Archive for March, 2015

Happy Anniversary Bull Market

Monday, March 9th, 2015

image2

Today is the 6th anniversary of the post-crash stock market bottom, so just a quick note this morning as I’m at the Retail Banking Conference. I wanted to share a chart that is pretty interesting – it’s Marty Chenard’s graph of the S&P 500 since 2009’s crash bottom showing a well defined rising wedge pattern.

Here is the definition of a rising wedge from Stockcharts: The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the tracding range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

This type of technical analysis is important because it gives you insight into investor psychology more than anything else. It basically tells you that investors get complacent as prices increase and are less inclined to sell on bad news. Generally they take on more risk and possibly utilize margin loans to buy stock that they otherwise can’t afford. Then at some point they see the gains they’ve made and some begin to take profits. Then bad news at some point matters and the selling begins as investors want to preserve as much of their profits as they can. That drives the prices down and the index falls below the bottom line in the rising wedge.

So as with some of the other articles I’ve published recently, this is just a sign that a bit of caution is warranted as this market has risen so much in the past six years.

Our goal is to have some cash in client portfolios to buy companies cheaper when the inevitable pull back happens – not too much because we don’t want to underperform in the short term. We are also de-risking by rebalancing portfolios and taking some money out of big winners to get them back to strategic allocation percentages and adding to under performers also moving them back to strategic levels. Why is this de-risking? The winners have become overvalued and the underperformed shave become undervalued.

Enough for now as our meetings start soon, but I’ll be tuned into the market during the conference and will be taking any needed actions if anything eminent happens in the market.

Mark

Happy Anniversary Bull Market

Monday, March 9th, 2015

image1

Today is the 6th anniversary of the post-crash stock market bottom, so just a quick note this morning as I’m at the Retail Banking Conference. I wanted to share a chart that is pretty interesting – it’s Marty Chenard’s graph of the S&P 500 since 2009’s crash bottom showing a well defined rising wedge pattern.

Here is the definition of a rising wedge from Stockcharts: The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the tracding range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

This type of technical analysis is important because it gives you insight into investor psychology more than anything else. It basically tells you that investors get complacent as prices increase and are less inclined to sell on bad news. Generally they take on more risk and possibly utilize margin loans to buy stock that they otherwise can’t afford. Then at some point they see the gains they’ve made and some begin to take profits. Then bad news at some point matters and the selling begins as investors want to preserve as much of their profits as they can. That drives the prices down and the index falls below the bottom line in the rising wedge.

So as with some of the other articles I’ve published recently, this is just a sign that a bit of caution is warranted as this market has risen so much in the past six years.

Our goal is to have some cash in client portfolios to buy companies cheaper when the inevitable pull back happens – not too much because we don’t want to underperform in the short term. We are also de-risking by rebalancing portfolios and taking some money out of big winners to get them back to strategic allocation percentages and adding to under performers also moving them back to strategic levels. Why is this de-risking? The winners have become overvalued and the underperformed shave become undervalued.

Enough for now as our meetings start soon, but I’ll be tuned into the market during the conference and will be taking any needed actions if anything eminent happens in the market.

Mark

Pigs Get Fat, But Hogs Get Slaughtered

Thursday, March 5th, 2015

kroger

I often give you graphs telling you what to do in certain situation based upon the indicators I follow.

Well, today I want to show you what NOT following the indicators can do – particularly if you get greedy and want to play the market too cute.

Case in point: Kroger

If you haven’t been following Kroger, this formerly stodgy grocery store has transformed itself into an aggressive competitor of both Whole Foods and Walmart, providing both upscale options for the nutrition conscious consumer and a low price selection for the value conscious consumer. Their growth rate has become tremendous and they are now the country’s second largest retailer.

Its a company I’ve wanted to add to client portfolios for quite awhile, but I always wanted to buy it at the 50-day moving average. If you look at the graph above, I’ve annotated it with two green arrows showing the last two times this company hit the 50-day moving average in the past 12 months. If you look in the green box I’ve drawn, you can see that the price was moving down toward the 50-day moving average in recent days, but my indicators (circled in red) were flashing that the stock had fallen too much. I second-guessed them, because I was greedy and wanted to buy at that price thereby reaping the big rewards for client portfolios, and opted to wait for another day or two for the stock to go down a couple more percentage points and I’d buy it at the 50.

NOT HAPPENING…

This morning, Kroger announced incredible earnings (as I assumed they would) and the stock is up nearly 7% today to a new high. So, I am kicking myself because I wanted to buy it at a price my indicators clearly said was unlikely to be reached.

Indicators are not perfect, as I have found out over the years, but they are consistent enough to be relied upon as inputs to the decision process, particularly when trying to time buy/sell decisions. I just did not rely upon them.

There is an old saying in the investment business: “pigs get fat, but hogs get slaughtered.” As you can probably guess, it means making money is great, but don’t get greedy as you always lose out.

After 30+ years in the business, I continue to learn my lessons (and relearn them too sometimes).

Kroger goes back on my watch list and we move on to the next opportunity.


Can anyone guess what this video has to do with the blog post? Its obscure but if you’ve seen Pink Floyd in concert you will know exactly what the answer is.

Mark

NASDAQ Hits a Record After 15 Years

Monday, March 2nd, 2015

nasdaq-20-year

Today is big day in the markets – its taken the NASDAQ 15 years to return to the 5,000 level that it reached at the pinnacle of the Dot Com mania of the late 90’s. Back then, investors were willing to throw money at just about anything that planned to use the internet as a delivery platform – Pets.Com is the classic example of a multi-billion dollar company that was not much more than an idea, but investors threw so much money at it that it was valued higher than many established industrial companies that had actual products to sell and cash flow for operations.

Today, we complain that valuations are high (for example, Facebook at 71 P/E, Under Armour at 81 P/E, or Celgene at 50 P/E), but these are small potatoes by comparison to the mania pricing of 15 years ago. The big differential between then and now is that the companies with high valuations in general have real businesses that generate earnings. Investors can see where these earnings are going in the future and are willing to pay premium valuations today for the promise of high earnings in a few years.

All over the business news today, there is a debate about whether we are in another Tech bubble. That seems silly to me – yes, P/E’s are high, but so are earnings growth rates. I think a more salient issue is whether we are at a cyclical peak and due for a bit of a pullback. Check out the graph below:

nasdaq-comp-annotated

I have circled several of the indicators that are flashing warning signs that the index has moved too high too fast. Does that mean it will definitely go down? For long time readers of the blog, you know that these over bought readings can be cured by either a fall in price OR by a movement sideways in price and the passing of time. Either is as likely as the other.

But the one thing I do want to point out to you is the red arrow I’ve drawn on the price graph. You can see that the index is having trouble breaking through the blue line which is acting as resistance. This blue line is the 10% band above the 200-day moving average. We haven’t discussed that band in a few months, but it is an important level for any stock or index. Indexes particularly have a difficult time trading at that level – much of the time, it represents a near-term top in the price of the index and it represents a level where you want to be a seller more than a buyer – in other words, it is a high risk area of the market.

Will it be the top this time? No one knows. If you are a gamblin’ man you might bet that the amount of money sloshing around the economy due to artificially low interest rates and money printed through the Federal Reserve’s Quantitative Easing program (as well as those of Japan and Europe) will keep the party going. However, in my opinion, it is better to be safe and cautious than wildly bullish at this level. Chances are good that we will see a bit of a pullback that will cure the over bought indicators and allow the index to pull back from the 10% band.

At least that is what I am looking for at this time.

Mark