hattery buy ERX calls

BOT ERX APR calls. It has strong support with it resting near it’s strongest price level of support measured by volume profile, with it’s weakest resistance above with a big volume pocket should things heat up. Individually, there are a few bearish looking chart patterns in energy. Those who wish to hedge may look at a BP put.

Since I am buying AT support… If we aren’t higher by  end of day Thursday, I will probably sell on Monday(no trading Friday).

Good job for those that followed along with the SLV trade. Comments timestamped.

Since the method I have discussed looks to reduce positions into oversold conditions, In order to keep up with returns of a roaring bull market that we have been in, occasionally I will make a few option trades with a small portion of the portfolio.

I’ve read the following stats:

* In hyperinflations (rises of some hundreds of percentage points each year) no one is able to beat buy-and-hold for a year or longer.
* In monster bull markets (annual advances of 25-50%) less than 1% of the market participants beat buy-and-hold.
* In powerful bull markets (annual rises about +20%) only about 1-3% of all market timers beat buy-and-hold.
* In average bull markets (annual rise about +15%) about 3-5% of all market participants are able to beat buy-and-hold
* In weak bull markets (annual advance about +10%) about 10% of all market participants are able to beat buy-and-hold.
* In sideways markets (+/- 5% per year) 20-50% of all market participants are able to beat buy-and-hold.
* In bear markets (losses of 10-20% or more per year) 80% or more of all market participants beat buy-and-hold.

I believe “market timers” refers to those that hold a % of cash trying to pick the top.

So this is why I felt that I must amend the strategy a bit. If the vix drops below a level, (say 20), I think it’s time to use a bit of capital in leveraged options when the timing is right to make sure we can make an effort to keep up with the market. Particularly when the M&A arbitrage premium has gotten squeezed out much more than it has before. It makes a bit more sense to me to try to play commodity related names like silver and gold, and perhaps other names that have a more mild correlation. If we are able to merely break even in strong bull markets with less cash once oversold, it is a win since we will have more cash and be able to more aggressively buy the oversold conditions
Although we certainly could hold here in Gold and Silver, the precious metals market is very vulnerable right now and so I am going to refrain from buying the dip in precious metals and may even go so far as to selling a bounce in gold from 1630 up to 1645. We appear to potentially have broken longer term trend-line support in gold, depending on how strictly you draw your line. With a forgiving trend-line, we still hold above 1600. Volume pocket below.

Gold remains bullish over the long term (measured in years). It may be biding it’s time before a longer term move up over the next few years, but give it some time as for now it is neutral to bearish over the intermediate term(measured in month), even though it could swing higher here (measured in days). I would say Gold will trend lower in April and perhaps find support in May, and perhaps retest the breakdown in June.

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One of the draw backs of most technical analysis is that it is difficult to be objective. There have been various methods that people have come up with to try to eliminate any bias

1)Sharp rules of entry and exit regardless of the pattern.

2)using moving averages golden cross and death cross as two signals without having a price target

3)A measurement rule on the patterns. The pattern high minus the pattern low added on to the breakout point gives you price target. Stoploss should be 1/3rd of the target.

4)Point and Figure Charting (tic tac toe stuff)

Obviously by the title we will be looking at some tic tac toe.

I’m not going to reinvent the wheel and try to explain it all, stockcharts does a great job answering, “what is point and figure“?

The main drawback to point and figure is that it doesn’t give us a time frame, but it can give us a direction and price target and always give us an answer “is this stock going higher or lower?” and “how much higher/lower?” I did not say that it will always be right, or that it won’t suddenly give a reversal sign or breakdown and be bearish when it was bullish the day before, but it does do a good job of filtering out noise by only counting the given interval which usually is a whole dollar amount. (A break above $41 is not significant unless it crosses to $42).

P&F is useful for quickly and objectively identifying price target and calculating which areas have more upside.

I decided to put in some work in generating price quotes, running wikiwealth’s value analysis to generate price target and running P&F targets. So far I have just done those included in “regional ETFs”

I wanted to put more weight into the fundamental values first. I went with a 68% weighting into the value analysis and 32% into the P&F targets (daily chart).

Unfortunately there are some that had no P&F target at the moment, for these I had to just go with the value weighting. Additionally the “fair value” price was determined a few months ago, so it’s possible the fund has changed it’s weightings drastically since then or that the earnings or individual stocks in those ETFs have changed in value for one reason or another.  So you may want to recheck the value of the ETFs.

With that being said, the result is the following 12 names with 50% or more “potential gain” as determined by this weighting.

