Seven Reasons Why The Trend Is Your Friend

I will often joke about market technical analysis.

Daytraders often live and die by minute-by-minute moves and magical voodoo terms. Technical analysis is no more the holy grail than buy-and-hold investing. The presumption that the tail waggs the dog is dangerous and not grounded in any scientific evidence. Yet, my experience says it's of as much value as fundamental analysis in helping you determine if a stock could rise or fall. Above is the most recent analysis of the S&P Trend line which can help one reduce risk and increase profit opportunities. The idea is simple. Know when to plant seeds. Know when to harvest profits.

I was trained in Modern Portfolio Theory (MPT) in my business BBA program in the 70's.

Naturally at a University you'll learn what is believed to be the best researched and scientific based thinking of the time. Most often based upon utilizing mathematics to identify correlations and relationships in search of the holy grail of reducing ones risk while increasing the probability of maximizing your returns. So, all the Professors contributing to the knowledge of MPT, were strong mathematicians not past professional money managers.

The founding fathers of MPT, people like: Harry Markowitz Nobel Prize in Economics, 1990. Diversification reduces risk. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Single-Factor Asset Pricing Risk/Return Model. William Sharpe, Nobel 1990 Prize in Economics, for Capital Asset Pricing Model. Efficient Markets Hypothesis, Eugene F. Fama, University of Chicago. Fama was first to get access to using a Mainframe IBM computer to analysis massive amounts of historical data that had been collect in print.

Fama's, extensive research on stock price patterns was the foundation for Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. This was among the easiest of concepts to grasp. Yet, to this day this is the most misunderstood theory. Often those with no formal investment training such as journalist, will imply Fama's theory means the market must always be rational.

But the most valuable concept that I learned outside of the class room in real life money mangement pertaining both to the market and individual stocks was how to spot a simple trend and capitalize on that trend.

We spend a great deal of time trying to spot stocks heading in the right trend, or direction. Careful attention needs to be given to the support and resistance lines. These lines are also called trend lines.

Here are seven reasons why the trend can be your friend in investing:

1. These lines draw the general trend, or direction, the stock is heading. They’re not used for daily tracking, they’re more of a longer-term direction that the stock, mutual fund or commodity is heading. If you are using a longer term approach, the trend is what you really want to know, not necessarily the day to day wiggles in a stock.

2. Often times, the trend line will give you guidance in a stock for years, not just weeks or months. But these support and resistance lines are often bumpers, or guardrails, along the way. Stocks often drift toward their support or resistance lines and then bounce back in the opposite direction.

3. If you can pick off a stock you find attractive as it is bounces off the support line, it could be a terrific time to buy. The reason is you have a strong, logical place for your stop point...just under the support line, which is really close by. This helps minimize the amount you have at risk.

4. Some of the best winners come from stocks that are purchased just as the stock breaks through overhead resistance and forms new patterns. Holding the stock until it breaks support line (which might be possibly many months, or even years later) can really help your overall performance!

5. The reasons behind why a stock jumps through a brick wall are often not clearly visible. The reasons for the move may emerge days or weeks (or even a year!) down the road. But when a stock or a mutual fund breaks through the trend line, either up or down, it’s important news.

6. If a stock or mutual fund we are following breaks through it’s overhead resistance, we have a high level of confidence that the stock will continue to climb upward.

7. Lastly, if the support line of your mutual fund or your stock is broken, beware! This is a very clear signal we should consider selling a portion (or maybe even the entire) position. Breaking the support line is the ultimate sign that supply is now clearly in command. Your principal is now at risk.

Bullish Momentum or Bearish Mojo ?

Bearish triple Ms? Doje? Bearish flag? Bearish Cross? Bearish Reversal Candlestick Patterns? Advance on low volume bull trap? Say all the mojo vodoo you want, but the market exploded open today moving up 100 plus points within the first 15 minutes today.

After a year of listening to people say buy-and-hold and passive investing and EMT is dead...those who did nothing but stick with a passive index fund, are the real market gurus. I've listen to high paid money managers and CNBC "experts", say the market would turn south for months once it hit 8,500...then 9,500 for sure was the top...and now were at 10,500. Hay, I thought 9,800 was tops. I too was expecting a little 5% pull back, that never came in the index. Lots of stocks have pulled back but the market index has continued to climb higher.

Gold and commodities explode up today. No idea why the 180 reversal from last Fridays stronger dollar. India must be passing out free glasses of Champane to Americans visiting their country, as their new stock pile of gold rise in value.

