Archive for July, 2015

Beginning of a Golden Opportunity?

Friday, July 24th, 2015

S&P

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It was a losing week in the market as most equity indices headed down toward their 50-day moving averages.  The 5-year graph of the S&P 500 is above and on the far right you can see that the index was headed down most of the week.  Below is the NASDAQ, which has a similar path:

compq

The real damage, though, is in the small cap stocks as represented by the Russel 2000 Index:

RUT

The small caps are nearing the 200-day moving average, which over the past 5 years has represented a buying opportunity – you can see the red 200-day moving average line in the graph above and note how each time the index drops below it, if you had bought on that dip you would have made some serious money.  Will that be the case again?

It sure seems to me that investors are not as accepting of risk right now  – maybe its because the Fed continues to discuss raising interest rates or maybe its because the economy is really slow or because our large exporting companies are being hurt by the increase in the price of the dollar making their products too expensive in overseas markets.

For whatever reason, this time just seems to feel different – stock trading volume on down days is well above average and on up days well below average.  It just does not seem that buyers are willing to turn out when prices are down, and in fact, the sellers are liquidating out of fear on those down days.  Optimism is always better than fear in the stock market.

However, the real fear in the investment world right now is in Gold:

Gold

Gold dropped below $1100 per oz this week and for the first time since records have been kept, hedge funds are short gold future:

hedge fund gold

These graphs courtesy of Zero Hedge blog

hedge fund Gold2

The top graph depicts for you the dollar amount of gold futures that the hedge fund industry collectively has in their investment funds.  The second graph shows you what happened to the price of gold in coming years the last time hedge funds were at their lowest gold position.  Is this is a sign that gold is nearing a bottom in its four year decline?  Or is gold telling us that global deflationary forces are winning the battle against the worlds Central Banks?

From a practical standpoint, the gold miners are reducing production, shuttering mines, laying off employees – in general doing the same thing that the oil industry is doing.  At some point, because production is reducing supply, demand will exceed supply of both oil and gold, causing both to go up in price – at some point.

Earlier this week, gold dropped $50 per oz in one day so we added to our holding of Royal Gold – a unique player in the gold mining industry, it is a company that owns no mines nor mining equipment.  They simply own royalty interests in 37 producing mines and 24 development stage mines – a situation I prefer to having the exposure of mining itself.  Until today, gold continued to fall.

Below is the graph of the price of gold for today – did gold finally bottom?  Is it set to deliver outsized returns like it did after the bottom in 2006?  Will investors be fortunate enough to catch it?

gld

For what its worth, price bottoms are generally a process where the price of the stock/commodity/bond/etc will hit bottom, move higher, fall back to the bottom, then finally start a move up.  If anything, this is likely just the first of the double bottom process with a test of the  low price still to come.

All-in-all, it was a difficult week to be an investor but there were some opportunities to pick up some stock in companies that got hit with news related sell-offs and bounce backs.  The biggest is Cypress Semiconductor:

cy

This is a 10-day chart of Cypress – we bought shares during the big climax sell-off on Wednesday at $11.12, it bounced yesterday up  almost 9% and fell today a bit over 2% for a nearly 7% net gain.

I have a gut feeling that the rest of the year will be market that you have to be very opportunistic, booking profits when you have a chance and buying fear when companies get sold below their real value.  Never a dull moment in the investing business.

Mark

Stock Market Health and Growth Vs Value

Thursday, July 16th, 2015

 

spx daily market health

I wanted to give you a view of the health of the stock market at the current time.

The graph above is a view of the S&P 500 compared to its 50 and 200 day moving averages.  Not too long ago, the index had moved below its 200 day moving average – a good buying opportunity – and its now approaching its all-time high once again.

The question for the investor is will the index be able to break through the that all-time high which has acted as resistance on its last attempt to move above it – or will we see another pullback to the 200 day moving average as we did last time.

To help us answer that question, I have added a number of indicators that I follow that give me a picture of the health of the market.  The top one – the Relative Strength Index – is approaching its upper boundary but has not yet crossed it.  Generally when it crosses the upper boundary, the market pulls back as investor enthusiasm has pushed it too high too fast.  I rate this one cautiously positive.

The indicator below the price graph is the McClellan Oscillator and the Summation Index.  These two indicators are momentum indicators based upon the number of stocks advancing in price compared to those declining.  You can see that the McClellan Oscillator area graph has moved into the black and the Summation Index line graph has curled upward – both indicating that the market is getting healthier with move stocks moving higher than lower.  I rate this one positive.

Below this, you have the Mammis-Meisler Indicator.  This also uses the Advance/Decline concept and shows you short-term movement V intermediate-term movement of the line.  In this case, the blue short-term line has moved both above the red intermediate line and above the zero level.  This indicates an improving market with advancing issues now starting to outnumber declining issues.  The intermediate term line is still not above zero level but it is moving in that direction.  I rate this one cautiously positive only because the red line has not moved above zero.

The TRIX indicator is the next indicator – it is an indicator of the rate of price change of the index compared to its 10 day moving average.  In our case, the TRIX black line has curled upward and crossed the red moving average line.  However, both are still below the zero level.  This indicates an improving market with prices trending higher, but still not to a level where they are becoming overvalued.  I rate this one positive.

The bottom indicator includes to histograms, the first represents the number of companies trading above their 50-day moving average (the gold color bars) and the second represents the number of companies trading above their 200-day moving average (the black bars).  On the far right side, you can see that the gold bars have finally started to move above the black bars.  This is a positive sign for the market as it says that prices are moving higher and that more companies have moved higher in price above their 50-day moving average.  I rate this one positive.

So, as far as the overall health of the market, the current move higher toward the all time high is being made at a time when the markets breadth and momentum are supportive of the move higher.  This is a good sign that the market could make a new high in the near future.

However, one of the things that is happening below the surface needs to be examined.  That is, the performance of Growth Stocks compared to Value Stocks.

Growth V ValueThis is a price performance graph of the Growth Index (red) and of the Value Index (blue).  From the end of 2012 to the end of 2014, value stocks were the far superior investment – the traditional Blue Chip companies and those big dividend payers ruled the roost for investors during that time.  However, the end of 2014 has brought a change – Growth stocks have outperformed.  In this 3 year price performance graph, you can see that value stocks are actually down for the year to date and growth stocks have moved higher, such that over the three year period of this graph, growth stocks have a total performance of 61.5% compared to value stocks of 58%.

All this says is that everything goes in cycles – value stocks have been the big winners over the past 20 years mainly due to the big NASDAQ stock crash that occurred in 2000.  The NASDAQ is home for the growth companies that you hear so much about.  However if you choose your starting point as the bottom of the NASDAQ crash, over the past 12 years Growth has outperformed Value by five percentage points.

Everything goes in cycles so just because value is under performing is no reason for concern.  Stick to your investment strategy, don’t feel crushed because your strategy is underperforming at the present time, and don’t chase the hot performers.  The time to buy growth was end of 2014, not today.

Mark