UMX,INDL,IXP,BBH,KWT,JXI,MNA,IRY,LBJ,DZK,UBR,FGD

MNA had no P&F target

Ultra MSCI Mexico Investable Market (UMX)
Daily India Bull 2x Shares (INDL)
iShares S&P Global Telecom (IXP)
HOLDRS Biotech (BBH)
Market Vectors Solar Energy ETF (KWT)
iShares S&P Global Utilities Sector (JXI)
IQ ARB Merger Arbitrage ETF (MNA)
SPDR S&P Intl Health Care Sector ETF (IRY)
Direxion Daily Latin America 3x Bull Shares (LBJ)
Direxion Developed Mrkts Bull 3x Shares (DZK)
Ultra Brazil (UBR)
First Trust DJ Global Select Dividend (FGD)

A very diversified group. Not just diversified among sectors but countries and type to a limited extent (dividend, merger arbitrage ETF). The great thing about this is many of them add very unique things tot t he portfolio and are not heavily correlated with the markets. As such,You can get a bit more aggressive and boost your return without sacrificing risk; assuming these correlations hold and/or that this value analysis and technical analysis can offer increased returns at lower risk, which I personally believe both to be true to at least some extent.

If you are not looking for a long term play, you can monitor chart patterns or candlestick patterns instead, and try to time these. This way you are trying to time vehicles that should go upwards to a greater degree over time so if this analysis holds true and your timing is even random, you should be able to have a more than adequate return.

The next step is perhaps to look at other asset classes (currency ETFs and bond ETFs, look at commodity ETFs and REITS) and perhaps some more sector wide ETFs to get exposure to a few more sectors and do the same thing.

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Euro is fucked up royally. Who the fuck thinks you can take a system and say “okay we make euros now, you owe us money in euros” and then say “fuck you, go sell some of your own damn bonds”. What would happen if the US went into the gold standard and owed all of it’s creditors gold? I’m sorry, we owe you 13 trillion dollars worth of gold? We only have 8000 fucking tonnes 1 tonne is worth 1000 kilograms. 1 kilogram is worth 1000 grams. Gold is about $55 per gram…

So $55 times 1000. Times 1000 again times 8000. If my crude (or if you prefer “fuzzy”) math is correct that means we have $440 billion of gold about. If we went to a gold standard, gold would have to by my math get about 30 times more expensive than current price if we were to pay all of our debt back and that would mean shipping all the fucking gold in this country away from us. Maybe it would be worth it long term, I don’t really know. But if you think that’s where we are headed, you better get your JakeGint on like a mother fucker, and guard your shit with guns so the government can’t take it and ship it away.

But the point is not about us…. It’s about EUROPE. If we went to the gold standard and owed our old debts in GOLD, we could not pay it without gold going much higher. In order for the gold standard to become a viable option gold has much further to rise.

But if we continued to do business in Bonds and keep everything somewhat the same we would be fucked.

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Silver dipped below 31.50 so I bought calls because I feel it is on the verge of doing something soon. A long term chart shows silver coiled up here. Since it is a long term pattern a daily close below support would not be that significant, but a monthly close would be. As we approach the end of the month, I decided to play the dip by buying in anticipation of a bounce.

Do not confuse this with a long term play as below support there lurks danger.

1)I think bulls will defend this month and try to keep gold above 30.50. If they defend successfully, we could rally strongly here.

2)If they fail to defend (as it looks like we are headed for if we do not get a change in trend) I suspect they still attempt a short lived rally right here or in a day or two before we trade lower to close out the month. The downside move in the short term, likely has played out or is close to it (unless we are on the verge of a long er term breakdown.).

3)Worst case scenario for weekly calls is we dip below 30.50 and rally to close the day just above it to give a signal that we will likely see new highs in the future or near it to give really a lack of a clear signal.

4)I bought calls instead of SLV because I feel that we potentially could crash very hard in a very short amount of time if/when we breakdown and I wanted to limit exposure. A lot of the buyers that want to buy for the time being have done so leading up until the peak (and the peak of gold)

5)In hindsight, I am having buyers remorse a bit. Not that I regret buying but I bought weekly calls in addition to april calls. I should have probably only bought the APR calls because then I still have enough time left come first trading day of April to determine if the bulls defended successfully or not, and to get out of the trade with still some premium, and I can still sell a short term bounce if I nail the bottom here. APR calls probably offer the most flexibility. If you are after stability per dollar risked, you need to buy longer term calls s there always is a healthy time premium if trade goes against you. This way, your percentage loss is less, even though your percentage gain is limited. I am not aggressively loading up on calls here, just a few extra calls beyond what I would have to replace the underlying if I were to buy SLV here.

I will reevaluate come April 1st for potentially rolling options to a longer term hold, or playing the downside with longer term puts.

A little bit backwards technical analysis is done here as the downside target was  around 31.50-32 in silver and we are at these levels and typically that is a signal to get out of any bearish bet. I did use some GLD and SLV puts as a hedge but I took off the trade earlier this week. Bulkowski’s research (in his book Encyclopedia of Chart Patterns
) on technical analysis gave me an interesting idea of flipping it on it’s head. A lot of stocks might breakdown an average of 20% with a particular pattern but then they on average, once the trend reverse I believe every pattern would end up higher than the breakdown point. So either accumulating a position as it breaks down or buying if it reaches the downside target actually MAY be a good decision, although it generally lacks the clear need of support and where to sell making it difficult to manage. So I rarely plan on doing this, but the move is coiled up and near support so it is manageable and makes sense to me. I also like the idea of buying a business or commodity at a LOWER price as a result of technical analysis even for a dip buy, but the clear problem in many cases is management of the trade.