Triple shorts and double short ETFs got clobbered today regardless of low volume. So should we change our thinking? Dow 11,000 now? Well,today was great for index investors but I saw a ton of selling during the first 30 minutes with many prices falling thereafter. So, lets listen to Ron explain this from his market technicals point of view. He explains why he's staying short and bearish near-term on the market.


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DOW Hits 10,400 What's Next ?

Now that the Market hit a new high 10 days ago what next?

What next? Dow 11,000? or 9,800? Well, after listening to all the newly minted market wizards on Seeking Alpha.com make continuous market crash perdictions, since the mother-of-all-bounces (in our lifetime) began, they final stopped about two weeks ago as the market was agin hitting new highs. Now that they stopped I'm ready to get very defensive. No as, I've said before, I see no 20% correction for certain in the next few weeks. Getting defensive, for me, means selling the stocks and sectors that have risen the most and rotating into stocks with perdictable earnings and good dividends that have not enjoyed a big market advance. And if there were a 5% correction you can bet I'd be looking to buy unless we had new negative economic data, in addition to our serious unemployment problem. Remember unemployment is a a very serious problem but if companies are expected to earn more resulting from these lay-offs and if the future economy is expected to get better then stocks can continue to slowly rise or go sideways as they did in 1983-84 and 1991-92 even as unemployment was high. But lets just consider whats more likely for the next few weeks.


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So, to help me confirm or reject my guess I'm calling in advice from the Voodoo Chartist as us EMT boys like to joke about. I'm not one to get excited about minute by minute market technical's and charts. But I do make major portfolio shifts in allocation between sectors, industries and cash based upon my technical advisors in addition to fundamental analyst recommendations.

When one chooses a technical advisor I recommend one be chosen based upon their knowledge of fundamentals, market history and knowledge of how portfolio managers think too. I'm going to share with you Ron Walker ( one of my advisors ), a man who's ego is in check and is worth your listening time. Now given the market has had its greatest move up since the 1930's I'm worried the markets now ready for another minor 3 maybe 5% pull-back similar to the last two.


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Another technical advisor I follow Carter Worth, of Oppenheimer Fund Management has also advised me a correction is now the most likely near term outlook. And we've said all along that the market seemed insistent on going back up to the pre-Lehman bankruptcy level of last September. We've hit those levels. Based upon his training and experience Carter says, "that's the wall we'll not climb above for some time now." He believes a correction is due. Does it mean we must have a sharp correction? No. It can be a slow back and forth but continuous drip down into December. Even if we have no correction now, I'd bet it would come in January when large investors choose to take capital gains for all of 2009 profits, on their 2010 tax return, simply by waiting to sell on January 1st 2010. Most likely the big winners in commodities related stocks will sold. But let's not start speculating beyond the next few weeks.

Last week I saw the fertilizers companies and telecom companies rise while oil drillers like my favorite RIG were extra weak. I've sold my fertilizer play IPI and oil tanker shipper FRO. I'll look to buy it back below $25, I hope. I'm holding my DRYS due to the rising BDI rate rising. I'd be looking to buy more RIG below $82. Metals like X and AA can be bought on any noticeable drop. Large banks and insurance companies like BAC, WFC, C, STI, GE, PRU, MET and HIG seem on very firm ground and in little risk of falling down more than 6-10% compared to other jumbo winners in 2009. I'd be looking to buy BAC, GE or HIG on any noticeable pull back. I also notice that some of my favorite defensive plays with excellent yields continued rising as other socks weakened last week. Finally boring defensive stocks like WMT, MO, LLY, PE, VZ and CHL (I hold positions it all four stocks) moved up. These stocks may finally be in a mini-break-out mode which makes them a safe play to hold (even in a correction) as one takes other short positions ( as Ron describes ) or moves to 50%+ cash levels ( which I am ).


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These videos are more for individuals with some good basic understanding of technical analysis. It's for those who want an in-depth market analysis and opinion on if the market is more likely to move down or up in the next two weeks.

Special Note: The average individual needs to spend more time developing a long-term savings and investing plan instead of a market trading plan. Market timing and market trading and daytrading is a very time consuming activity. Those selling monthly subscription services will always tell you "passive index" or "monthly dollar cost averging plans" or "buy and hold" is dead. Yet, many traders make less money than a simple buy and hold passive investing strategy. The down side of daytrading is rarely discussed. What does it cost you to be spending 8 hours a day five days a week on market trading?

Death Of A City - 1/2 Million Buys Silverdome

A once great domed football stadium built as just one part of the Detroit MI area mid-70's reveal plan just sold for about 1 percent of what it cost to build.

China, India, Kuwait take note. You want a deal on real-estate? Do you want to buy at prices below the usual going-out-of-business 65% off everything? How about prices at 90% off?

