SPY technically oversold

...and due for a (little) bounce. No question, there are structural problems in the macroeconomy and some major technical damage to the indices, but bears would do well to claim a small victory, take some profits and either go to the sidelines or reverse gears for a day or two.



It's time to get your list ready of stocks you want to own: GS, MSFT, PFE, KMB are some safe names. The last two have dividends larger than the 10-year Treasury. Even MCD and PEP have yields that are safe, although their stock price may pull back. For more aggressive investors, HCN, FTR, NLY are high yielders.

Remember that company earnings are still healthy regardless of what employment and other economic indicators may say.

Don't listen to me, these are not recommendations to buy or sell anything.

Update: Dogs of the Dow

Eight weeks ago I allocated my IRA into the four Dogs of Dow and so far, so good. February 5th was the swing low and my holdings have cumulatively appreciated 8.6%, although under-performing the SPY which has gained 10.6%. The best Dog gainer has been Dupont (DD) which is up 16%, and the worst of the four is Merck (MRK) with a 3% gain. Verizon (VZ) and Kraft (KFT) have intermediate gains. Only Verizon (VZ) has not gone ex-dividend since the purchase, and the cumulative yield of the Dogs is 4.5% annually.


I am pleased with the good performance of the Dogs so far; while they have not done as well as the SPY index, they should be a safe haven for my stock allocation for the remainder of the year.

Bonds and Asset Allocation

I admit I never looked at a stock table, the WSJ or even knew what a mutual fund was until I finished my ob/gyn residency in 1994. Once out in the real world, the surgeon’s lounge had no text books or journals and only the WSJ to read between cases. I began reading books by John Bogle, Charles Schwab, Charlie Munger… I got addicted. The fact that the “tech boom” coincided with my peak accumulation years only fueled the fire. I socked away a ton in mutual funds and did well.

It's all about 'volatility-adjusted' returns. In the 90’s I rarely beat the market but it was okay because I had double digit returns year after year. I lagged the market returns but did so with very little volatility. When the crash happened in 2000 I survived because I had bought into Bogle’s principle of diversification with bonds which decreased my volatility. Since 2000 I’ve handily beat the market every year until 2009. This is ALL because of the bond allocation.

Nobody leaves the casino happy: the losers wish they never came and the winners wish they had put more on their bets. The important thing is to not worry about performance and comparisons… but enjoy the process. If I lose money but did everything correctly, oh well. When I stop enjoying the process– *the game*– then I’ll take my ball and go home… I can always dump my assets into a balanced fund (or follow Teresa Lo’s allocations) and go golfing.

Dogs of the Dow

Today I funded my IRA and employed the the Dogs of the Dow. This is something that I had done with regularity in the 1990's with success, but got away from it the last few years for various reasons. The thesis goes like this: The Dow stocks represent a varied cross-section of the stock market and the "Dogs" are those members who are most undervalued using yield for valuation.

Instructions: Take the top five yielding stocks, drop the top yielder since it may have some fundamental problem, then invest one-fourth allocation into each of the next 4 in rank. The ranks will change almost daily and the picks should be held for one year. One variation is to use only those stocks selling below $30 per share, called the "small dogs", with the thought that stocks with higher share price are not as desirable. Since the current four doggish stocks are all near $30, I didn't use this screen.

Therefore, I put one-fourth allocation into each of Verizon (VZ), Dupont (DD), Kraft (KFT) and Merck (MRK), with an average yield of just under 5% which is better than long term Treasurys. In my experience one or two will largely outperform the others, and since it's completely unpredictable a buy-and-hold discipline must be respected.

One unintended bonus: I went long on these four names at 2:00 pm which inadvertently pegged the day's bottom; it's always good when a long term holding gets a 1% gain in the first two hours you hold it. There, now I jinxed the strategy.

Is Toyota a buy?

Down 12% last week and now rebounded 3.2% on news of a "fix" for the accelerator. Pro: Toyota has a lot of brand loyalty and this is their first significant recall. Con: Toyota is purchased for safety and reliability, not image, and this is a big blow to that brand. Also, macro environment for autos is suspect and it trades at a 24 forward PE, well above competitors.

Daily shows nice bounce... or is it a bear flag?

On the 10-minute, we see a bottoming pattern and gap that could be filled.

Buy above $80, but by macro market view is still bearish.