Personally, in the grand scheme of things I prefer a monthly close below 30.50. The reason is, a breakdown lasting until most of 2012  (August is est. time frame for end of the move with possibility it spills over into early 2013 not outside the range of possibilities) would be excellent for managing my trades. Even though I am hoping for a dip in stocks before I get too aggressive with my cash hoard, with the VIX low I am content to place a small amount of capital in options and play the upside. But while doing so, I feel exposed, and if I could hedge with some SLV or GLD puts every now and then it would allow me to get more aggressive. Additionally, I feel a strong correction in 2012 will be helpful as it will flush a lot of buyers out, work off the overbought levels and set the stage for a run up in gold over the next several years, because nations around the world are in trouble and all the money in bonds has to go somewhere, especially when every bond printed is also a dollar that pays interest and accumulates more debt as a result. The higher interest rates will result in higher debt payments when the DEBT is rolled. FYI Spain and Portugal will roll their debt in 2012 here. It is not just Europe, but JAPAN has a very poor debt to GDP scenario as well and the US has lots of unfunded liabilities, although debt to GDP is not as bad as other parts of the world. I don’t know who started the idea that higher interest rates were “bearish”. This is sometimes true perhaps, but when Japan has lowered interest rates for decades as their stock market declined, or the lowering interest rates during 1929-1932 (yes they hiked it at one point then immediately started easing. Whitney Tilson and others have shown that stocks tend to be more bullish with rising interest rates. Robert Prechter, and others showed how major depressions and declines happened during periods of falling interest rates. Rising interest rates means MONEY is in demand and people are willing to pay up for it, and are not willing to  accept low yields with money on sidelines while there are so many other places to put the money.

Well I am getting off on a tangent now like I do too easily, but for now there is a ton of speculative excess still in gold and silver markets that could potentially be squeezed out even though a significant part of that move has happened. If we rocket higher from here instead, in the long run, I think silver and gold will top out sooner, and crash harder for longer, and be less predictable. A healthy correction would be favorable in my opinion. I may be getting a tad overzealous here and it may be more prudent to wait until April 2nd to place a trade in precious metals when we know whether or not we hold monthly support here around 30.50

If we break down, the initial breakdown of the longer term chart gives a target is around 25. secondary target could even be as low as 15. but I suspect we will set up another pattern by then if we breakdown
If we hold, initial pattern doesn’t face resistance until nearly 35 with huge upside if we break resistance from there, which I suspect will happen (IF we hold the monthly level significantly above 30.50).
I would say this month is pretty much do or die for the bears on whether or not we will see a deeper, healthy correction this year.

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Something is going on… Greece is defaulting, not defaulting, defaulting again… having no official default event while still defaulting… it’s official, default CDS triggered!

Okay, old news by the time you hear it… but this is finally good for the stability of the market, as it may restore confidence to the CDS markets and at least the ability to insure the bond market may slow down the flight of capital out of bonds and into stocks to more stable levels. But with the vix this low already, you can’t exactly benefit from betting against volatility. Additionally, it is only short term. If anything, the longer term picture should see rising volatility as the structural problems of the Euro remain and the markets have been completely complacent regarding the Euro troubles.

Money poured strongly into stocks as capital fleas the bond markets. I was expecting the official default to restore confidence to the CDS and bond markets, but there are other reasons capital is fleeing.

US treasury yields are spiking in the short term. Will that cause problems if rates get hiked? For the short lived move, perhaps, but it means capital is flowing out of bonds, and it is not isolated in the US but is instead global. Gold+silver are showing early indication of potentially a big breakdown here that could produce a very significant low this year if it occurs. People do not behave rational in the sense that a lower rate causes them to borrow more. I have researched and found no evidence of such a correlation of lower rates=more borrowing. Instead, rate hikes can sometimes have the opposite effect as banks have more incentive to lend when they can do so at higher interest rates, and more incentive to find ways to promote buying of real estate, rather than stories of fear. Meanwhile, people see rising rates and want to lock in the relatively low rate while they still can, and they fear missing out a little bit more. I personally do not buy the “conventional wisdom” that rising interest rates are bad if it is happening for the right reasons. Lower rates has meant lower stock prices many times. So rising bond yields which could lead to rate hikes in the future, may not be a bad thing.

http://www.elliottwave.com/freeupdates/archives/2010/03/17/RATE-ing-In-Vain-Market-The-Fed-Is-Not-In-Control.aspx

Although those examples were isolated instances, the “insane” rate hikes of Volker era continued to see high inflation. Certainly interest rates going up or down doesn’t always pan out as expected. Money in any given currency is traded and treated as a commodity. Well higher interest rates cause problem when the debt has to be rolled over. Spain and Italy will face troubles as hundreds of billions of euros will be rolled with interest rates substantially higher. It’s like an adjustable rate mortgage on their home. That will cause an outflow of their national wealth, which perhaps is bullish for stocks, or perhaps the migration into the dollar will be too strong at some point and crash stocks and commodities priced in dollars. The primary beneficiary over the long run from the migration of capital out of bonds should be stocks, and with interest rates heading higher, it would not be a surprise to see the rally continue. It is not as if the dollar has crashed hard from the 2009. It has lost about 15% since the dollar’s peak while stocks have more than doubled since their bottom. The stocks have gone up over 30% since October 2011, while the dollar lost only about 2% of it’s value. TLT has lost 12% of it’s value since then. dow/gold is up 33% from it’s august 2011 low. Money is flowing into stocks, but how much longer until we see a pull back, or worse a reversal of trends?

