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Category Archives: Fundamental Analysis
August 30, 2011Posted by on
In looking back at the last week in the market, we had a couple major events. One of them was expected and left us wondering what all the build-up was for. The second one was unexpected and gave the market a nice little boost of confidence that it has been lacking recently. Concerning the former, for much of the past two weeks the market participants have been building up the meeting held Friday in Jackson Hole, Wyoming. We have been building this up due to what occurred a year ago at the last meeting held here, QE2. While Bernanke stopped short of calling for another round of QE he did reiterate what he stated in front of congress over a month ago and claimed the FED was ready to stimulate the market if needed. He also stated that the FED will extend their next FOMC meeting by one day to two in September. This once again is telling as the market believes that the extension will lead to further discussions on how to stimulate the economy. I only have one question. Why would Bernanke stimulate a market that he believes will rebound over the next few quarters? This has been the Fed’s tune for the past 4 months. I am holding to the fact that the FED cannot do much if anything to help the economy. This is also one of the reasons that Bernanke put the spotlight directly on the chest of President Obama and the Republican leadership in congress. No one wants to take on the responsibility of the recession. There is simply too much to lose for all parties involved and so now we play the blame game. When I was seven years old I realized through hiding behind the couch that Santa Clause was not real. Hopefully that is not breaking news to any who read this. When will the market realize that Santa can no longer bring forth gifts? I do not know, there is no one who can. That is why we trade with the trend and leave the blame game for others.
Over the course of the last few weeks technicians have been able to start making probability decisions due to confirmation of support and resistance levels. Much like what happened at the end of the prior up trend that lasted about 9 months we now know where short term, intermediate, and primary resistance levels are. We also know were short term support levels are. In analyzing the S&P 500 we have confirmed support levels of 1120. We also have resistance levels at 1200, intermediate resistance at prior support levels of 1250 and primary resistance levels at 1350. It also looks like we have ended the short term bearishness in the market with support holding a second time at 1120 and a current re-test of resistance at 1200. Remember, these levels are not finite numbers. They are zones, much like rubber bands. I believe caution, controlling risk, and hedging are the name of the game right now.
Economically we have many reports coming out this week which will give us more understanding of the health of the economy. On Monday, we have consumer spending and homes data. Consumer spending came in higher than expected and this is a healthy sign for the economy. Tuesday, we deal with consumer confidence as well as the FOMC minutes. Both reports will move the market. On Wednesday, we start to see employment data that will come in through the unemployment rate released on Friday. We also will see some manufacturing and construction spending data this week. It does not need me to state it but this is a big week in the market. As usual, the market will also focus on any news concerning FOMC member speeches and European debt situations.
The other big news that came out last week was Buffett’s next investment into the banking sector with his 5 billion cash infusion into Bank of America. Buffett also has the ability to buy 700 million common shares at 7.14 and receives 6% dividend payout. This is a similar deal to the one Buffet had in 2008 with Goldman. There is no denying the Buffett bounce. It immediately put a bottom (for now) in BAC as well as it generated more confidence in the banking system and the overall market by other investors. If the greatest investor of the modern era is willing to do it, then why shouldn’t everyone else, is the thinking. While I will not deny any of this, I will simply point out that as of last week, Buffett’s options to buy GS were still out of the money.
August 10, 2011Posted by on
Over the last 5 months the market has been shifting from bullish to neutral to bearish situations. In this time frame we have seen slowing momentum, trend shifts, reversal patterns and now a breaking of intermediate support levels. This means we have also shifted to a slightly bearish stance in the market. In looking at the massive market sell-off it is difficult to see a bottom right now as the market is very reactive to news and the underlying economy is not supportive of the previous bullish trend.
If I wrote the prior paragraph in January of 2008 it would have been dead on, except this is not 2008. It is August of 2011. However, we are seeing very similar situations occur. The main difference is that this market is faster and the problem is 2008 is not a private problem it is an extremely massive public problem. In Master Trader we teach you to analyze the market from a technical approach so you are always trading with probability and have the ability to profit in any market condition. This is one of the most important times in history for you to take control of your financial future and if you are new to the markets then you will find that you also have a very unique opportunity to profit in a bear market. In 2008 (see figure below) you will see one of the biggest shifts in financial wealth in history. Money is not created nor burned in the markets. It is exchanged hands from the ignorant to the educated. It is often said that education is your most important asset. This has never been more true than it is today. What can we learn from the prior bearish market that lasted nearly 18 months?
