then there was flat earnings growth in 2009 and a nice jump of 23% on the S&P 500.  I can’t figure out a pattern there, can you?

historical-sp-500-earnings-growth-and-returns

spx-vs-corporate-earnings-historical-performance-chart`

There are many more myths out there, but these are six of the biggest ones, and Ryan does a great job of illustrating why they are myths rather than actually trading tools.

 

Friday News – SEC Actually Does Something?

Mar 28, 2014   //   by Profitly   //   Profitly  //  Comments Off on Friday News – SEC Actually Does Something?

no-faxing-payday-loans

 

Firms continue to bring in the cash (WSJ)

SEC sending a blow to guys like Uncle Carl and Bill Ackman (WSJ)

Mixed signals on rates continue to come out of the Fed (CNBC)

An end to winter to bring an end to closed pocket books and an increase in income? (CNBC)

Blackberry may have recorded another losing quarter, but the stock is rising (CNN)

Large investors may have to disclose their positions earlier (WSJ)

Things may have cooled down in Russia and Ukraine, but it’s not over (WSJ)

Biotech and Tech Stocks Take a Beating

Mar 26, 2014   //   by Profitly   //   Profitly  //  Comments Off on Biotech and Tech Stocks Take a Beating

biotech

The major stock indices may be sitting near record highs, but some big names are in the midst of a rough patch. The two sectors getting hit the hardest right now are tech and biotech.

This post isn’t meant to make a bullish or bearish case on these sectors, I’m  just giving you an example of news that can lead to volatility and trading opportunities since even though many of the Profitly gurus don’t make macro-economic news their main focus, they do keep an eye on what’s going on in different sectors, especially “hot” sectors like tech and biotech. If you want to learn how to trade and be as successful as them, you need to do the same.

The gurus also watch the big market headlines to see what are the main things on the minds of investors and what type of stocks may be moving the most on the news. For example, with the news that marijuana had been legalized in some states, stocks related to marijuana were hot for a while. Also of note is that it is slightly less likely that a stock will crash if the general market is in a major rally. It’s not impossible, but it can be a factor in determining where the momentum lies.

Right now we have the iShares Biotech on track to close below its 100-day exponential moving average for the first time since late 2012. Then there is the fact that momentum stocks like Tesla, Netflix, Twitter and others are al having a tough time right now. After more than doubling after its IPO, Twitter is now down nearly 13% over the past month. And after climbing more than 500% last year, Tesla is down more than 10% over the past month.

But even with the recent sell off, the biotech-sector ETF is still up 53% the past 12 months, which is a ways ahead of the 19% advance in the S&P 500.

What’s leading to the sudden decline? There are a few sector specific events, but these stocks were some of the best performers last year and have some of the more “expensive” valuations, meaning investors are more likely to get out of these stocks before others. Then there is the fact that when people get worried about the market being over-valued, they head to safer plays. This has brought about a frantic rotation out of cyclical, economically-sensitive sectors like technology into more defensive areas like utilities over the last few weeks.

Last week Friday’s biotech selloff caused Biogen Idec (BIIB), Amgen (AMGN), Celgene (CELG) and Regeneron (REGN) to plunge. Why was Friday in particular such a rough day? Analysts are blaming a letter to Gilead Sciences (GILD) which questioned the price of its hepatitis C drug and ended with speculation of a biotech bubble. But one of the largest firms on Wall Street, JPMorgan, says everyone should keep in mind that this sell off in particular was just based on speculation.

It’s not just individual stocks either, mutual funds with higher exposure to things like biotech have also been hit harder than more defensive funds. Yet, Wall Street doesn’t seem to be extremely worried, as noted with JP Morgan defending GILD above. Analysts have conceded that a pullback may happen in the near future, but they went on the defensive to say that valuations remain near historical norms.