Capital is fleeing government debt and into risk based assets. With that being said, certainly there are major concerns, particularly for stocks right now.

July 2011 3.3% cash
August 2011: 3.4% cash
Sept 2011 3.8%R
Oct 2011 3.5%
Nov 2011 3.5%
December 2011 3.5%
January 2012 3.6%

Mutual fund cash level have remained historically low but historically there still is a lot of cash on the sidelines of hedge funds and of course retail investors missed out on the rally. So perhaps this may be a bit misleading.

RSI is overbought on a daily and weekly charts

Slow Stoch is heavily overbought on daily, weekly and monthly

We still remain in an upward trend and as I have warned previously, uptrends tend to stay overbought longer than downtrends can stay oversold. This is why the strategy I have mentioned is to allocate “risk on and risk off” accordingly, rather than shifting to negative risk or shorting the market.

The long term look at treasuries appears to remain a good contrarian play, and perhaps it is finally breaking here. The more heavily allocation towards the dollar and currency ETFs and away from US treasuries has paid off. The recognition of FXI being more overvalued than SPY in the Feb trend trader, may have provided some with a short that made money despite the market melting higher as well as provided some value long names, of which many have done well. It also would have provided you with a look at some currency names that may have held up relatively well. I would advise raising a little cash from both trades.

I have a feeling we could stay overbought for a little longer here, but I’m not willing to bet on it heavily either way. I tend to think a top is coming and that the similarities of 2007 are slowly starting to surface with rising gas prices, stocks ignoring overbought signals and an election not far behind.

The relative strength in the dollar (making higher lows since May 2011), even as the stock market makes new highs, and the inflation trade doesn’t seem apparent globally or domestically with gold and silver breaking down as the dollar holds up.

This is telling me that capital is migrating into the US, and globally is still finding it’s way into risk assets.  Perhaps individuals are selling assets (which are priced in dollars, and with global reserve currency in dollars tend to first liquidate to dollars), in commodities and bonds and foreign currency, and raising cash while still entering into stocks. It seems that way.

Some plays for the long term… short treasuries, long dollar, long currency etfs, long natural gas long term, short gld+silver, long dow, short nasdaq (a bit dangerous as it could produce a parabolic blow off top like in 2000.) Otherwise scan through the trend trader for some ideas that are undervalued long term and won’t hurt you to rebalance if we go lower, and perhaps run a screen for upwards earnings revisions. I believe if we don’t roll over relatively soon, JUNE is probably the month to watch for a peak.

Unfortunately sometimes the last part of a move is the strongest. for this reason, I speculate in options every now and then when the VIX is low, rather than expose myself in stocks directly. If it is a big blow off top, then I will gain more with a smaller amount of leverage. If not, I may lose a significant amount, but not significantly more than I would have. if I am less aggressive, my downside will be less and my gains will be nearly the same or about the same or slightly more..

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Money is pouring into stocks, particularly financials right now, Central Banks are buying US equities, oil is set on fire and the stocks, especially the leaders held up strong in the face of metals like Copper and Gold and Silver tanking yesterday.

Well the market also gets pushed further into risk with the low yields, the Soverign Debt Defaults and “not actually a default” ruling and the people starting to realize their CDS are as about as worthless as the subprime derivatives and negative real yields make bonds not so great.

All the money sitting around gets pushed into stocks, parked into real estate, and sheltered overseas away from the money squanderers in government in the west, and instead into the benefactors. Well US companies benefit from cheap labor overseas, entitlement spending at home and stimulus to the consumers, devaluation of individual wages and many of the american companies are expanding globally to markets that benefit from the spending and exporting of the capital via debt interest payments to creditor nations. Oh certainly bonds outperformed in the last 30 years but following a 30 year trend, 30 years into it is insanity. Don’t get me wrong, the “risk off” trade is still to US dollars and bonds, and so some TLT position to take advantage of the “risk off trade” is perfectly fine, but I certainly wouldn’t want to be reaching for yield at this low levels. I understand some older people need income for retiring, but I would still rather put a significant amount of my money in high yielding stocks t this period of time. You do not want to follow the trend of baby boomers moving to bonds because it will not last. The yields are near or at long term extremes. Compare stocks to bonds and stocks are for the first time in a very long time, finally at least reasonably priced relative to bonds. Relative to real estate bonds are just barely at what I would consider extremes as well.

I believe that is the long term trend that we have in store for us but lets be honest, even with all that going on, how can appl continue to act like it is a small company that just smashed earnings by 100% and is just starting to get recognized by institutional investors every single day? It’s not that it isn’t undervalued but how often do stocks go straight up in the air indefinitely that are already $500 Billion dollar companies?

