1
Sep

Que Sera Sera - Some Things Never Change $SPX $DJI

This is a little piece I wrote several years ago and I had chosen it as the introduction to my new website when I started this site. Some things need to be re-posted. I hope you enjoy it.

 

Doris Day - Que Sera Sera

 

When I was just a little girl, I asked my Mother what will I be? Will I be pretty? Will I be rich? Here’s what she said to me

Que Sera, Sera…Whatever will be, will be. The future’s not ours to see…Que Sera, Sera…..

From the book Psychology of the Stock Market, by George Charles Selden.

1 – Your main purpose must be to keep the mind clear and well balanced. Hence, do not act hastily on apparently sensational information; do not trade so heavily as to become anxious; and do not permit yourself to be influenced by your position in the market.

2 – Act on your own judgment, or else act absolutely and entirely on the judgment of another, regardless of your own opinion. “Too many cooks spoil the broth.”

3 – When in doubt, keep out of the market. Delays cost less than losses.

4 – Endeavor to catch the trend of sentiment. Even if this should be temporarily against fundamental conditions, it is nevertheless unprofitable to oppose it.

5 – The greatest fault of ninety-nine out of one hundred active traders is being bullish at high prices and bearish at low prices. Therefore, refuse to follow the market beyond what you consider a reasonable climax, no matter how large the possible profits that you may appear to be losing by inaction.

These words, his personal summary of the ideas he tries to espouse, are rules to live by for any active trader. Written by Selden in 1912, his book is amazingly accurate in describing the sentiment of today’s market and every market for the last century.

Believe it or not, the market has not changed in these one-hundred years because we the people have not changed. We would like to believe that we have evolved with all our new technology; that trading and investing today is unique to any time in history, but this is merely delusional. We are emotional beings reacting with the same fear of winning or losing and the enthusiasm for knowing our business; both these emotions hinder our ability to be objective with regards to Mr. Market.

In these last few years that I have been trading actively, I have heard many seasoned traders talk of this being a normal or abnormal market. I have heard traders say that this it is not right that we should not be able to profit more than 3%-5% on a trade and I have heard traders say that it is not right when we are able to profit more that 3%-5% on a trade, but in actuality, this is all normal. The market finds a point where it will rise when it can no longer sell off until it reaches the point where it should rise no further. At this time, it continues to rise in small increments, what we call the chop for a few days or more until it finally turns to the downside. The trader who says, “finally a normal market” is just as naïve as the trader who asks, “what happened to our normal market?” – for both conditions exist, have always existed and will always exist.

The same holds true for the inverse, as the market will sell off to the point where it should sell off no further based on fundamental analysis, but it will continue down in a chop just as it did at the market top. There are, and always have been, traders who take advantage of each moment in the cycle because this is what they have determined is the way to best make a profit and they scoff at those who profit during a different time in the cycle. There are those who like to take profits early and those who like to let it ride and both sides believe that the other is foolish. One side believes the other takes too much risk, while the other side believes the one to be careless and unable to take full advantage of the possibility of profit.

Today we separate the value investor from the chartist. The two sides generally despise each other openly, claiming that the other is unrealistic and is not trading with best odds, yet both sides make the same mistake led by those pesky emotions.

As I read Selden’s book over the weekend, written a century ago, I was amazed at how traders, investors and speculators had the same sentiment then, as we do now. Most professional and successful traders fall into the same traps that Selden speaks of. We have all seen the various sides that the pros on IBC have taken with regards to the market. We have our bears who are relentless in their resolve regardless of what the market is actually doing; the market is overbought they say. Certainly it cannot go higher and when it does they whine for it is wrong and has been manipulated to defy its fundamental course.

We have our bulls who are just as stubborn and all the while using the same excuses, making the same mistakes that traders have always used and made.

The market is manipulated, we say, the bearded clam has made it so with his POMO. It will go higher! We are at our most bullish because the market has risen to our expectations, why should it stop now. We expect it to continue amid the chop which we are sure will become a blow off top…and we say this as if we have never heard this before…as if no trader or analyst in time ever considered that the market was being manipulated. But traders have always accused the market of manipulation as Selden clearly points out, whenever prices don’t go as the speculator has determined they should, say if a ticker “looks strong, has encouraging news and they hope for large profits….if prices decline, they charge it to ‘manipulation,’ ‘bear raids,’ etc., and expect early recovery’ since…’the bear news appears to be put out maliciously, in order to cause prices to decline further.” It usually takes a painful slide into a grotto of losses before the trader determines that “there is no use fighting the manipulators” and suddenly we have a surge of short selling.

