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Point and Figure notes for October 2, 2009
Managers seek a more reliable approach Financial Times 10.2.09 pg.21
Risk Management Ideas based on diversification of assets are being questioned after the strategy became disastrously unstuck last year, forcing funds to look for improved models, writes John Authers, The Future of Investing
...The way in which apparently diverse markets took a synchronized dive last year has shaken up ideas about diversification.
Classically, asset allocation involves making trade-offs between different asset classes. This tends to be labeled "60/40" approach, because many institutions tend to start with a 60 per cent in equities and 40 per cent in bonds.
Last year this approach came catastrophically unstuck, as virtually all of these asset classes fell in unison.
"These models hadn't been stress-tested. They went into it on the principle that this opportunities existed, and there was a first mover advantage. But they had no governance structures and no skill sets to manage these risky assets." says Amin Rajan.
Mohamed El-Erian, head of Pimco, suggests that asset allocation should be about the "risk factors" of different investments, rather than about asset classes. "The same risk factor can apply in different asset classes." he says..."There is also a risk factor, which is public policy. Whether we like it or not, government has become an integral part of markets." ... All look at the risk of outright loss, rather than the volatility of returns.
This requires asset allocators to look at eight different kinds of risk: 1)Concentration risk (the risk that many investors have crowded into the same strategy, making it more prone to sudden busts); 2)Leverage risk (which multiplies both gains and losses); Liquidity risk (the chance that an asset cannot be sold quickly at the prevailing price); 3)Transparency risk (if the investment structure is too complex to understand, Wells Fargo suggests, it is too risky; 4 & 5) Sensitivity to the over-all equity market, and bond market; 6) Event risk (the danger an unforeseen event could pose); 7) Volatility risk (the extent to which returns vary); 8) Operational risk, which includes various risks of businesses failing to perform.
Over the past 10 years the "style box" approach has predominated...splitting funds into nine separate categories, according to whether they used growth or value style or a combination of the two, and whether they invested in small, mid or large cap stock. [fund managers given mandate to abide with a very precise style] ... the achievement of a small-cap value manager beating his benchmark by one percent does not look so appealing of the benchmark is down by 30 percent.
Both the Financial Times series, The Future if Investing and this week's Markets action have prompted me to discuss my methodology of investing in the Stock Market. Everyone needs a methodology or system and the discipline to stick to it.
I learned Point N Figure Charting through the Dorsey Wright Associates school. John Murphy's stockcharts.com also teaches the method and provides tools. I like to follow the Momentum/Growth stocks found in "Investors Business Daily", read Smart Money's stock screens and appreciate Benjamin Graham's 'margin of safety' value-style investing. Whereas I have no inclination to daytrade, nor can I be a passive "buy and hold" investor.
Predicting the market's course of action for any length of time can be as futile as predicting weather patterns. [After a multi-year drought, we now have had one of the rainiest years on record, and my hometown could use some of that "Global-warming"]. Markets fluctuate; change is the only constant.
Almost 100 percent of stock market analysis is meaningless drivel or noise. How does one trade GDP numbers, "V"-shape, "W"-shape, etc? I will leave that to pundits, analysts and experts. Point N Figure breaks things down to something quite useful, the ongoing battle of supply vs. demand. The Bullish percent is our Head Coach, determining whether we shift into an offensive posture of "wealth accumulation" or a defensive one of "wealth preservation". It is about making gains, then protecting the gains made - not foolishly giving them back.
Plan oyur trade in advance. Scout out what the primary Market trend is doing: positive or negative? Which sectors and industry groups are leading the markets (financials, banks, insurers; technology software, semi-conductors, mobile phones, etc.). Which stocks are out-performing their peers in terms of relative strength.
You can check fundamental, valuations and do your "due diligence". But a good looking chart will reflect all the above with a nice pattern. I lean heavily on technicals and watching for action points to know when to buy, hold or sell. I also look for a favorable risk-to-reward ratio and plan an exit strategy. Before I learned how to sell, I was at the mercy of the rising, then receding tides of the markets.