Chorus of Positive News: January 1930

In January 1930, exactly 80 years ago, the news of the recovery was all over the press. TIME magazine reported:

Editor Marcus A. Rose of The Business Week: "Business will be good in 1930 for the lean, hard firms..."

Editor Richard H. Edmonds of the Manufacturers' Record: "I anticipate a gradual but marked improvement throughout the country."

Editor Ralph C. Busby of India Rubber & Tire Review: "Distributors everywhere in looking to 1930 have legitimate reason to be conservatively optimistic."

Editor Lester W. W. Morrow of Electrical World: "Electrical manufacturers are in splendid shape..."

President Louis Fairchild of Fairchild Publications: "A late Easter is expected to aid sales of men's, women's and children's apparel accessories."

Editor A. C. Saunders of Furniture Manufacturer: ". . . the business, valley will not be deep and will be crossed during the first quarter of 1930."

Editor Peter A. Stone of American Contractor: "During the year 1930 the volume of building construction work materializing will be greater than in 1929. . . ."

Editor J. S. Warren of Hotel Management: "During 1930 hotels should prosper as a result of the intensified sales efforts that most manufacturers and others will make, in that more salesmen will be on the road."

Editor Carl W. Stocks of Bus Transportation: "The year looms bright for the industry."

So how did we do with all these glowing predictions?

Yellow shade is the calendar year 1930 which started out at 267 and ended down 38% at 160.... and proceeded to bottom in 1933 at 50 points.

Dr. Pangloss never dies, and deflationary cycles tend to rhyme. My guess: we are at about April of 1930 today.

Ritholtz on the Market

Points he made:

1. We are still in a secular bear market.

2. The easy money has been made in the counter trend rally, but bias is still to the upside.

3. Inverse correlation of stocks to the dollar seems to be ending.

4. "We're giving the rally the benefit of the doubt. Innocent until proven guilty."

5. "The easy trade is to bet rally is over, and rarely is the easy trade correct."

6. Not a new bull market because valuations are still not as cheap as 1982.

7. Sentiment is middle of the road, and is not useful at the current juncture.

8. We could churn for 18 months, ala 1975 to 1978.

9. One graphic he had shows that bear market rallies average about 70%, and then show a 25% pullback before a 5 year churn. So, should we expect a 25% pullback soon?

Yellin: "Not massively overvalued."

Ah, the last time a Fed governor commented on the equity markets was 1996 when Uncle Alan Greenspan warned of "irrational exuberance." But we continued for another 4 years before the crash, and Al continued the easy money to get us there.

"Not massively overvalued" and Rosie is "Not massively obnoxious."

Eric and Traderfeed's 2123

Always looking for the Holy Grail of buy-sell indicators. Eric was viewing Traderfeed's 2123 4-week hi/lo indicator as an oscillator. Just playing with the chart, I added a 5-day MA to this.

When the "oscillator" crosses the 5-d MA, this has given a fairly reliable buy or sell reversal signal... maybe not on the day, but pretty close. I'm kinda new to the freestockcharts.com, so I haven't figured out how to superimpose the SPY yet, but these inflection points do come right at intermnediate-term reversals.

As Eric says it's a lagging indicator, but usable.

Talk of Green Shoots = Higher DJIA. Always?

Megan McArdle references headlines from the summer after the last deflationary crash in 1929. From July 23rd 1930:

[Hoover] Administration members reported telling Wall Street that business has turned corner, and should curve slowly upward until winter, becoming clearest in October. No forecast beyond that ventured. However, administration strenuously denies rumors of using "its influence to bring about organized support for the stock market."

Irving Trust July review says we may be entering "ultimate pit of the depression;" sees mostly bad news in June, including declines in most lines of business, lower commodity prices, stock market declines, and possible tariff reprisals. Nevertheless, advises remembering that "It is always darkest before dawn."

Sentiment improved by market support yesterday. Conservative observers still advise buying on dips and selling rallies, but if market can get above previous resistance, would be considered confirmation of uptrend and convert many observers to the bull side.

Banks reported deposit increase by $257M in past week, to $21.317B; most of money not employed; increase of $37M in loans and $82M investments.

[snip]

Technical analysis: Next week is crucial to determining whether the current rally was due to fundamental factors or just technical. As of last Friday market had recovered about 50% of the June break. Bear test on Saturday and Monday then wiped out about a third of the rally gains. New support yesterday was encouraging; if market continues up, this indicates rally is due to fundamental reasons (increased business confidence).