Does this sound familiar? It’s been going on for a hundred years folks.

Selden speaks of the “Market Makers” that have always made it so, although he doesn’t call them this, he simply calls them “They”. He discusses the possibility of “They” being the large investment banks, the floor traders or big oil companies. He mentions this long before we had high frequency trading, trader bots or even online brokerages. Somehow, the market makers have not changed much with all our technological advancement.

I know quite personally the mistake of many traders/investors to rely on research analysts to tell them where a stock or the broad market will go, but we forget that analysts don’t trade. They are not experienced in the art of trading so how is it that we trust them to tell us how we should do so?

These are often the manipulators who spread the rumors in order make the stock trade a certain way. The sell side analyst has a client for whom he wishes to be correct so that he can continue to sell his research and assessment. By the time companies report earnings the miss or hits in the earnings reports are often expected by analysts who know they have spread the rhetoric so that the expectations have moved the prices in the direction that they said they would even before earnings are reported. There is much truth to the idea that expectations are usually priced in and only when there is a surprise do we get real movement after earnings. If the consensus is for a stock to have good earnings, for example, it is very easy for the analyst to set those expectations just a little high all the while knowing that the stock will run up into earnings by having set those expectations and this is why many seasoned traders will often sell out before the earnings report because even if the earnings meet expectations, the price has already been run up and will now come down.

Selden devotes a chapter to this concept which he calls, “Confusing the Present with Future Discounting”.

We may be easily impressed by these analysts who write eloquently and make calls that come into fruition not admitting that “They” made them so.

We may be equally impressed by the analyst who debunks other analysts because his analysis is more accurate. Certainly there are some who are better than others at running the numbers and making accurate predictions. These debunker analysts of analysts are the true professionals, we say. This is who shall lead our trading decisions because they so eloquently and accurately debunked the calls of the other analysts, but again we forget that a good analyst is not necessarily a good trader. He does not trade; he is usually restricted by his firm and is rarely allowed to trade in the firm’s effort to not raise flags to the powers that be. Rarely does the portfolio manager in a large hedge fund do his own analysis. He usually buys the research from the sell side analysts and employs his analysts to either debunk or affirm the sell side’s analysis. The portfolio manager eventually makes his own decisions which may take the analysis into account although, if he is well seasoned, realizes that the time frame of the analysis is what he needs to correct.

I will sideline here for just a moment to give you a bit more detail of the start in my own career which I have mentioned before. The money manager and hedge fund for which I started out was a very rare occurrence.

I was very interested in learning about the market and how to trade it. I interviewed for this job with this small hedge fund. I had much double entry accounting experience under my belt and this well known and respected Money Manager / Venture Capitalist hired me to do the accounting for his fund. It was a fairly large fund considering how little staff was involved. The fund managed a large sum by most standards and the staff consisted of this money manager and me and no one else. It is unheard of in the industry for a money manager to run such a large fund with a staff of one book keeper inexperienced in the ways of Mr. Market. He hired me not just because I interviewed well, had much accounting experience, good references and proved that I could do math quickly and accurately in my head, but because I answered the 100 million dollar question when he asked me why I wanted the job. I told him, “because I want to learn how to make a lot of money”. And so he took me under his wing and gave me a beginning for which I will always be grateful.

The first stock that I modeled under his direction and that we subsequently analyzed together was $NFLX. It was July of 2005 and we decided that it was clearly a short at its current sub $20 price. I probably don’t need to show you a chart of $NFLX for you to guess that we were dead wrong. It not only went up from there, but is now trading at well over $200. But at the time we were convinced that the financials were over valued and had to come down. This was my first lesson in price action although I did not realize it at the time. I did not yet understand why traders or money managers hired analysts or purchased sell side research. It is quite rare to be unbiased enough as a trader to also be your own analyst for the analysis will sway you, once again led by those pesky emotions.