Although I refuse to put a large % of my overall cash into this nonsense until we get a meaningful correction, that does not prohibit me from occasionally getting aggresive via OTM calls. And the Financials are breaking out, or BTFO as RC likes to say.

The Nasdaq is nearing extremes

Look for a break in trend and a shift in the nasdaq back to the dow, or else wait for dow/nasdaq to get below 4 before playing (as a contrarian play).

I will have the rest of the March Trend Report Up in a few days, for now just some minor observations and highlights.

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Let’s have a look at housing. Real estate in 2012 looks like a good investment in the US. So why exactly might buying real estate as an investment in 2012 be a good idea?

According to Shadowstats, inflation adjusted income is at 1950 levels. Of course, production has been high and we have been doing more with less, and technology has evolved so that does not mean we are at 1950s life style (the current official CPI numbers uses hedonics and subsitutions so that basically inflation is more a measure of quality of life rather than the monetary expansion and effect on price. I.e. a computer costs $500 now when in the 1990s it’s costs was $2000 so even though that occurred as a result of production it is considered deflationary. It just means that gasoline and food prices are high which aren’t reflected in the official CPI numbers. Well if there was this sort of drastic reduction in inflation adjusted income, it would only be logical that home prices on the same measurement were adjusted to 1950 levels. We can see that at this point it is actually significantly lower. In fact it is at it’s 1920 levels at all time lows. If you compare income from 2005 when housing was significantly higher priced to what it is now, there is not enough of a reduction in inflation adjusted income to justify the inflation adjusted decline in real estate. I realize that some people have issues with using the shadowstats site so going forward I will only use the official CPI adjusted. Well even if you use the official CPI you can see income since 2005 has not fallen much but home prices have. On the other hand if you consider income at around 98 or 88 levels then we are not quite back to where we started. However, let’s not forget that interest rates are lower and thus a monthly payment on a house will be less as a result of lower interest rates.

Is there any indication of when things will become under valued enough to be worth looking at other than just CPI? Yes, we can look at a historical valuation perspective relative to other assets. This time I will use the official CPI to give us a price of home, and I will see how it compares to stock valuations. I use 1 divided by the 10 year trailing PE plus the dividend yield for that single year and take 1/ that number to convert it back to PE. Then I will adjust it so high home price and low valuations of stock to represent a high number so that the high number represents a time when real estate is overvalued relative to stocks and a low number will represent a time when real estate is undervalued relative to stocks. So I will take the Case shiller index divided by this stock valuation.

I took 10 divided by the bond yield to convert it to price so that a low number meant the bonds were undervalued and provided a high return similar to like a did with a low adjusted PE for stocks. For some reason I took bonds divided by the shiller instead of the shiller divided by bonds, so this time a high number represents when bond prices are high and their yield is low and interest rates are low and home prices are low so the ability to finance a property is good and also the need to hold your money locked away in bonds is low.

Well, we can see there is a reason to consider shifting some capital into real estate, particularly if you can rent a property and get positive cash flow and build equity from which you can use to get a loan to acquire more properties and more cash flow and continue this process over time while prices are low relative to other assets.

 

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I would like to say a bit on a matter of investment strategy and philosophy, sometimes repeating something that seems simple in isolation makes a world of a difference in how you perceive the big picture. There is a great guide to investing in stocks here that piggy backs off of many of these principals and better illustrates it using pics.