1) Portfolio management: Diversification of the following is vital
i. Asset classes: stocks, bonds, fixed income strategies and tradition rotation of money including simple cash allocation.
ii. Strategy selection: if you are heavy in credit based strategies you should balance your portfolio based on the Greeks. Theta positive is certainly something we can look at especially with options prices increasing dramatically over the last couple weeks. However, if you have too much of your portfolio allocated to a certain strategy you are taking too much risk to your portfolio. You could look at balancing bearish and bullish credit strategies and off-setting Vega positive strategies as well. Witnessing
opportunity should never outweigh the potential risk to the portfolio.
iii. Slightly bearish does not mean run to hills and put all your capital in OTM 2 month put options. It means you should take a structured approach to balancing your portfolio that could be slightly bearish
iv. There are still many good buying opportunities even in the worst of markets. Look for fundamentally strong stocks to build a watchlist and/or add to the portfolio.
2) Bearish markets: these markets tend to move fast and can be extremely reactive to headlines for both the bulls and the bears. People are trying to make decisions and each day that changes. Do not over-react to a news headlines and a one day movement. This market is also faster than the prior bearish market. In 2007 it took 10 months to form slowing momentum, reversal patterns and the eventual breaking of support in January of the 2008. It took another 6 months to form the kiss of death and the following breaking of the second support level. Over the 16 months the market was down between 8-15%. It eventually went down close to 60%. In the current market
we are down close to 17%. Once the KOD forms we should be down closer to 10%. When it forms, if forms, and how long it takes are all answers we do not know the answer to as yet. However, it is important to analyze 2007-08 and compare that to the market of 2011 because there are many similarities in both technical and economic analysis.
3) Defensive and Balanced. This is not changed from the prior neutrality in the markets from March to early August of this year. We should continue to be balanced and protective. We simply want to make some adjustments to our portfolio to match our bias towards the market.
There is much to the market future direction that is up in the air. Will the current market continue into a full bearish market? Will the fed step in again? What is Washington’s roll? Will the 2012 presidential election see a market bounce? How does the debt issue get resolved? Does it? Did the S&P make the correct call in lowering the U.S. credit rating? What is the long term impact of the decision?
Too often traders make proclamations of current activity that includes too much emotion and typically is an over-reaction to the current condition. They are also often wrong because the proclamation is a reaction to something that has already occurred. Educated investors analyze and systematically make decisions that protect their portfolio. If it is not balanced then decisions are made to better reflect bias toward the portfolio based on bias towards the market. I am not known for making bold proclamations on future expectation because as a technician we tend to take a more systematic approach to the market. That does not mean I do not understand the economic pressure we are under. In fact, as early as April of this year I have been telling students and traders alike to switch stances in their bias to better reflect the risk exposure in the market. This has not changed since then and I offer the same advice right now. The difference is until the market goes back above 1250 or in the future forms multiple levels of support and resistance we are slightly bearish and this means balance and defensive.
Did the S&P make the correct decision in lowering the long term credit rating? Absolutely and it was a long time coming. Warning shots are not changing anyone’s fiscal or monetary policy anymore. It took decisive action and that is what the S&P did even though the decision does little to effect borrowing and investing in US debt. In fact, today saw a rush to buy government bonds. Not much hesitation there. However, the US needed to be taken off the iron thorn. This is 20 years in the making and it is not a republican or democrat issue. Both are to blame for the problems. It is a political system issue and if you want to do anything about it I would suggest registering to vote and speak the way true democrats do (even if we actually have a republic) and kick democrat and republican leadership out of office. We need to hold politicians accountable.
Unlike the public, the S&P is holding Washington accountable for their lackluster attempt to fix the debt. Washington lacks the spine to make the difficult decision. Did the president/congress not learn a thing in the past 4 years? Stay out of the economy’s way. Get out of the private sector, they already are greedy enough. In fact, I will vote for the president, stop ripping Bernanke and even vote for current Utah representation if they all go on vacation for the next 6 months. On a side note, Bernanke was seen in public and the market dropped 200 points. Obama spoke about America being the greatest nation in the world and the market then dropped 400 more. They both just gifted wrapped that title in a nice little box and sent it to the East. We are not witnessing the death of anything (yet) nor a birth (yet), but it feels good to make bold proclamations of historical importance even if/when I can change my tune next week. In a nutshell, the S&P made the correct move in lowering the credit rating to AA+ on long term treasuries (over a year) even though it has little effect in the actual purchasing of treasuries.