I have also heard many on this site scream some of the same words that Selden describes as being said by a conservative individual when he describes the danger of getting a “notion” in one’s head. “You meet a highly conservative individual and ask him what he thinks of the situation. ‘I am alarmed at the rapid spread of radical sentiment,’ he replies. ‘How can we expect capital to branch out into new enterprises when the profits may be swept away at any moment by socialistic legislation?’”

Have we not heard the same rhetoric in recent years with regards to the Obama administration? How many watchers of Fox News have declared the same sentiment for today’s America as if it has never been suggested before. My own Mother in her conservative extremism had declared the Czars of Obama policy would destroy all that America stands for. She has believed this to be true since he took office as if no one had ever said this before.

I am pretty sure Alan Greenspan felt the same way as he sat by Ayn Rand’s side mesmerized by her philosophy which she so beautifully articulated and which later caused the famed Fed Chairman to allow our banking system, unregulated, to dig a hole so deep as to collapse the market. Not that this collapse was anything new, nor that he or anyone else had the ability to negate it. I hear so many talk of the impossibility for our economy to recover because of the lack of jobs. Do you think no one has said that before? Surely we can all imagine this sentiment in the early 1930’s. Selden discusses this same sentiment having taken place in 1909. And in a recent viewing of the film The Game from 1997 with Michael Douglas and Sean Penn, the idea that the economy would never recover because jobs were never to come back was a background theme. The reverse of this is he who speaks radically that spending and high cost of living are unimportant when compared against the trillions of dollars of new wealth that will certainly ensue and he is of course, a convicted bull.

 

All of these ideas hinder the trader simply because we have them. We do not innately have the ability to “go with the flow”, to curb our emotions and not take a side. I have been fortunate enough to meet one such trader, although I will not name him for I have already spent too much time as a marketeer (sic) in this role as King of The Peanut Gallery. If you recognize the value of this ability, you will or maybe already have searched it out. That trader who can curb his emotions and remain unbiased in the face of so much bias. The trader who can, as Selden preaches, “keep out of the market, when in doubt, because delays, do indeed, cost less than losses.”

This is my final word. The market is behaving normally. The market has always behaved normally for this is how the market behaves. Don’t fight it for acceptance will allow you to finally be unbiased. Trust in the price action and “go with the flow”. I hope this helps and I wish you all the best of luck in your trading endeavors.

 

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5
Jan

Feeling the Pain of Volatility - The Irrational Fear of Popping The Oil Bubble $VIX $XOIL

I am a patient Wife, but I must admit that I had not intended to hold my volatility trade into 2015. I believed a good Santa season would allow volatility to come in enough for me to get out but the continued descent in oil has left fear running amok in the markets. But is this fear rational?

Folks who are selling their 401k's in fear of another 2008 market crash that ensued as a result of the housing bubble pop should take a deep breath. There is a large difference between the bubble in housing and the bubble in oil.

When housing built its bubble, it did so by growing its investment base. Lower and middle income Americans bought houses with sub-prime loans inflating prices to well beyond what they could actually afford. All the while inflating house prices faster than income inflation.

According to U.S. census, the median U.S. income was $10,394 in 1975 while the median house price was $35k. This equates to 3.36 times annual salary to purchase a home. In 2005, however, the median income was $46,326 while the median house price was $220,000 or about 4.79 times the annual salary. Add sub-prime mortgages to this disparity and now you have people buying outside of their means by even larger percentages. In other words, the person with an income of $46k in 2005 was not buying a $220k house, he was likely buying a $300-400k house because banks were giving him the loan to do so and the average Joe was led to believe that this was his guide to future wealth. After all, most of us were told by our parents that property is the best investment we can make. I remember when the housing bubble was inflating. I was living in the San Francisco Bay Area and I would hear people say that we should all go out and buy the most expensive house that a lender would allow because this is the best investment we could make.

Fast forward a few years and everyone is invested to the hilt in housing. The rich and the poor alike were owning houses, along with banks and entire towns and counties. Entrepreneurs were popping up with small lending companies; bankers with a sketchy sense of ethics were creating derivatives of derivatives based on housing investments. When that bubble crashed, it hurt a huge number of investors from Joe the Plumber to the Too Big to Fail banks.