Emotions of fear and greed can be detrimental to an investor's psyche. By planning in case things do not go as expected, having a stop-loss order in place to protect against more serious losses makes sense. The same goes for planning to reap profits in a systematic way. For instance, if you buy a stock at $100 and a few days, weeks or months later see it trading 25 percent higher @125/sh, why not sell a third of your shares or at least place a stop-loss priced to execute preserving your 25% gain? If the same trade moves another 25% higher to $150/sh either sell another one third of your position or at least raise the stop-loss to lock in your gain. You may prefer to use trailing stop-losses. Option strategies also can be employed for hedging or insurance against market turbulance - especially if you are trying to hold out to qualify for long-term capital gain status.
Learn how to manage each trade. Plan your sells as you plan your buys. Find a system that works for you. Don't be a victim of the market. Education is your best investment and insurance policy. The market moves in trends and gives signs, both lagging and leading indicators. Learning to read them and watch money flows will add to one's success. You can become a skillful crafts-person instead of a "lucky" or "unlucky" stock picker.
T = Top = The point of exhaustion, when supply is overwhelming demand; supply can be equated with "sellers", and demand equated with "buyers".
DT = Double-Top; TT = Triple-Top; QT = Quadruple-Top; 5T = Pentuple-top. ["An "S" preceeding DT, TT, QT, 5T represents a "Spread" topping action, as opposed to consecutive tops].
B = Bottom = The point reached where demand (buyers) overtakes supply (sellers) and prices are buoyed.
DB = Double-Bottom; Tb = Triple-Bottom; QB = Quadruple-Bottom; 5B = Pentuple Bottom. ["S" preceding DB, TB, QB, 5B represents a "Spread bottoming action, as opposed to consecutive bottoms.
BRL = Bearish Resistance Line. Support becomes resistance once a positive trend turns into a negative trend. Trading below resistance in counter-trend rallies should be monitored closely as they approach overhead resistance levels.
BSL = Bullish Support Line. A "positive trend" (PT) is established once the primary bearish resistance-line (BRL) has been breached and prices close in positive territory.
RS = Relative Strength. Measures performance against the various market Indices, benchmarks, other asset classes, sector, sub-industry groups or peers. The stronger the "RS" the better.
"buy" = In Point N Figure, a simply "buy" signal is given once a column of Xs surpasses the previous column of Xs.
"sell" = Conversely, a "sell" is when a column of Os drops lower than the previous column of Os.
CP = For practical purposes, A "CP" will refer to the current or closing price of the asset at time of writing.
A Reward-to-Risk Ratio is a calculation determinant of the amount of capital hoped to be gained via use of a price objective "P.O." divided by the predetermined amount of loss, based on stop-loss point. For example:
(EEM) iShare MSCI Emerging Market Fd ETF $38 c.p. P.O.=49 Stop=35. This position yields a possible $11 gain and also a possible $3 loss. 11 / 3 = a 3.67/1 ratio. At minimum, one desirs to gain at least 2X the amount of possible loss.
P.O. = Price Objective. Can be "bullish" or "bearish" target price determined from PNF vertical/horizontal count.
STOP = Stop-loss Pt. Point to abandon trade to preserve capital.
9.21.09Mini S & P 500 DEC: I still like a long position here on a pullback to the middle of the trading band. We will tweak this recommendation by suggesting to buy two contracts on a pullback to 1030. Set the initial stop here at 990 (a double bottom "sell" signal). Take partial profits at 1080 and close position at 1130 (the bullish price objective). After establishing this long position look to scale into two more long contracts on reversal up the chart.
Highs/Lows: Comparing the 2007 market peak at 15,938 Dow Jones Total Market Index (The old Wilshire 5000) occurred on October 11, 2007. The current cycle high was reached September 23, 2009 at 11,162. The big difference here is the many more new lows seen during the 2007 period. All the ten days recorded double or triple digit new lows, while 2009 has seen only single digit new lows. The High/Low ratio is currently much stronger than it was in 2007. But the thing to watch for is performance of the high/low in the ensuing days...
RAXRackspace Hosting, Inc. $18.00. RAX just reset with a new price objective of $31.00 and is trading near new highs reached. Would consider buying on pull-back in 15 to 16 area. Set a stop-loss pt. at 12.50 (bullish support line). According to info gleaned from Investor's Business Daily (IBD), RAX offers various types of managed hosting svcs. to businesses, support web sites, web-based IT systems and companines. Revenue and earnings also look good.