The market selloff is due to the underlying economic concerns and they are not going away anytime soon. Unemployment is a disaster and one that is not changing anytime soon. Corporations do not have reasons to hire. They are pushing employees harder and getting more out of a smaller workforce than ever before. They are also not going to hire until the economy starts to rebound. It is a vicious cycle that we could deal with for a long time. Growth is down. This is not surprising given the economic reports we saw throughout the second quarter. What is slightly surprising is how ridiculously wrong Bernanke was just a short month ago in his testimony in front of the finance committee. However, he was not more wrong than the projections for the end of the year that all of the major banks lowered for 2011 growth. I believe the lowest one was from Goldman Sachs where they lowered the S&P projections to around 1400 at the end of 2011. Golf clap for GS. Could they be right? Sure. I’ll take your 1400 and give you 900 and see which one touches faster. Once again, bold proclamations are fun.
What is Bernanke’s next move? In all likelihood it will be to once again destroy the US dollar and continue to be a proponent of inflation because you know…it works!!! QE 3 in on the way even if the FED announced today that they will simply keep interest rates low for the next two years. This is a short term welcome relief to the market but it is not something we did not already know. QE cannot be stopped but we know something Bernanke does not, we have been counting the shots he fired. He already fired his 6 shots and is out of ammo. QE has diminishing returns and if it was you know, actually successful in the first 2 attempts then if may have a chance to be successful the third time. Even monkey’s throwing you know what hits a target eventually. I am not suggesting that Bernanke is a monkey. I am simply making an observation that he has been acting like a monkey and in no way am I trying to make monkey’s look bad by comparing them to the fed’s fiscal/monetary policy. To make QE worthwhile the FED needs to pony up 2 trillion dollars just to make a dent.
I look forward to QE 3 and another inflated market based on little economic strength but gets the president re-elected. I love America. I really do, I just can’t stand those who are leading the giant ship into the ice. What happened to the days when our politicians simply drank, womanized, and basically did nothing. The 20’s were fun. Quick, name the 4 presidents in the 20’s. You probably had to look that one up. Wait, the 20’s did not end very well. However, that was a unique situation that was out of their control based on the horrendous Versailles treaty. I was attempting to give politicians some credit but then forgot they initially set up the great depression in 1919 that forced Germany to hyper-inflate, depreciating currency, and eventually led to Hitler taking control in 1933 when he had a tremendous back ground in turning around an economy through a back ground in art. Back to Bernanke and his six shooter. He can lower interest rates. Not available to him, already at record lows. He can lead an influx on money into the bond market. Should not be available to him as it has been proven not to work. What can he do? The only thing he should do, is do nothing. I am starting to back Jim Rogers belief that the FED should simply go away.
In the end, I have much more to say but alas I have exceeded the my word count and simply need to retire for the day and get ready to watch Michael Bays next movie opening up in theaters near you. It is a gripping political thriller about greed, fear, back room deals, political maneuvering, back stabbing, more back room deals, and as any Bay movie goes, it has heroes, villains and more explosions and drama that need to be there. It also has a ton of unpredictable and irrational plot changes. Most of the movie makes little sense. Fascinating stuff I tell you. It opens tomorrow morning at 9:30 am EST. It has a running time of 6.5 hours and leaves you with little answers.
Love it or hate it, enjoy my therapeutic rant. I will have more detailed technical information when the market settles into support hopefully by this Sunday. Also, last week I promised not to mention debt. I only broke my promise 3 times and none of that was European debt. I call this success. Remember one thing, I did say slightly bearish.
June 7, 2011Posted by on
When venturing into the financial markets, the two primary questions that must out of necessity be addressed are What to buy and When to buy. Both questions are not equal in importance. The timing question – when to buy – is much more significant. In the market, timing is everything. Traders can purchase any stock and make money, provided the timing is right. You could buy the worst company in the world and make money; you could buy the best company in the world and lose money. There are two schools of thought that are used by traders in answering both questions – technical and fundamental analysis.
Fundamental Analysis consists of digging into the balance sheet and financial health of a company. It primarily helps identify what companies to buy. Advocates of fundamental analysis contend that strong companies have more of a reason to rise in value thus making them the best stocks to buy. There are a bevy of metrics used to assess the strength of a company like PE ratio, debt/equity ratio, revenue, growth, ROE, and PEG ratio to name a few. Our MachTrader™ software includes a fundamental window which displays these relevant metrics and more.
Technical Analysis is all about charting. The lion’s share of traders who begin stock trading tend to rely heavily on this approach. Since a pure stock trader lacks the ability to initiate neutral positions, they must necessarily make directional bets. Rather than taking the random coin flip approach when forecasting a stock’s future direction, traders pour over charts and indicators seeking patterns which hint at a stock’s next direction. Our MachTrader™ software also includes top of the line charting tools and indicators to aid traders in performing technical analysis.
While some traders champion one form of analysis over the other, other traders combine them. They use fundamental analysis to identify what to buy and then use charting to discover when to buy.