Crude Oil, on the other hand, has a relatively small investment base. That base consists of those who extract and sell oil, i.e., drillers and suppliers, funds that are largely invested in oil as well as banks who have made oil loans. Virtually everyone else stands to benefit from low oil prices. You and I benefit from low gas prices, enough to really make a difference at this point; retailers like Amazon (AMZN) benefit from lower shipping costs; importers and exporters, airlines, refiners all benefit from lower oil. The likelihood that a bubble pop in the price of oil will crash the entire economy is relatively low. The current reaction in equity markets to lower energy prices is largely fear based.

I don't believe that commodity demand is in a deflationary period overall. Demand is merely shifting. We are becoming more energy efficient, certainly, better gas mileage as well as other forms of energy like solar and wind means we use less oil. And the increase in production by Arab countries trying to keep up their market share is only adding fuel to the oil fire. But what about other commodities?

The backlash of Moms around the country at high fructose corn syrup amid terrifying reports of increased health issues has lowered the demand for the overgrowth of corn. Widespread reports of diseased livestock that are commercially raised, residual pesticides in the Dirty Dozen and now GMO's have families shifting to pasture raised meats and organic produce. The farm to table concept is gaining momentum as folks get tired of being fed what the U.S. Dept of Agriculture wants to force down their throats like so many fatty geese that have been banned from the state of California. And with lower oil, those folks have more money to spend on better food.

At some point in the near future folks will come to terms with the idea that low oil does not necessarily equate to another Great Recession as the housing crash did. That in fact, low oil can stimulate the economy. Once earnings reports start coming out in a few weeks, this point should become more clear. When market makers exhale, volatility will collapse. I am a patient enough Wife to wait for it. 

 

15
Dec

By Special Request for The Analyst Bomber $SOX-X

For those of you who don't know The Analyst Bomber, he once had a coveted spot writing for another publication. He is the most accurate fundamental analyst that I know of and while you may think I am biased because I am married to him, I assure you that his views should not to be taken lightly. While I have some experience with fundamental analysis, he is my in house fundy analyst and I am fortunate to have him.

I trade technicals for the most part. I believe that technical analysis lends better odds to those of us retail traders swing trading our portfolio but when Robert (AB) has fundamental ideas that match up with my technicals, those are often the strongest trades and that combination allows for even better odds. But as I have mentioned many times, fundamental analysis tends to be emotional as the very structure of it causes the analyst to say what "should happen" and makes it difficult for him to accept what "IS" happening. For those who don't know, fundamental analysis determines the value of a company while technical analysis charts the price of the stock for probable direction without concern for actual valuation.  In this sense, fundies are better left for long term investors rather than swing traders since a good fundy analyst will likely see price go to its value eventually but not before some volatility. Charts, on the other hand, tell us what is now.  

For this reason, Robert and I decided some time ago that I should manage all our accounts going forward. I use his fundamental views as an influence to my technical views and trade according to my strategy with discipline. Like any money manager, I enjoy a good valuation point of view and I am grateful to have such a great analyst on my team...and cheap too!

Recently we have been talking about the SOX or the Philadelphia Semiconductor Index and without further ado, here is my technical analysis of the SOX By Special Request from The Analyst Bomber.

SOX-X daily chart shows a pull back and currently the secondary trend or shorter term trend is down. The daily chart follows but be sure to keep scrolling down for the longer term charts and analysis.

soxdailysecondary

When I zoom out to look at the weekly chart, I note that the index broke out of its 2014 level of resistance. It knocked at that door several times and eventually it opened in November. The index  went higher for a couple of weeks before rolling over. It is now approaching that breakout level and the 8 week ema (my trigger line). Previous resistance often becomes support and as often as that resistance was rejected, I suspect it can deliver a strong level of support. Here is that chart, but again, be sure to scroll down for the big picture.

soxweekly

Then I zoomed out to look at the multi-year trend on the weekly chart and I note that a multi-year breakout took place in February of 2014 before it created the recent resistance level that it broke out of in November. There is no question when looking at the longer term chart that the primary trend of the index is up and as long as recent resistance/support confirms with an inflection, I will be a buyer of SOX components into the new year. But I also note that as a technical analyst, I reserve the right to be wrong and I have no issue with that. I do not state what should happen or what will happen but only what is probable based on the charts. If that resistance / support level is lost, I will be keeping Stox in SOX at bay. Here is the Primary Trend chart.

sox primary

23
Sep

Wife's Equity Strategy - The Basics

This post is a long overdue outline of my equity trading strategy for those of you who are interesting in better understanding my equity style. 