Here is what JP Morgan said:

After two years of dramatic outperformance, concerns about valuation and a “biotech bubble” have emerged. We believe that the sector remains broadly attractive from a valuation/pipeline/growth perspective, particularly in large cap. Notably, the average 3-year revenue and EPS CAGR for the top 10 biotechs (market cap) is 4.5X and 3X that of the S&P500, yet the P/E/G on 2015-2016 forecasts for biotech is ~0.7 versus the S&P at ~1.4. Regarding the industry pipeline, product cycles are very long in biotech (>10 years) and dozens of major launches are occurring or are about to occur ([Gilead’s] Sovaldi, [Biogen Idec’s] Tecfidera, Imbruvica, Pomalyst, [Celgene’s] Otezla, [Regeneron’s] Eylea, Kalydeco, Xtandi, Linzess asfotase alfa, Vimizim, idelalisib, evolocumab, alirocumab, etc.). In addition, we estimate that at least 50+ compounds/label expansions that have some level of derisking are largely unaccounted for in Street models. Admittedly, companies with earlier-stage pipelines that haven’t been fully de-risked are being awarded a higher probability of clinical success, but drug development has become more efficient, particularly for orphan drugs. The recent concern on pricing for Gilead’s Sovaldi has caused much anxiety; at the end of the day, the benefit/risk and cost/benefit profile remains quite striking and we doubt that the recent Congressional inquiry would lead to an “innovation tax” (i.e., forced material discounts).

This is just a brief example of the type of news you should be looking at when doing your research. You need both broad and company specific information. Knowledge is power in this business!

 

 

 

 

Monday Morning News – Big IPO Week

Mar 24, 2014   //   by Profitly   //   Profitly  //  Comments Off on Monday Morning News – Big IPO Week

candy-crush-ipo

Sweet set of IPOs coming this week (CNN)

Apple still trying to do something with the television sector (CNN)

Be wary of excessive valuations (WSJ)

Victimless crime claims first victim (CNN)

Investors keeping a close eye on future of rate increases (WSJ)

Key economic metric slows in March (CNBC)

Stocks were falling this morning and some notable names were taking the biggest hit (CNBC)

Flight allegedly ended in the Indian Ocean (WSJ)

Friday News – Mt Gox: Stupid or Lying?

Mar 21, 2014   //   by Profitly   //   Profitly  //  Comments Off on Friday News – Mt Gox: Stupid or Lying?

mt-gox-chart

S&P keeps climbing (CNN)

Swing bitcoins resurface (CNN)

Stevie Cohen still can’t catch a break (CNBC)

All of the major banks can supposedly withstand a long term downturn (CNBC)

Subprime mortgages back in vogue? (CNN)

Putin isn’t backing down (WSJ)

Yellen makes her debut (Bloomberg)

The Market in 2007 vs. Today

Mar 19, 2014   //   by Profitly   //   Profitly  //  Comments Off on The Market in 2007 vs. Today

wallstinsan

 

All of the gurus on Profitly are a bit different, but they all use technical analysis at some point or another. Fundamentals have never been able to predict an exact market top, but technicals can occasionally offer clues toward trend changes in buyer/seller behavior at key turning points.

If you look back at 2007, many of the traders that focused on technicals were the ones that were bearish. On the other hand, those that are focused on fundamentals were more bullish and believed that the problems in the sub-prime market were contained.

Tim has said in the past that you need to be able to look at both the technical and fundamental standpoints to decide which trades to enter, so don’t think this post is bashing the fundamental side of things. It is just meant to show you that in different situations, different techniques are more useful.

Last week there was a lot of selling going on in the market, with the Dow Jones Industrial average ending lower every single day. In fact, according to research from Bespoke Investment Group, over the last 10 years the Dow has been down all 5 days of a 5-day trading week 7 times, so a pullback is healthy here. Bespoke also points out that as of last Thursday, 66% of S&P 500 stocks still above their 50-days. Combine that with the market being up 181% off the 2009 lows, and people are constantly look for reasons to think this is another top.

Josh Brown of The Reformed Broker pointed out that Jon Krinsky, technical analyst at MKM Partners, has a recent piece highlights the major technical difference between the stock market today and in 2007 by digging beneath the surface of price and taking a look at the internal dynamics.