• The market has no guarantees, therefore to take advantage of opportunities of lower prices or “dips” within a greater uptrend, you should always have some cash, and if you prefer some “risk off” etf (such as currency etfs or bonds etfs, or even perhaps a more aggressive short hedge.)
• The market is not completely random, if it were and there were only the option of being long stock or cash, you would have 50% cash, 50% stock and rebalance and it would be the only way to make money and beat the market over a long period of time (if only very, very slightly.)
• Furthermore, money flows in and out of various assets. If it did so randomly you could hold an equal amount of all major asset classes, and simply maintain that same balance with the similar concept of there only being stocks and cash, but this way you would take advantage of more movement of capital. However, generally on a relative basis one asset is more attractive than another, and thus you should shift your weightings based upon expectations of capital flows and value so you have more allocated in the more favorable assets.
• Additionally, one asset may be more or less correlated in relationship to the others. The kelly criterion shows us that “independent bets” divided as small as possible and bet simultaneously produces the least volatility, and the most long term upside on risk. In reality, there are not really many independent bets, but “correlation” can be monitored, to avoid owning very correlated assets, and to produce an overall correlation to the market that increases with your degree of bullishness on the market (which should generally be greater on oversold conditions and uptrend signals). (see my post trend following strategy using sound money management principals)
• The market does not go straight up over time, however it does trend up over a very long period of time. If it were to go only up, you would be over 100% invested, if the gains exceed the cost of leverage. The market over a very long period of time goes up as production increases and money gets added to the money supply, therefore you must recognize that getting short is a very aggressive and generally short term move, unless it’s used as a way to reduce your overall exposure to “risk”. If you do use short as a strategy, it should generally be less aggressive than when you are long.
• Both buying the extreme oversold signals and reducing position on extreme overbought signals on multiple time frames, as well as following the trend have merit. Balancing these two factors should be a part of trend following.
• When too many people get bullish and lack funds to push it any higher, tops are made, when too many people sell and run out of funds to sell, or get too exposed to a short squeeze, they lack the selling pressure to push prices lower. Therefore, the principals of contrarianism on a longer term basis have some merit as well and are worth watching in combination with OB/OS signals on a monthly chart to anticipate the end of the trend.
• The market generally prices stocks by expected worth over a period of time compared relative to the other investments, with a few other factors considered. As a result, a 10% change in growth expectations over a year can drastically effect the price of the stock based on pricing it at 10 years of earnings over that time. A stock earning $1 per share with 0% growth might be worth $10 if you add up the $1 per share for 10 years. But with 10% growth, it becomes worth $15.93 assuming that growth is expected to consistently be maintained over a full 10 years. What’s more, in a year the 10 years worth of value will be 17.53 for the next 10 years if the growth is expected to continue. I explain this to illustrate both the pricing mechanisms in terms of expectations, and the dramatic effect they can have after big positive earning surprises and upward revisions, and to understand how big daily fluctuations in the market can still be somewhat rational. Additionally, both principals of understanding growth and value are important if you are choosing individual stocks, and if you are choosing ETFs, you need to still understand the value and the things that effect changes in growth in the macro economy. Growth is a very powerful factor, as such growth stocks offer greater potential as well as greater risk if expectations are wrong. The EMH (effiecient market hypothesis) is probably wrong to a degree, because everyone has different concepts of acceptable risks, and different ways to manage it, and different time frames, and everyone invests based upon expectations of earnings, which only need to change slightly to cause big differences in “fair value” measured by a stocks 10 years worth of earnings.the markets have proven to exist in mania phases. If for example, you expect demographics to cause a decline over a long period of time, but you are a short term trader, you probably won’t make any adjustments until it gets very close to the time frame in which the concern is there, and even then most investors who use earnings won’t project drastic changes based upon demographic trends
• Please note the drastic difference in behavior of value and growth stocks. Value stocks may swing among optimism and pessimism, but is not dependent upon growth. Generally more money going into a company (and higher prices) makes a value stock less attractive because it yields less. It is only when that money allows the company to invest the capital and through a high return on capital produces growth that a stock going up can be a good thing. However typically value stocks become more of a target as they grow and must posses barriers from competition growing such as a consumer monopoly and brand name recognition to simply prevent contraction.
• On the contrary, growth stocks for a large portion of their growth phase can become attractive if they are going up, (provided they don’t have excessive buying pressure in a short amount of time that is difficult to continue and are severely overbought). Many well managed growing companies use the additional capital they collect from investors to put to work in a productive way and further boost their growth and earnings. As a result, individual growth stocks in the right conditions can continue to go up for a long time until they reach a saturation point where additional capital becomes increasingly difficult to put to work to achieve the same kind of growth, which results in a decline causing some people to pull money out which contributes.
• Additionally, since expectations of growth is relatively arbitrary, a more rosy expectations can see prices drastically higher, while less rosy expectations can put a stock drastically lower. As a result, opportunities present themselves to buy the dips and sell the rips.
• A shift overall between growth and value can take place based upon the liquidity cycle and outlook and macroeconomic factors. If you expect growth to be inhibited, value stocks should be of larger weighting in your portfolio. If you expect growth to be strong, growth stocks may be best, provided the added risk of more growth can work within the context of your portfolio.

Taking into account all these factors and taking advantage of all these opportunities requires a delicate balancing of information and determining where to shift your assets. You have to be careful to generally go against the crowd at the extremes, but to follow the trends and lead the majority of the crowd in the trend. To buy an uptrend early enough, and hold onto it long enough to take advantage of the upward movement, but to still start selling into it early enough to profit and reduce position before the crowd does, and more aggressively start reducing your allocation when overbought. Meanwhile, identifying which assets specifically to bet on. Identifying the mispriced assets that offer high return with low risk. Perhaps you may also bet against those with high risk and low or more ideally, a negative return.

 

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There is an excellent effect of earnings revisions on stock prices. I believe these are also some of the major factor behind the Zack’s ranting system.

The PPT has a screener that can help you with this as well, to go with the Fly’s updates and the communities comments on stocks, and of course the main reason to subscribe is the hybrid score.

 

But I digress… this is not an infomercial, but instead is about using a screen to identify such stocks.

I will use Zacks free screener so the freeloaders have a chance to try it out.

Now you can look at several factors from here, it depends on how strict you want to be.

Personally I like companies with a cash ratio of 1 or more, high profit margins, and high ROE. But sometimes I will manually go through this list of 100 names and plug them into wikiwealth or gurufocus and look at the valuations. Then I sort the top several and post it to finviz and look at the charts. But it’s up to youl. Instead, lets take the abbreviated version.