SWING TRADING:

I am a swing trader. This is to say that I buy and hold stocks from a few days to weeks or months. However, I will not hesitate to drop a position the same day I have entered if it no longer warrants holding. I use mostly technical analysis in my swing trades, but I do have a background in fundamental analysis and will incorporate some fundamentals when appropriate. I also use primarily fundamental analysis in my longer term investments. 

TECHNICAL ANALYSIS - INDICATORS AND TIME FRAMES:

I use a combination of Candlestick signals, Moving Averages, Chart Patterns, Stochastics and Volume at Price. I use the 8 exponential moving average as my trigger line. I only go long when a stock is above the 8 ema and will close a stock that closes below the 8 ema. Most stocks tend to go up when above this moving average and down when below so it's a no-brainer for me. The other MA's I use include the 50 and 200 simple moving averages. These are my primary indicators.

Secondary indicators I may use include Fibonacci retracement, MACD, Bollinger Bands, Donchian Channels, VWAP, & Pivot Points as well as the 21 sma and the 34 ema. 

My general theory is that too may indicators spoil the chart as do too many chefs spoil the soup. I keep it simple and generally stick with my primary indicators only checking the secondary indicators for confirmation should I find the need. Often traders will become overwhelmed by too many indicators which begin to contradict one another, often causing the trader to lose confidence and question his resolve. This leads to hesitation and fear which only hampers the trader.

As a swing trader, I chart the daily chart first and foremost and I make most of my trading decisions based on the daily chart. I then move on to the weekly and even longer time frames to get an idea of how the chart looks on longer term. I will look at shorter time frames, mostly for exits but also to get an idea of where a chart is going intra-day. 

BUY SIGNAL / SELL SIGNAL

I go long or short based on candlestick buy and sell signals. I use stops mostly as a marker as I try to give positions to the end of the day before deciding to close them out. (Note: if I have to leave my office for an appointment and am not able to watch my positions, I do set hard stops.) If a position is selling off with volume, I will close it early to avoid further losses but I try not to get shaken out of a position that is only seeing some profit taking but for which the bullish trend is still in tact. How the candle closes determines the signal. A candlestick is not a sell signal on a daily chart in the middle of the day.  The 12 major signals are listed below. Each signal is linked to a page that will provide a simple description or image of the signal. Once you are able to recognize the major signals, you can continue your education and learn the secondary signals.

Doji Signal
Bullish Engulfing Signal
Bearish Engulfing Signal
Hammer Signal
Hanging Man Signal
Piercing Pattern
Dark Cloud Cover
Bullish Harami
Bearish Harami
Morning Star
Evening Star
Kicker Signals
Shooting Star
Inverted Hammer

CATCHING THE TREND

I am a firm believer in respecting the trend. That is to say, I will tend to go long in a bullish environment and either stay on the side lines or lean short in a bearish environment. Longs have a harder time working in a distributive environment and vice-versa, so if I determine that the overall indices go into a down-trend, I will refrain from adding longs. I often refer to this as my internal Market Timer. When it is green, I will add longs when it is red, I will refrain. I do not, however, close all longs in my port the moment I believe the market to be reversing to the downside. Once I am in a position, I manage it on its own merit, individually. I may start adding shorts once I confirm that the market is in a downtrend. 

POSITION SIZING

A full sized position for me is 10% of my portfolio. I will sometimes take a half-size or starter position in stocks that have not yet confirmed then add to them as they do or I may take smaller size while the markets are turning bullish but have not yet confirmed. I will also often scale out of a position to lock in gains along the way so my portfolio is rarely filled with only full-sized positions. I try to never take more than 12 positions at any one time as I find more that 12 is difficult to manage. But I do try to have several positions on because too few and I lose diversification.

All that said, if I am struggling or in a slump, I don't hesitate to go very small in position size, even paper trading for a couple of weeks until I get my mojo back. Likely I am struggling due to some emotional trigger that I have not kept at bay. More on that later. But going smaller size, even a quarter of my normal size, can often keep those emotions away by reducing my risk to a point where losses are less painful and I trade objectively. 