The lack of a cyclical top stems from several key reasons:

  1. Breadth
  2. Trend
  3. Leadership/rotation

Breadth: In our view, cumulative advance-decline lines are one of the better long-term breadth measures to observe. As you can see below, at the 2007 peak, even as stock prices (NYSE Index) were making new highs in October, the cumulative advance-decline lines had already peaked four months prior, and were clearly in a downtrend.

Below, Krinsky’s chart demonstrates the negative divergence in advance-decline that signaled the 2007 top – yes, markets were making new high, but there were less stocks participating and the rally had become more and more concentrated. This is a classic tell that a bull run is exhausted.

 

nyse2007

Now here’s the same chart today. Take note of the confirmation emanating from fresh breakouts in the advance-decline…

nyse

Krinsky tackles the second two points, Trend and Leadership, in the report, saying that while we’re definitely overextended (326 days above the 200-day moving average in the S&P 500), the technicals still do not remotely suggest that we’ve reached a 2007-like top. If anything, strength in these measures augurs well for continued strength, even if a retest of the breakout level is coming soon.

Then the Wall Street Journal pointed out last week that Bespoke also said nine of the 10 biggest S&P 500 companies are currently trade at price-to-earnings ratios of less than 20. Compare that number to the peak of the tech bubble in March 2000, when not a single one of the 10 largest companies were that cheap.

In 1999 and 2000 when the market rocketed to new territory, the bubble started in tech stocks and then made its way through the rest of the market. That bubble lifted tech companies to excessive valuations and pushed the market to expensive levels. Today, however, valuations of the biggest companies remain in-line or even below historic averages.

Take the top 10 companies, on average. They currently trade at 16.1 times trailing earnings, according to Bespoke. In March 2000, the 10 biggest firms had an average P/E multiple of 62.6. Yes, 62.6, that’s nearly four times the current amount.

For some added perception, Google’s current valuation would’ve ranked as the third cheapest among the S&P 500’s top 10 biggest companies in March 2000.

Microsoft, which was the biggest company in the tech boom, traded at 56.8 time trailing earnings. So before you start talking about bubbles and market tops, take a look at technical analysis as well. As a trader or investor, it is important to see all perspectives of the story in order to make the best judgment call. The market may have more pullingback to go, but that doesn’t mean we are headed lower for the rest of the year. Maybe we are, but technical analysis isn’t showing that is the right call as of now.

Monday Morning News – Alibaba Files For US IPO

Mar 17, 2014   //   by Profitly   //   Market, News  //  Comments Off on Monday Morning News – Alibaba Files For US IPO
alibaba

Alibaba makes the U.S. IPO official (Bloomberg)

Banks will get equal roles in Alibaba IPO (WSJ)

The fate of Fannie and Freddie is left to the courts (Reuters)

Would an end of Fannie and Freddie also be the end of 30 year fixed rate mortgages? (Bloomberg)

The Federal Reserve is weighing its options in ending the historicly low rates regime (WSJ)

Half of the Business Schools in the U.S. gone by 2020? (Bloomberg)

Friday News – Herbalife ($HLF) party getting rained on

Mar 14, 2014   //   by Profitly   //   Market, News  //  Comments Off on Friday News – Herbalife ($HLF) party getting rained on
Ackman Leaves J.C. Penney Board After Ullman Gets Soros Support

IMAGE VIA huffingtonpost.com

FTC starts Herbalife probe (WSJ)

Herbalife continues to defend their business model (WSJ)

Herbalife changes the date of their shareholder meeting for Uncle Carl (WSJ)

Cost cutting to continue on Wall Street (Bloomberg)

Zuckerberg takes a swipe at Obama (CNBC)

Investors shift more focus to China (CNBC)

A name change can’t protect SAC Capital (now Point72 Asset Management) (NY Times)

What recession? Number of millionaires hits a new high in the U.S. (CNN)

 

Wall Street Isn’t Trustworthy

Mar 12, 2014   //   by Profitly   //   News  //  Comments Off on Wall Street Isn’t Trustworthy

wolf_leo

Many of us already knew Wall Street was full of scumbags, but now we have analysis from the WSJ to prove it.