The Pontiac Silverdome — once home to the NFL’s Detroit Lions — was just sold for $583,000, or about 1% of the $55.7 million it took to build in 1975.

The Silverdome, an 80,300-seat stadium located in Pontiac, Mich., is the latest example of how comprehensively the recession has socked southeastern Michigan.

Mass layoffs and automotive plant closures have wreaked havoc on the local economy. Budget deficits are deep, foreclosures are widespread, and the population shrinking – from about 2 million people in the 1960s to about 900,000 today.

As a former Michigander and Detroit resident I'm sadden by the death of the area. The once great Silverdome stadium may be a metaphor for the state of business and employment in Detroit MI.

Here are just a few other examples of the death of a city.

When I worked in the Detroit area the K-Mart headquarters was a shiny new showpiece (employing thousands)and business was booming. K-Mart filed bankruptcy in 2002.

Rockwell International(my Detroit employer) was number 27 on the Fortune 100 corporation list. Rockwell International had a workforce of over 100,000, organized into nine major divisions. By 2001 what was left of Rockwell was split into two smaller companies.

Just 10 years ago most believed GM was at the top of its game, a much leaner and more efficient company from the 70's and now their bankrupt.

Michigan unemployment now exceeds 15%, but real unemployment in the whole Detroit metro area is at depression levels (25%). It's just one more example in a long string of examples of the shifting sands of world economic fortunes.

Death of a Great City, an article written in September by Daniel Okrent, a Detroit native, outlines the city's economic plight and compares it to a natural disaster we all recall, hurricane Katrina, which devastated the city of New Orleans.

" Three years after Katrina devastated New Orleans, unemployment in that city hit a peak of 11%. In Detroit, the unemployment rate is 28.9%. That's worth spelling out: twenty-eight point. Unemployment in Pontiac is at 35.0%."

He concludes with:

"...the story of Detroit is not simply one of a great city's collapse. It's also about the erosion of the industries that helped build the country we know today. The ultimate fate of Detroit will reveal much about the character of America in the 21st century. If what was once the most prosperous manufacturing city in the nation has been brought to its knees, what does that say about our recent past? And if it can't find a way to get up, what does that say about our future?"

Brasil is Hot -Part 2

Here is the editor of Intelligence Report discussing why he likes Brazil. This follows on the heals of my prior post on Brasil.

Richard C. Young, editor of Intelligence Report, says Brazil is an emerging economic power with a stable democracy and a healthy financial system.

As an investment destination, Brazil offers profound promise. Slightly smaller than the continental US, Brazil [has] a population of 190 million. More than half the population is now considered middle-class by Brazilian standards.

Unlike many emerging-market countries, Brazil is not overly dependent on commodities or exports. Its economy is highly diversified, with personal consumption expenditures accounting for 60% of [gross domestic product] and exports accounting for only 14.3% of GDP. Manufactured goods account for 60% of exports. Brazil is the world's seventh-largest manufacturer of automobiles and the fourth-largest manufacturer of airplanes.

Brazil is the only BRIC nation that is both a stable democracy and at peace with all its neighbors. Brazil's financial system is healthy: Total credit to GDP is only 41%. Brazil has $233 billion in foreign exchange reserves, which is equal to 19 months of imports and fully covers the country's public and private external debt.

Brazil is also endowed with natural resources. It is the world's leading exporter of iron ore, coffee, soy, orange juice, beef, chicken, sugar, and ethanol. Brazil has 958 million acres of highly productive arable land, with 222 million acres that have yet to be farmed. The country generates 73% of its energy needs from hydroelectric power. Brazil is also home to one of the ten largest oil reserves in the world, the Tupi field.

Decades of recurring turmoil, arcane lending laws, and high inflation have kept Brazil's economy underleveraged. Mortgage debt in Brazil is equal to only 2.5% of GDP, compared to 80% in the US. There is huge pent-up demand waiting to be unlocked in the housing sector. Mexico, which has 60% of the population of Brazil, builds four times as many homes.

Lower interest rates and changes to lending laws are likely to unlock Brazil's pent-up demand for housing over the coming decade. Falling interest rates have already begun to unlock credit growth in consumer loans—65% of car purchases are now made on credit, and purchases with credit cards have been growing at 22% annually during the past decade.

Brazil has always had great potential, but has consistently managed to stumble. Change is now under way. Inflation has been tamed, the state has found an acceptable balance with private industry, excessive government debt is no longer a problem, and stability has returned to the economy. A more stable Brazil should result in higher earnings multiples on Brazilian stocks, lower interest rates on Brazilian debt, and a more valuable currency.