KEEPING THE ODDS ON MY SIDE

Trading is a numbers game. Everything I have mentioned thus far comes down to one thing, keeping the odds in my favor. I just mentioned that having too few positions can keep me from being diversified and diversification helps to keep the odds in my favor but statistics are also a factor. The best traders on Wall St., statistically, only get their picks right about 50% of the time. Somehow they manage to be profitable even though half of their picks are losers.  In other words, how they trade is more important than what they trade.

If I know that I am statistically likely to only be right about my stock picks half the time, then only taking one position will give me a 50/50 chance of having a winner. This does not keep the odds on my side. However, if I take two positions, I know that chances are that one of them will work while the other one doesn't. As soon as I recognize that I have a loser, I can drop it early and let the winning position ride, taking more in gains than I do in losses. This keeps the odds on my side. It's like being the casino, the house has the odds. Fortunately I also have my knowledge of candlestick signals which tends to give me better stock picking percentages and also helps to keep the odds in my favor. 

RULES RULES RULES!!

This is the most important section herein. None of the ideas I have described above would do me any good without my rules. I keep them in bold black ink on 8x10 sheets of paper on the wall of my office and add new a new rule whenever I make a mistake that is not already covered by a current rule or I adjust them as needed. If I don't keep my emotions at bay, I will never be profitable. This speaks to the idea of how I trade being more important than what I trade.

I have been working on a Power Point presentation for weeks now about writing rules but I find it is a complicated task. Each and every trader has to derive his/her own set of rules that addresses his/her own risk profile and emotional triggers. You may get upset when you lose $1000 or you may get upset when you lose $100 or maybe you have no issues with losses until you lose $10,000. Perhaps it really bothers you when your gains turn to losses or maybe you can't stand it when you leave money on the table.

Whatever YOUR individual emotional triggers are, you need to have rules to keep them at bay. Emotions are important in our daily lives. They keep us safe but they can be detrimental to a trader. And this includes the emotions that may be affecting your personal life. You are in no position to trade when you are fighting with your boyfriend or your wife is having a baby. Stressful situations can hinder your ability to make objective, unemotional decisions. I am the most emotional person I know but I manage to keep those emotions out of my trading with my rules.

 

ACCOUNTABILITY

I also keep myself accountable by sharing my positions and performance with the world on my site. My site is my trading journal and every trader should have one...a journal not a website. You don't need to share your trading ups and downs with the public but you should write it down in a personal journal at the least so that you can catch your mistakes and create the rules that will keep you on the right side of the tape.

For more on Trader's Psychology, be sure to check out websites by Dr. Doug Hirshhorn who is an elite Wall St. trader's coach at www.drdoug.com AND Norman Hallett who's 4 minute drills are a must listen for any trader at www.thedisciplinedtrader.com. And stay tuned for my Power Point on rule writing. I promise to get it out before long. 

 

23
May

The Morning Report ...But The 10 Year Yield is Higher?

Good morning traders!

I am feeling pretty safe in my cash position this morning with markets dropping lower the world over. I will wait it out this morning to see how things settle but a gap below the 8 ema would suggest some moves lower in the coming days. The SPY chart below has some levels drawn out that may act as support. I see 163.70 then 161.06 which is the first fib level from the November low.

Yesterday's move lower in US markets was blamed on statements from Mr. Bernake, but he has made pretty similar statements before without much effect on markets, so why now?

I often say markets will pull back when they need to and they will find their excuse to do so, or rather the media gives them an excuse by blaming whatever rhetoric is popular at the moment. In this case, it was the Fed's minutes but today with world markets and US futures dropping, I see the blame being put on Japan and China. Again I remind that the media looks for excuses to justify the moves that need to happen.

What gets me on this little pull back, is the 10 year treasury bond. Bonds go up when markets go down. Certainly there have been correlations that have made contrary moves of late, but this one tends to hold strong. Yet yesterday's move in the 10 year was not as it should have been with markets down. With the 10 year yield continuing higher (meaning the bond itself will go lower), there is a disconnect. And so I propose the following macro idea: 

Housing has been in strong recovery. Quite suddenly, homes for sale are selling within 10 days of being listed with multiple bids above asking. Is this really happening again? The difference being, buyers must come in pre-approved or with sufficient cash to make the buy, but we know banks have been loathe to lend. Perhaps they have been persuaded to open up lending again to well qualified borrowers. This is what they  are supposed to do, after all, but since 2008 the lending market has been closed to even the highest quality borrowers. 