ARSTArc Sight, Inc. $22.77. ARST broke out fro a bullish triangle and spread triple-top on Sept. 1st at 21.00. Price objective is 27.5. Bullish support line is currently at 17. Again from IBDs information, ArcSight is a Cupertino, CA-based cyber-security company. Small-cap in size. Sells products designed to defend against fraud, theft of credit-card data, espionage and cyber attacks on critical infrastructure. Earnings are off the charts! Customers include businesses, Government and individuals; services garner repeat sales/contracts. I really like this company a lot. The correction or pullback now beiing experinced in general market may lead to opportunity to find leaders such as Rackspace and ArcSight at a better price and entry point.
Yesterday`sUSAToday article on front page of Money section was helpful in putting into perspective speculation concerning "waiting for a pullback in new market rallies from troughs." Average of 12 cyclical lows was 64% gain and 2 yrs. duration, before the market yielded a meaningful 10% correciton. Continue to take advantage of these smaller pullbacks/pauses.
Mark Leboveit appeared on Nightly Business Report as guest monitor (VR Trader) and forecast:
DJIA:11,303 Gold:$1300/oz by 12.29.09 Silver:21/oz.
SLViShares Silver Trust $15.74. Was one of his picks I also like. He was bullish and has an excellent track record.
9.18.09T-Bonds DEC: Stopped position on double bottom "sell" signal at 119.50.
9.21.09Corn DEC: Add another two short contracts on the dbl. bottom break at 320. Raise the partial profit target from 300 to 312 for positions currently open. Maintain a closing tgt. price of 284 and stop at 344 for all contracts.
9.23.09Swiss Franc DEC: Closed the position as the Franc moved through target prices (98.50), setting just above 99.
9.24.09Heating Oil OCT: Covered position on one contract reversal bakc down on chart to 1.78. Lower buy-stop from 1.96 to 1.88, which is a double-top. Cover the remaining contract at 1.64, just above the bearish price objective.
9.25.09Sugar OCT: Lower partial profit target from 23 to 22.80; lower closing target to 23.80 (from 24). Maitain stop of 20.40.
ICEIntercontinental Exchange, Inc. $94.99 (+3.94). ICE continues to base, with a series of higher bottoms in place. PO=113/Stop=90. I suspect that (RIMM) Research in Motion will do likewise. RIM, maker of the Blackberry users love the products and services, so so traders of RIM shares!
GMCRGreen Mountain Coffee Roosters $73.30 (+4.37) NH @ 75. GMCR broke through resistance in the 71-72 area and a S.TT@73. PO=115 Stop=65. Diedrich Coffee also posted a nice gain and (SBUX) Starbucks was in the news with new product offerings of "instant coffee."
EEMiShares MSCI Emerging Markets Fd. $38.09 Up 52% YTD. EEM has just completed a "bullish catapult" formation @38/sh on 1/2 pt. scale PNF chart. PO=49 Stop=35. I like EEM for technical reasons, but check out FTs "Why the phrase emerging markets no longer applies" article by Marko Dimitrijevic (9.29.09) on pg 24 for further insight.
JNKSPDR Barclays Capital High Yield Bond Fd $38.36 UP 18.4% YTD, and increased in flow of cash, not to mention 12.3% yield make this Junk Bond fund attractive. PO=45.5 Stop-loss=35. Wait for a pull-back to 37 area or scale-in, "buy-on-dips" to juice fixed-income returns with a smaller speculative stake.
Among the sign of potential market froth: The recent surge in share prices has been led y companies with the highest proportion of their shares sold short. That outperformance could be a sign that investors believe any economic rebound will be strong enough to right even the weakest businesses or that investors are simply chasing the most beaten-down shares, which are now rebounding with the most momentum...These stocks include Advanced Micro Devices, MBIA, Wynn Resorts, Gannett and American International Grp., all companies with significant business or balance-sheet risk.
The fact that heavily shorted stocks are leading the market isn not a tip-off that shares are about to head lower. The trend can continue. In fact, these stocks have led the charge since early March - up a staggering 116%. .., investors need to be on their guard against animal spirits getting out of control.
There also was a bit of action in Research in Motion, Ltd., whose stock continued to spiral lower after reporting disappointing earnings last Thursday.
Traders in this case appeared to be selling both calls and puts in Research in Motion, however, dumping $70 calls and October $65 puts. That suggests the stock could stabilize in coming weeks, one strategist said.
Shares of RIM closed at $66.44, losing 3.6%. They dropped 17% on Friday after the company released 2Q revenue numbers that failed to meet Wall Street expectations.