Current month is the anniversary of the business slowdown; October will be anniversary of the stock decline. "Every succeeding day means we are just that much nearer a definite turn for the better." Meanwhile a Canadian broker points out: In the 1907 panic March 14 was the low, and the nearest low afterwords was 224 days later. Likewise in the 1929 panic, Nov. 13 was the low and the nearest low afterwords was 224 days later (on June 25)!

There's more, and you can go to her website for more newspaper quotes from July 23, 1930: Business improving, cash on the sidelines, technical improvement, fundamental improvement... yada, yada. We can relate the summer of 1930 to today, using Mamis' view of market bottom's. Traders and investors had all the same lingo we hear today and I'm sure were all "cautiously optimistic" and nobody wanted to miss the "recovery" which was just around the corner. I'll add the charts annotated with the Mamis points:

So, let's look to see what the intervening couple years had in store for all those investors' "green shoots". Ouch.

Of course this is a new century and the political and monetary minds may have learned something in the intervening 80 years; the Hoover administration was all about balanced budgets, fiscal restraint, and tight monetary policy and ignored the huge deflationary influence of increased capacity and rising unemployment. Thus we saw bank failures and a massive abrupt deleveraging of our indutrial and financial industries. Today, arguably we have a looser monetary policy and are flooding the market with liquidity. Will it have a material effect?

Investors and traders likely learned something as well and may be less giddy this time around. But all this is doubtful.

Game Theory for end of month [Update 4-1]

My elaboration of  Eric's Quick Thouights [sic]

Friday: Market up in anticipation of Barron's saying the bear is dead.  

Weekend: Barron's announces "Bear is Dead"; talking heads mention the booming market up 20% in 3 weeks, yada, yada, yada.  

Monday: Retail traders call their brokers to get in and late day rally as managers (ie, "smart money" guys) buy.  

Tuesday: Market sells off or goes sideways all day, then tanks in the afternoon.  

Wednesday: Broad-based trend down day.

UPDATE 4-1

Well, I couldn't have gotten that more ass-backward! So much for me gaming the market on daily movement, I guess I'll go back to grunt work on the daily grind.

Bear Market Rally Continues

Despite a mid-day market swoon and a dizzyingly high VIX, the market managed an impressive gain, coming only 2 days after a monstrous rally on Monday.  Many analysts point to competing news items -- good housing sales, deficit spending by the feds, early re-payment of the TARP, poor Treasury auction, etc,-- as the cause of the wild swings in price levels.

The fact is that the market has been long overdue and now we are up about 20% from the low set March 9th, just about the average for a counter-trend rally.  Problems remain with bank solvency, asset deflation, rising unemployment and decreasing consumer spending which appear to have no end in sight.  Is there more rally left in the market given all these headwinds, or should prudent investors be heading for the safety of cash?

Factors in favor of a continued rally are the large stores of cash on the sidelines and  the end of the quarter when fund managers need to report their positions and few will want to say they spent the best month since 1991 in cash.  Also, sentinment remains bullish with "wall of worry" permeating the trading sites.  Perhaps most immediately significant is the statistic that short-interest is at a one year high, which should act as a continued bid on the market.

My surmise is that a small pull-back may be in the offing, but we should make one more push for the 840 mark on the S&P before consolidating.  But make no mistake, we are still in a bear market however timid he may appear at the moment, so set those stops and stay disciplined.

Killing the Generals

The worst performers today were those stocks that have been relatively spared within their sectors and the broader market:  GOOG, WMT, MS to name a few.  Even hot names like GERN and STEM who benefited from Obama lifting the previous administration's ban on stem cell research faded the open.   Both ended down double digits.

Good news like DOW buying ROH and MRK buying SGP for cold hard cash was shrugged off.  At any other time such news would have been greeted with glee at least within the respective sectors. Not today.

What does all this tell us? 

As Eric has pointed out in the past, they kill the generals last and WMT, GOOG and MS are four star generals.  My take is that we are nearing the end of the beginning of this bloodbath.  The next phase will be a capitulation on high volume (may or may not be classic) followed by a relief rally of 20%.  Only after this can we begin the long hard slog up the wall of worry.