You should continue to expect wicked volatility when investing in Brazil. The government still has its hands deep in the private economy, as evidenced most recently by the implementation of a tax on capital inflows. Plus, while Brazil is headed toward developed market status, it is not there yet. Begin with a starter position in Market Vectors Brazil Small-Cap (NYSEArca: BRF) or iShares MSCI Brazil (NYSEArca: EWZ), and add to your position on dips.

Brazilian Stocks Are Hot

International stocks continue to gain popularity as investors look to align their portfolios with emerging market economies and creditor nations.

China, India and Brazil are all economies with a growing middle-class on the rise. A rising middle-class in America was accompanied by a rapidly rising 20 year market from the 1950's to 1970. Just something to consider. I'm not totally comfortable with investing in emerging markets. But my eyes can not deny the trend in growth and in stock prices.

Consider Brazil. Brazilian stocks have been among the top of the emerging market list, with the South American juggernaut being fueled by a pro-growth government, booming exports and the modernization of its infrastructure.

Pro-Growth Government

Brazilian President Luiz Inácio Lula da Silva, otherwise known as "Lula", has led the country's pro-growth strategy, appointing the market oriented economist and former CEO of Bank Boston Henrique Meirelles as head of the Brazilian Central Bank. Lula and his administration quickly strengthened the country's relationship with the IMF by renewing agreements and paying off its debt early.

Next up was the Growth Acceleration Program, an initiative designed to free the country's economy from growth constraints. By 2008 Brazil had became a creditor nation, with its debt recently getting the nod from Standard & Poors as investment grade.

Booming Exports

Much of Brazil's incredible growth trajectory is being driven by its strong export business as a commodities powerhouse. Here is a big surprise to me. Brazil is the world's leading beef and soybeans exporter, and ranks high in a number of other agricultural categories like chicken, orange juice and coffee. With the exception of coffee these are all areas where I was use to the USA being the agricultural export powerhouse. Brazil's service industry is also on the rise, with new exchanges and financial services companies helping to create a more balanced economy.

Infrastructure

An infrastructure story will be a recurring theme associated with emerging markets, but infrastructure development is literally and figuratively the road that leads a country to prosperity. In 2007, Brazil launched a four-year plan to spend $300 billion to modernize its roads, power plants and ports. The development of modern infrastructure and middle-class amenities has helped Brazil establish credibility as a progressive nation and future economic leader.

Now comes the important part, how to capitalize. One way would be to move to Brazil and invest in a textile plant or soybean farm. That actually sounds like a lot of fun, but might not be realistic for most of us. Here is an easier way; buy Brazilian stocks.

There are plenty of great Brazilian stocks that trade as ADRs on American exchanges, providing a nice dose of transparency and regulation to a less familiar investment destination. Here are four Brazilian stocks to watch. Interesting to note that while the USA stock market stands near it's 1999 high our market has been used to raise trillions for foreign stocks.


Basico do Estado (SBS - Analyst Report) provides sanitation and environmental services in Sao Paul, the most populous Brazilian city. As a utility, this is one of the more conservative Brazilian stocks, but that helps create a more balanced approach to the market. The Zacks #2 rank stock looks like a great value pick, trading at just 6.5X projected current-year earnings.


Petrobras (PBR - Analyst Report) is a oil stock many may be familiar with as one of the more popular Brazilian stocks. This integrated energy company will be involved in some of the largest oil projects in the world in coming years as it works to tap into the deap-sea discoveries off the coast of Brazil. The next-year estimate looks solid at $3.57, a 22% growth projection.


Gafisa SA (GFA - Analyst Report) is a Brazilian real-estate developer. The company just reported amazing third-quarter results, with its revenue more than doubling from last year. Analysts are looking for next-year earnings of $2.79 per share, a bullish 72% growth projection. Based on the current-year estimate, GFA has a forward P/E multiple of 20X, a reasonable valuation for a company growing this quickly in the strong Brazilian economy.

Price-to-Cash Flow

The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued. I would add that a much better measure used on Wall Street is Price-to-Earnings-to-Growth (or PEG. And one must always put more weight on Forward Earnings not Trailing Earnings.

The Price to Cash Flow (or P/CF) is another great ratio. Cash is vital to a company's financial health, especially in tight credit markets, in order to finance operations, invest in the business, etc.

And cash can't really be manipulated on the Income Statement like earnings can.

The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures.

Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio.

Many analysts prefer using the Price to Cash Flow metric to judge a stock's value.

And just like the P/E ratio is calculated by dividing the Price by its Earnings per share -- the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share.

Also like a P/E ratio, the lower the number, the better.

Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 9.6. For the 12-month forward P/E ratio, it’s 15.3.

But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.

But make sure you compare the stock's P/CF to its Industry, since different Industries will have different numbers that are considered normal.

For example: the average Price/Cash Flow for Gold Mining companies is about 30, whereas it’s about 3 for Telecom.

There were 30 stocks that came thru this week's screen. Here are 5 of them:

BARE - Bare Escentuals, Inc.
CMN - Cantel Medical Corp.
HS - HealthSpring, Inc.
TTC - Toro Company
VIA.B - Viacom Inc.

USA Unemployment Hits 26 Year High

The American unemployment rate surged to 10.2 percent in October, its highest level in 26 years, as the economy lost another 190,000 jobs, the Labor Department reported Friday.

The nation’s jobless swelled to 15.7 million. Since late 2007, payroll employment has fallen by about 7.3 million. Only 1.8 million jobs were lost in the 2001 recession. So, this is 3 times worse. More than a third of the nation’s unemployed — 35.6% — have been out of work long-term, defined by the Labor Department as a period of 27 weeks or more — that's the highest proportion since World War II.

The jump into the realm of double-digit joblessness— provided a sobering reminder that, despite the apparent "technical" end of the Great Recession, economic expansion has yet to translate into jobs, leaving tens of millions of people still struggling. And many with a job are wondering if their next.

The labor situation is actually worse than what these figures and the 10.2% rate show. The government doesn't count as officially unemployed the so-called discouraged workers who have given up looking for jobs -- which in October numbered 808,000, up from 484,000 a year earlier.

There also were 9.3 million people who reported they had little choice but to work part time because their hours had been cut or they could not find full-time jobs. If this group and discouraged workers are included, along with others on the fringe of the labor market, the nation's unemployment and underemployment rate in October was 17.5%.

The last time the jobless rate crossed double digits was during the recession and initial recovery period of the early 1980s. Then, unemployment hit 10.1% in September 1982 and stayed at or above that level, rising to a high of 10.8%, until June the following year. This time around, unemployment has risen even faster and, by many analysts' and economists' predictions, could hold above 9% through 2010.

While it seems counter intuitive the stock market in 1982 was similar to 2009, as it also rose over 60% -even as unemployment was rising. Now let's hope the 2010 stock market is more like 2004 then 2002 market. Even, some market bulls find it hard to believe (with this recession dwarfing 2001) that we are at levels above DJIA 10,000.

Current Ratio Analysis

Current Ratio Education Combined With Zacks Analysis By: Kevin Matras



Current Ratio is calculated by dividing current assets by current liabilities. The higher the ratio the better, meaning the company has more liquid assets to meet its short-term obligations. A ratio of 2 or more (meaning a company has at least twice as many short-term assets than short-term liabilities) is generally considered good.

Currently, the average current ratio for the stocks in the S&P 500 is 2.09. This is a nice improvement from mid-year when it was at 1.75; and an even bigger improvement from the beginning of the year when it was at 1.67.

Screening for this is quite easy to do.

It's a ratio, so on any stock screener programs, including the Zacks Research Wizard, you'd want to first go to 'Ratios'. And then go to the 'Liquidity and Coverage' section. From there, you'll find an item called 'Current Ratio'. That's the one.

As for what value to use, I prefer to compare a stock's Current Ratio to the median for its Industry. And in this week's screen, were doing just that. We'll also add in some other items to help us find sound companies with solid prospects for the future. But please keep in mind variables like the individual companies and industry outlook are far more important than its current ratio in moving stock prices.

Screen Parameters. Below is just one example.

■Zacks Ranks = 1
(Only Strong Buys allowed.)

■Current Ratio > median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.)

■Current ratio > 2
(And at the very least, we want the companies to exceed the commonly held definition of good, which means greater than 2.)

■Projected 1 Yr. Growth Rate > median for its respective X Industry
(This means we’re looking for the companies with the best growth rates within their groups.)

■Projected 1 Yr. Growth Rate > 0
(I only want positive projected growth rates.)

■Price >= $5

■Volume >= 100,000

Here are 5 stocks that passed this week’s screen:
BLK - Snapshot Report BlackRock, Inc.
CBT - Snapshot Report Cabot Corp.
FIRE - Snapshot Report Sourcefire, Inc.
ISRG - Analyst Report Intuitive Surgical, Inc.
VRX - Snapshot Report Valeant Pharmaceuticals

Note: Current Ratio Analysis is only one of many financial ratio's and I'd say you would only use this as a confirmation of your investment choice based on economic and industry outlooks combined with the more important earnings and revenue outlook for the company you are considering investing into.