Oil and Gold Fall While Dollar RalliesFT September 25, 2009 pg. 24 Government Bonds Gain Groundby Dave Shellock
Risk assests ran into heavy weather yesterday as big central banks moved to scale back emergency lending programmes,...Meanwhile, risk appetitie was also dented by signs of headwinds still facing the US economic recovery.
David Rosenburg, chief economist and strategist at Gluskin Sheff, suggested several reasons as to why US equities had sold off on Wednesday in spite of ... unabashed good news.
"it could imply that the market has run our of buying power." Mr. Rosenburg said. "Or it could mean that the market has already overpaid for the "sweet spot". It could mean that the psychology of "buying on the dips" is over, and a "locking in the gains mentality may be settling in.
"This is the first time in this six-month rally that we have seen a reversal to the down-side on a positive news day." "The combination of strong cyclical growth and policy still at "crisis settings" should be favorable for the prices of risky assests even from current levels. However, investors should be alert to signs of policy unwind, and be prepared to reduce exposure quickly."
Home Sales Figures Put the Brakes on Early Momentum
WALL STREET, by Samantha Pearson FT Sept. 23, 2009
The National Association of Realtors said existing home sales in August had dropped to an anualized rate of 5.1m from a rate of 5.24m in July. Economists had been expecting sales to rise to 5.35m.
Stocks had dropped higher on encouraging jobs data. The number of Americans filing fresh claims for unemployment benefits last week dropped to 530,000 from a revised 551,000 in the previous week.
"The sell-side has to see something that shows this rally is conclusively over, that the economy is going to double-dip, that something horrible is on the horizon. Only at that point in time will they actually tell the buy-side client base to take their money out of this market, to sell their long positions or to get short. Today is not that point." - Randy Cass
GAME Shandra Games Ltd. The Beijing-based online computer-game company, the largest U.S.-listed initial public offering of stock in more than a year, closed down $1.75 a share or 14% to $10.80, from its IPO price of $12.50 a share on the Nasdaq.
Some 83.5 million shares were sold, 20.5 million more than originally planned, at the high end of its expected price range. By raising $1.04 billion, Shandra can lay claim to the title of biggest U.S.-listed IPO so far in 2009.
The reception to Shandra was in contrast to that experienced Thursday by an unprofitable electric-car battery maker, A123 Systems, Inc., which rose 50% on its debut... a similar IPO from Changyou.com Ltd. was ewll received in April, and that stock is the best performing IPO since inception this year, currently trading 126% above its IPO prize.
9/7/09 Swiss Franc December: Buy a full position @94.50 or better. Set initial stop @93.5, a dbl. bottom. Take partial profits at 96; close position @98.5, the bullish price objective.
9/7/09 Heating Oil December: Remains in a downtrend and now has given a sell signal from a bearish-signal-formation. Short 2 contracts at 1.80 or better. Set 1.96 as the initial stop. Take partial profits at 1.60, the bullish support line. Cover remainder contract at 1.48, the bearish price objective.
9/7/09 Corn December: The grains remain in pronounced down-trends. Short a full position (4 contracts) at 3.20 or better. Take partial profits at 2.80; cover position at 2.32, the bearish price objective. Stop at 3.32, a double top.
9/7/09 T-Bonds December: Long-term chart has now given three (3) consecutive "buy" signals. Buy a half-position (2 contracts) on a pull-back to 121. Initial stop should be set at 119.25. Take partial profits at 123. Close position at 126.50
(BBY) Best Buy $39.65 (+2.22) TT@39 PO = 54 / Stop = 34. Traditionally, Best Buy is a holiday shopping season play as consumer appetite increase for i-phones, MP3 players and electronic gadgetry. By investing in Best Buy shares, one may increase one`s shopping capital or help offset spending expenses this holday season. [2.87:1 reward/risk ratio]
(CF) Industries Hldgs $83.35 (+1.69) TT@83 PO = 110 / Stop = 79. CF was up $13/sh. in August, possibly driven higher by speculation that BHP Billiton may acquire it. CF sports a solid 6.2: reward/risk ratio, and is a member of the chemicals sector/materials.
(DHR) Danaher $64.15 (+2.02) TT@64 PO = 77 / Stop = 58. Conglomerate famous for Craftsman Tools tm, Water Purification Systems and Dental Supplies look attractive.