Any rally will require a catalyst and if two significant mergers could not do it today, then we'll need something really big.  Finding Osama would be great.  Rescinding mark-to-market might do it, and those Congressional hearings start Thursday.  This market is oversold and ready to pop.

I really thought today's morning rally could have been it, but alas, it fizzled.  Who knows when this counter-trend rally will transpire, but in the mean time, keep your powder dry and be careful with those shorts.

Tuesday Recap and a look ahead

The bloodbath was impressive and gave me pause on entering any long positions at all.   But since I presented a few stocks I went ahead and got some CY at $5.09 and even went commando and went long FCX at 27.64 which was not a good price and one I may regret.  MS dropped so preciptously that it broke the support that I had mentioned, so I never opened that position.

The short side is working much better.  AVB continues it's descent into hell, and I did not short the other REIT, VTR, due to the gap down open.  I chased BBBY a little and sold it short at 21.34 for the next leg down.

Of course, GLD and SLV are the place to be and those are still being held.

The stink of blood still lingers and Asian markets are down as I write this.  No end is in sight for this free fall, but the futures point up at the moment and we should stay vigilant since we all know how violent bear market rallies can be.  Eric is predicting no bounce until Thursday at the earliest and more likely Monday.

Longs for Tuesday 2-17

Let's just say, for argument's sake, that the four horsemen take a detour and the world somehow pulls out of this descent into chaos.  Which stocks will do well?  These are all lottery tickets... looking for four baggers in the next few months, or they could all go bankrupt.

FCX mines for a lot of stuff: copper, platinum and gold.  The chart looks great.  Loose stops are okay on this one.  It could double with any rebound in the markets.  NG is also an adrenaline junkie's dream.

CY is in the semiconductor space but also is involved with design and manufacture of solar panels.   Could double, or could go to zero.  Careful.  Still holding MRVL and still like LLTC.

MS along with GS may be the last soldiers standing... and post-Mad Max investors will have to go somewhere once Citi's "mall" gets shuttered.  MS was trading at $50 six months ago, and while it may not double we could see a 20% pop very soon.

Shorts for Tuesday 2-17

Update: AVB was covered last week as a short opportunity and it has not disappointed... with a 6% decline so far.  Tight stop would be about 50 and loose stop is closer to 54.  Ride it on down.  

VTR is a healthcare REIT which is hovering above support.  Any drop below 22.70 could be met with a precipitous decline.  

BBBY has fallen below horizontal support and has formed a bearish inverse cup-and-handle.  Who really is going to buy scented candles on the eve of Armageddon?    Die!

Finding the "tell" in the graph

Eric has pointed out that yesterday's graph showed the SPY peeking above the short-term pennant and more importantly moving away from the lower trendline.  This was the "tell" to today's rally and resolution of the longer term pennant.  The red line is the "tell."

The interesting thing is that I saw this "tell" in the GPS graph I put up last night when I issued the warning about holding GPS short.  It turned out that was a necessary warning as GPS broke out above resistance of 11.50 (which was my buy stop) and kept going for to 11.85 today.

Stock charts for Friday

Big big BIG NFP number at 0830 hrs may move the market (I'm on tenter hooks.)  Geithner has "the plan" for banks on Monday and that may actually be a bigger item.  I can't trade the financials with all the chatter going on, so I'll just stick to meat and potatoes TA for now.

Short idea:  GPS (2 graphs)  The first is the daily chart showing it drop below horizontal support (now resistance), but it's not dying easily and rallied over 5% today.

Short idea: GPS on the 30-minute graph shows it violating the downward trendline but still below horizontal resistance.  Be careful, the closing stop is 12.12.

Long idea: MRVL still looking marvelous.  Semis are leading tech and tech is leading the market (for now.)  LLTC looks good, too.

Short idea: AVB owns rental residential properties.  Is it sustainable?  Stimulus legislation may give incentives for renters to buy homes.

FLIR falls out of bed

FLIR was covered last night and the night before as a potential short hovering at support.

Take some profits if you were fortunate to be short.

Stocks for Thursday

GDX is the gold miners ETF anbd has been trudging upward along its trade channel for several weeks.  The trend is your friend, but buy when it pulls backs into the lower channel.

PM has been breaking down and is threatening the November lows.  Good short candidate.

Update on FLIR, which was covered yesterday.  Will this hold support or fall off the table?

MRVL is one of the better performing semis.  Also, LLTC looks pretty good.