Earnings surprises can be one factor to use as well, but today I run the following screen.

Optionable=Yes (my personal preference)

Market Cap > 100M

% Change LT Growth Est. (4 weeks) > 10

Cash Ratio>1

ROE>10

Net Margins>0.10

Results: BIIB,DV,FRX,LSCC,XLNK

Some options have a lot of the expected gain cooked in, others don’t. So you will have to come up with expectations of price and a timeframe and determine where the risks and rewards lie and how much capital you should risk as a result. I like to relate things by using the kelly criterion and a kelly criterion calculator so I have a measurement of risk and reward, a expectation of gain relative to another where both are equivalent in risks to assess the situation. Certainly this is a bit of guesswork. Certainly because of the lack of certainty of probabilities, you have even more reason to risk less than the kelly, but as I have stated before decreased correlation and investment size can increase return.

 

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I decided to go with the posts titled “trend trader” for use explaining the individual industries and stock and etf selections and their weightings. The Trend Report will instead just analyze the market, the economy, etc.

When you expect the market to move strongly to the upside, and present high upside, limited downside with a good probability of success, you want to increase your Beta, that is your leverage to the overall market. The Trend Report is about trying to best understand the conditions to make those shifts to position your beta properly to be aligned with the market and your percentage allocation of “risk on”, “risk off” and “neutral”.

The Trend Trader instead is about Alpha. It is about individual names that present a good return on a low risk. A high individual margin of safety.

We will first analyze the sectors. This was mostly done in late January but I haven’t gotten around to completing it until now.

http://www.wikiwealth.com/company:healthcare
http://www.wikiwealth.com/company:telecom
http://www.wikiwealth.com/company:utility
http://www.wikiwealth.com/company:energy
http://www.wikiwealth.com/company:industrial
http://www.wikiwealth.com/company:financial
http://www.wikiwealth.com/company:technology
http://www.wikiwealth.com/company:staple
http://www.wikiwealth.com/company:discretionary
http://www.wikiwealth.com/company:material

healthcare 52%
telecom 31%
utility 26%
energy 19%
industrial 17%
financial 15%
technology 5%
staple 37%
discretionary 0%
material -9%

(valuations from sometime in late Jan)

The following get long term buy ratings as well: telecom,utility,energy,industrial,financial,technology,staple,discretionary

You can use sector spdr ETFs if you like, or else look at individual etfs or stocks within each area.

I combed through a handful of etfs in each area with decent valuations
discretionary PMR
discretionary UGE (2x)
staples KXI
staples RHS
energy MLPN
energy IYE
energy GEX
energy ERX (3x)
energy ICLN
energy TAN
energy DIG (2x)
financial IAI
financial UYG (2x)
financial KME
financial IAK
financial IAT
financial KCE
financial RKH
financial FAS (3x)
healthcare BIB (2x)
healthcare BBH
healthcare IHF
healthcare RXL (2x)
industrial PHO
industrial CGW
industrial PPA
transportation FAA
materials NONE
tech IAH
tech TYH (3x)
tech (nanotech) PXN
telecom TTH
telecom IXP
utility JXI
utility RYU

Of index etfs, SPY looks better valued than the rest while FXI is overvalued.

Here are a handful of highly undervalued regional ETFs
Mexico UMX
India ETFs INDL
Global/Multi-Region ETFs IXP
Global/Multi-Region ETFs JXI
Global/Multi-Region ETFs BBH
Latin America LBJ
Global/Multi-Region ETFs DBR
Global/Multi-Region ETFs TAN
Global/Multi-Region ETFs MNA
DEVELOPED MARKETS DZK
EMERGING MARKETS EDC
Global/Multi-Region ETFs DOO
Global/Multi-Region ETFs IXJ
Global/Multi-Region ETFs IRY
Global/Multi-Region ETFs ICLN
Global/Multi-Region ETFs FGD
Global/Multi-Region ETFs PBTQ
Global/Multi-Region ETFs GEX
Latin America ILF
Global/Multi-Region ETFs MKH
Global/Multi-Region ETFs PWND
Global/Multi-Region ETFs KXI
Brazil UBR
China FNI
EMERGING MARKETS EEG

Individual stocks with long term buy ratings and many of these still are likely to provide a margin of safety but should be checked at http://www.wikiwealth.com/company or gurufocus.