Is it possible that banks are de-leveraging in order to start lending again? And is this what is really bringing the markets down? In which case, this would be a bullish assumption on the overall economy and would suggest that once the de-leveraging is done that markets will rip back higher on their merry bullish way.

I know, this is a bit out to left field, but check out the charts. Note that the 10 year and the SPY correlate in opposite directions pretty decently....until yesterday, when they were both down. 

Click on charts to enlarge.

spy23 ief

 

22
Apr

Can I Take An Emotional Day? (Grieving $PWER)

My followers know that I tout the importance of my rules. I talk about having them in bold black print posted on the walls of my office. They are in no particular order but without a doubt, the number one rule is, "If You Get Emotional, Walk Away."             death_dollar_tombstone

Every rule that follows, is aimed at keeping my emotions from triggering. From position sizing to max loss to adhering to the signals, every rule comes back to the same thing, keeping emotions in check. But sometimes, there are no rules to stave off emotional events. This morning I find myself quite emotional. As such, I will set hard stops on the two positions in my portfolio and will not trade unless I am sure that I am beyond the frustration that I feel as a result of this event.

$ABB (ABB Ltd.) bought $PWER (Power One).

For several years I have been pounding the table about $PWER. I have talked about the fact that this is the only company that makes the inverters that all solar companies need for their batteries. I have talked about it's strong fundamentals; I have talked about the extraordinary low price of the stock compared to the amount of cash the company holds. I have made a lot of money trading this stock. At one point in 2009-2010, I held it from under $2.00 to $12.00, taking huge profits. I have on many occasions made large percentage gains in the stock so perhaps I have had my share and it simply was no longer my time. None the less, I find myself grieving. 

A year ago, I made a bold statement. I said that $PWER was not only a candidate for buy-out, but would be acquired by the end of 2012. As such I held a position of common in my long term account as well as out of the money calls. When 2013 rolled around and $PWER had not yet been acquired, I wrote this piece, Ideas for 2013, where I said I would let my calls exercise even though they were still out of the money because I believed it would be bought in 2013.  Through many ups and downs early in the year, I held on.

On March 18, I sold out of my $PWER. I did not sell it because I had a sell signal. In fact, I had held on through several sell signals letting it sit at whatever price, because of my strong fundamental conviction. I held it for fundamental reasons and I sold it for fundamental reasons.

I did it in light of the debacle in Cyprus. I knew that $PWER held most of its cash in Italian banks and I was concerned about the domino effect from the Cyprus banking system. This effect never came to fruition but waiting it out, I never got back into my $PWER position.

The event that I was so sure about has now happened. $PWER has been acquired and it happened without me.

Fundamental analysis is inherently more emotional than charting. I have always said this. Fundy guys get married to their conviction and whine when a stock does not do what they think it should, allowing positions to move against them to the tune of 20, 30, 40% or more...all the while adding to a snowball that is rolling down hill trying to lower their cost basis. Dangerous and risky, this style is not something I adhere to because I prefer to be safe. But I held on to $PWER through ups and downs because I believed so strongly. And so I give myself a reprieve for being emotional here. I just need to get over it and get on with my work. But I will take a couple of hours, and maybe even the whole day, to grieve.

RIP Power One. I will miss you!

11
Mar

Fundamentals for Dumb-Me Part 2 (as promised)

Here is the next segment in the fundamentals posts.

Trust yourself and not some goofy sell sider.

psychiatrist_trust_yourself_273725

 

 

 

When you are valuing a company, you need to have an income statement, or model, as the hedge fund folks call it. (Just a quick sideline here; when I ask my analyst friends what they are doing, they love to say that they are “working on models.” They are all men, of course…the analysts, not the models.)

When I first started in this wacky business, I was working for a hedge fund manager who required me to learn how to create models. I would painstakingly look up the historical numbers for sales, costs, cash flow, debt, etc. on the 10K filings and enter them into an Excel worksheet. I found this to be a tedious and miserable task. I always struggled to see the little cells that I had to put the numbers into. In those days, for whatever reason, we didn’t magnify everything so that it was easy to read and see. I had quite a bit of accounting under my belt, but this frustrated me.