(GPS) Gap, Inc. $21.18 (+1.49) - GPS posted a new 52 week high today @21.26, just above close price. Currently rests on S.QT @21/sh. Also had increase same-store sales.
"Gold edges nearer $1,000" - by Javier Blas in London Financial Times (pg. 11) 9/04/09
Gold prices hit a six-month high yesterday, ... "The price charts had been flagging buying signals", said Jonathon Spall, a gold specialist at Barclays Capital in London. "Gold has a positive technical picture."
"Grounded Financial Regain Wings. Sector's stocks take lead in market's run to recovery" -- Matt Krantz (USA Today - 8/31/09)
Financial stocks are on a tear, leading the market's critical leadership as it attempts to maintain its summer recovery.
Since the March 9 low, the S&P 500 Financial sector is dominating, up 137% vs. the S&P 500's 52% gain. The consumer discretionary sector is No. 2, up 67%.
Shares of banks, insurers and other financial institutions continue to rise in the face of bad news. The FDIC warned last week that the number of banks and thrifts on the watch-list soared to 416 in the 2Q, up from 305 the previous quarter.
* Bounce back from being priced for calamity. "Stocks closest to the abyss are leading us up now."
* Improved ability to withstand shocks.
* Attractive operating environment.
* Role as an early leader. Financial stocks have a history of being early winners from economic recovery, says Sam Stovall of S&P.
In celebration of the second Chick-fil-A kickoff footbal game, the University of Alabama vs. Virginia Tech on Saturday, the chain nationwide will offer a free Chick-fil-A chicken sandwich to any customer wearing any sports-related apparel from 10:30 am to 8 pm on Labor Day. This is great advertising; didn't Denny's do this with a free breakfast offer?
(ARO) Aeropostale $41.29 (+2.71) - DT @41. ARO traded @16.5/sh in Jan. 09, climbed 25 boxes on its PNF chart to 37/sh by May 09; from there it consolidated in a triangle formation for approx. 2 months, before breaking out @37 in July 09. No overhead resistance ahead. STOP = 37 (Double bottom) [Same store sales were up 9%].
(ANR) Alpha Natural Resources $34.02 (+1.65) - ANR reverted up to column Xs @35, making another higher bottom in place. This Abingdon, Virginia based coal company has a very fine looking PNF chart. The only other coal co. that I track which may be more enticing is Walters Energy.
(CHS) Chicos FAS $12.39 (+0.43) - Many apparel retailers are trading at a premium. Others may have moved even higher and are above trend line, but I like Chicos chances, here, and it is a good entry point. This bounce should continue to move higher.
(VIP) Vimpel Communicatiions $15.97 (+1.08) - A spread triple-top (S. TT) @15.5/sh. P.O. = 27.5 (stop ?). This Russian Telecomm bottomed @5 in March 09. Since it has had good action, despite not being in an advantageous group. VIP is one of 3 Russian stocks I track, which posted significant gains today.
(WBD) Bill-Dann Foods $63.49 (+6.27) - This Russian Dairy Fds. concern was dormant in the financial pages I use to record price movements/update charts. I lost coverage in MAR/09 @27/sh. in a column of Os. It just reappeared in USAToday`s financial pages in August.
a short idea:
(DECK) Decker Outdoors $63.95 (-0.94) - DECK has been knock down and has hit the proverbial "deck", currently resting on a TB@64. Its bearish price objective = 51. Buy/cover=70. "Deck the halls with holly ..." just don't buy any of those ugly Uggz boots for Christmas. What has Carrie Bradshaw and those "Sex In The City" vixens done for you, lately? Seriously, retail has been a mixed bag, but this shoe retailer/apparel has failed to participate in the 5 month rally. Short now or on the Triple-bottom break.
(NTGR) Netgear $19.41 (+0.50) - Price Obj.. = 29.5. NTGR broke out from triangle @16 in July 09 and into a Positive Trend, yesterday @18.5. Internet Structural Eqp. and IT in general are a good sector to invest in.
(NEOG) Neogen $30 (-1.62) - Sam acquired his NEOG chart from a DWA report many months ago, before the March low. NEOG had an attractive PNF chart and was moving counter-trend to both the market and its peers. This week it is once again in the news, proclaimed in pages of the WSJ to be beneficiary of selling medical-testing equipment in the Chinese market. P.O.=60.5 NEOG printed a S.TT @32 on the day prior.
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