AllianceBernstein (AB) Stock Research
Alliance One (AOI) Stock Research
Advanced Battery Tech (ABAT) Stock Research
China Yuchai Intl (CYD) Stock Research
COPEL (ELP) Stock Research
Ctrip.com (CTRP) Stock Research
Central European Distribution (CEDC) Stock Research
Dean Foods (DF) Stock Research
Gafisa SA (GFA) Stock Research
Hewlett-Packard (HPQ) Stock Research
Entergy (ETR) Stock Research
America Movil (AMX) Stock Research
AMN Healthcare (AHS) Stock Research
Dreamworks Animation (DWA) Stock Research
H&R Block (HRB) Stock Research
CTC Media (CTCM) Stock Research
Cemex (CX) Stock Research
American Dental Partners (ADPI) Stock Research
Grupo Televisa (TV) Stock Research
California Water (CWT) Stock Research
Best Buy (BBY) Stock Research
Goldman Sachs (GS) Stock Research
Gannett (GCI) Stock Research
ConocoPhillips (COP) Stock Research
Dell (DELL) Stock Research
Amsurg (AMSG) Stock Research
Energy Transfer Partners (ETP) Stock Research
Cal-Maine Foods (CALM) Stock Research
Interactive Brokers (IBKR) Stock Research
Exelon (EXC) Stock Research
AmeriGas Partners (APU) Stock Research
Banco Bradesco (BBD) Stock Research
B&G Foods (BGS) Stock Research
Capital Senior Living (CSU) Stock Research
Comcast (CMCSA) Stock Research
Apollo (APOL) Stock Research
Anglo American (AAUKY) Stock Research
Allstate (ALL) Stock Research
Brink’s Company (BCO) Stock Research
Diamond Offshore (DO) Stock Research
Itron (ITRI) Stock Research
Freeport-McMoran (FCX) Stock Research

Many stocks with long term hold ratings still provide an excellent margin of safety and also are worth looking at.

Gentiva (GTIV) Stock Research
Canadian Solar (CSIQ) Stock Research
Alliance Imaging (AIQ) Stock Research
Bon-Ton Stores (BONT) Stock Research
China Information Security (CNIT) Stock Research
Frontline (FRO) Stock Research
Hanwha SolarOne Power (HSOL) Stock Research
Excel Maritime (EXM) Stock Research
Corinthian Colleges (COCO) Stock Research
Calamos (CLMS) Stock Research
DHT Maritime (DHT) Stock Research
Imperial Sugar (IPSU) Stock Research
AMR Corp (AMR) Stock Research
Alcatel (ALU) Stock Research
Aegean Marine (ANW) Stock Research
CPFL Energia (CPL) Stock Research
Healthways (HWAY) Stock Research
Career Education (CECO) Stock Research
China Finance Online (JRJC) Stock Research
Farmers Capital Bank (FFKT) Stock Research
Bidz.com (BIDZ) Stock Research
China Medical Tech (CMED) Stock Research
Eastman Kodak (EK) Stock Research
Amrep Corp (AXR) Stock Research
Aspen Insurance (AHL) Stock Research
Cogo Group (COGO) Stock Research
Ambassadors (EPAX) Stock Research
Himax Tech (HIMX) Stock Research
ITT (ITT) Stock Research
Ceom Israel (CEL) Stock Research
Allied World Assurance (AWH) Stock Research
Axis Capital (AXS) Stock Research
Exide Technologies (XIDE) Stock Research
ACE (ACE) Stock Research
American Caresource (ANCI) Stock Research
Hudson City Bancorp (HCBK) Stock Research
JA Solar (JASO) Stock Research
Advanced Semiconductor (ASX) Stock Research
HDFC Bank (HDB) Stock Research
Forest Labs (FRX) Stock Research
Air T (AIRT) Stock Research

There are probably many more, but I have not gone through all of the names at http://www.wikiwealth.com/company

http://www.wikiwealth.com/country

The mexican peso for example looks great on a valuation basis and on a chart on a monthly basis, but the daily/weekly chart timing is terrible. You could add a FXN position and intend to increase the position it if it pulls back, and hold for awhile.

On the contrary, FXE is looking good on a weekly chart, but does not look to provide much of a margin of safety.

tradable currency (slow stochastics OS readings or close to it)

fxe weekly good

(fxs weekly okay)
(FXF weekly, okay)
uup daily good, weekly not great

tlt is somewhat reasonable to trade again. (relatively neutral signals).

But contrarian signals are warning that US treasuries should be avoided as it may present higher risks and lower return.

positive valuation

Taiwan (TWD, Dollar)
Egypt (EGP, Pound)
Singapore (SGD, Dollar)
Colombia (COP, Peso)
Greece (EUR, Euro)
Argentina (ARS, Nuevo Peso)
Hungary (HUF, Forint)
India (INR, Rupee)
Mexico (MXN, Peso)
Hong Kong (HKD, Dollar)
Russia (RUB, Rouble)
Czech Republic (CZK, Koruna)
Brazil (BRL, Real)
China (CNY, Yuan)
European Union (EUR, Euro)
France (EUR, Euro)
Indonesia (IDR, Rupiah)
Israel (ILS, Shekel)
USA (USD, Dollar)
South Africa (ZAR, Rand)
Italy (EUR, Euro)

Keep in mind that the euro can only be traded as one currency, however the bonds are sold separately so it is possible, but a bit more difficult to get exposure to the individual euro countries debt markets.

Currency ETFs for above that are available

icn/inr,fxm,fxru,bzf,cyb,uup,szr

Since prices change daily, valuations will as well, so you probably want to check everything over before making a decision, but this should give you a good range of selection from which you can determine which assets you want,
and then how to weight them… taking into account correlation and the overall outlook of the market based upon February trend report. You may want to use the guide to investing in stocks that I constructed to sort of explain how to bring the big picture together.

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