In an article that ran last week titled “Stockbrokers Fail to Disclose Red Flags,” the Wall Street Journal sent a startling wake up call to those of us that tend to trust people, even when we shouldn’t.

For those of you that don’t know what a stockbroker is, Investopedia defines it as:

An agent that charges a fee or commission for executing buy and sell orders submitted by an investor. It’s also the firm that acts as an agent for a customer, charging the customer a commission for its services.

The Journal’s findings reveal a substantial gap in regulation of the brokerage business. Brokers’ records are something investors expect to be able to learn before they decide to trust these people with their money.

The first of two astonishing examples in the article I want to make note of is stockbroker Marcos D. Leiva. In less than two years, he had racked up a personal bankruptcy, a tax lien, a court judgment for unpaid debt and a criminal guilty plea relating to a false report to law enforcement, according to the Journal. These infractions should have been disclosed, but none of them were. A 75-year-old client claimed he lost most of his life savings through the broker’s actions, recovering only a fraction.

The second is Stockbroker Ronald J. Garabed. He failed to report not just one, but four bankruptcy petitions he filed between 1997 and 2007. And bankruptcy was his only problem, records show that the regulator also alleged that he borrowed $15,000 from a customer in 2006, (a big no no).

The Journal found at least 103 brokers still working last year who had managed to enter the industry without their regulatory records showing that they had filed for bankruptcy.

A broker’s reporting failures can be a warning signal of future regulatory problems. A former J.P. Morgan stockbroker, Tiara Monique Jones, filed a bankruptcy petition in 2010, which she didn’t report. The next year, she allegedly withdrew $1,000 from two customers’ joint account without their knowledge.

Check out the shocking graphic below. It shows that a bankruptcy filing itself doesn’t suggest dishonesty, but brokers who had unreported bankruptcies had worse disciplinary records than the industry norm, on average. They were more than twice as likely to have been fired and about one in 33 had three or more other black marks such as customer complaints or terminations on their regulatory histories, a rate more than 65% higher than other brokers.

black_marks 

One of my favorite websites, thereformedbroker.com, is run by Josh Brown. And you can probably guess by the name of the site that he used to be a stockbroker. He definitely had a few words to add to this article: http://www.thereformedbroker.com/2014/03/06/of-brokers-and-bankruptcy/

One of the things I can tell you for a fact was that the brokers who were in the worst shape financially were always the biggest compliance risks. This is very simple – in a transaction-oriented business where the worst practices and products will frequently offer brokers the highest pay, you’d have to be an idiot to expect a positive outcome for the client of a desperate salesperson. This demented system of conflicted compensation arrangements is precisely why I hated it so much and couldn’t wait to escape it. The most toxic combination you could ask for is to put someone who owes a lot of money in a position to advise others. Ain’t no amount of disclosure, fine print, oversight or potential consequences that are going to change that.

This article should prove to you that not only are several internet market gurus untrustworthy, but other people on Wall Street are just as crooked. People are way too quick to trust people, and Wall Street is one of the worst places to put your trust.

People like Tim and the other people that have large followings on Profitly are such a rare gift in the financial world and I hope this article makes you guys realize that. These guys post all of their trades online and there is also a website called investimonials where you can see reviews of their services. This all means that they are accountable, unlike stock brokers. Where a brokers’ profit depends on what they can sell, Tim and the other gurus can only sell their services if they make great trades and help others learn from their strategies so they get good reviews. If their services sucked, you would quickly find poor reviews on Investimonials.

An “Appealing” Monday of News

Mar 10, 2014   //   by Profitly   //   Market, News  //  Comments Off on An “Appealing” Monday of News

banana

Image via bbc.com

Merger Monday, two giants to create the largest banana company (CNN)

An ongoing search for a lost plane (WSJ)

The Forex market continues to see punches thrown its way (Bloomberg)

Another celebrity to promote an automaker (CNN)

Are there marijuana television ads? Not so fast (CNN)

Google looking for its place in the app world (WSJ)

Apartments > Homes (WSJ)

Pages:12»