The joy came when we looked at the model/spreadsheet together and made predictions about where the company was going and what its true value was. You can get models already built, of course, from Factset or Reuters but these require costly subscriptions upwards of $9K per year.

Soon thereafter, thehusband also got a job in the biz. For the longest time, after I started trading on my own, I would ask him, my in-house analyst, to provide me with whatever models I needed and I was fortunate that he could easily provide them to me. After a while, however, I found even reading those models to be tedious. They had way more information than I really needed and I started looking elsewhere for the information I wanted. Historical data is perfectly well represented on Google Finance. I can easily double check the numbers and fill in the blanks to be sure I am using the correct data, and for the most part, I find they do a pretty good job with accuracy.

  Read more...

5
Mar

Fundamentals for Dumb-Me! The Very Basics (Part 1)

Not too long ago, I did some posts about basic fundamentals. I am re-posting them here so that they can have a place on my site in the archives. They are a series of three. This is the first.

Fundamentals for Dumb-Me: the very basics (part 1)

Before I start, I will point out that everyone has their own method and viewpoint for valuation.  The below is how I see it and while some pros may argue with me for my simplicity, strangely,  we always seem to arrive at the same place in the end.

That said, I have not decided if I will continue down this path. Most of you will either be way beyond this level or have no interest. I will wait to see if there is enough interest before I decide to continue.

You will get used to my old musical references eventually.

A reference to the song Do-Re-Mi from The Sound of Music:

Let’s start at the very beginning
A very good place to start
When you read you begin with
A-B-C
When you value you begin with
EPS
…or Earnings Per Share – in other words, a company’s net income divided by the number of shares outstanding. This is one important piece of information you will need to adequately value a company’s stock. You will also hear the term, Diluted EPS, which will take into account any convertibles or warrants outstanding. These are not included in the outstanding basic share count until converted or exercised whereupon they increase the basic share count and “dilute” earnings. You will find this information in the company’s most recent earnings reports.

Next we will use the EPS to determine the company’s multiple or P/E ratio; that is Price to Earnings or the stock price divided by EPS. This gives us an idea of what folks are willing to pay for a stock in relation to the company’s earnings. If a stock’s current share price is $20 and it’s EPS is $2, the company has a multiple or P/E of 10; that is 20/2=10.

Once you have these two pieces of the puzzle, you will want to check out the company’s most recent earnings report to predict future EPS, or EPS calculated on the next four quarters worth of earnings, and thus forward P/E based on the company’s guidance. This will give you an idea of the company’s expected growth rate. If the company guides earnings of $3 next year, this gives you a growth rate of 50% or a future stock price of $30. But let’s slow down for a moment and go back to our current price of $20 and divide that by our new EPS of $3. This gives us our forward P/E. 20/3=6.67. I mention this because when looking at the key statistics of a stock on Yahoo Finance or Zacks.com, one of the first things I like to look at is forward P/E vs. trailing P/E. If the forward P/E is lower than the trailing P/E, it’s a good bet that the stock is undervalued at it’s current price.

Be careful not to try to predict these too far out. More than a year is too much as any number of unpredictable catalysts can wreck your analysis. Your best bet is to update your numbers each quarter as the company releases earnings.

If you don’t already have a handle on this but would like to, I recommend a little homework. Choose a few stocks that you are watching and figure out the EPS, P/E and forward P/E. Go to the company’s website for a given stock and pull up the press release for the most recent earnings report. You will probably find it under Investor Relations (IR). Everything you will need to do this work is right there. Once you have done this with a few companies, you will not only have a better understanding of it, but you won’t feel like I am speaking a foreign language should we continue down this path in future posts.

I will try not to complicate matters too much as I bring in some other factors that can hinder our basic evaluation.

And as promised, following is a glossary of terms. Many of them we will not use, but it helps to know what they are when you hear them thrown about by the media.  I may update it as we go in case I use a term that I forgot to include.

EPS – Earnings per share

P/E -   Price to Earnings : stock price divided by the earnings per share. Also referred to as the multiple.

P/S – Price to Sales – Stock price divided by the sales per share

P/B – Price to Book – Stock price divided by the value of the company equity, or assets minus liabilities.

DCF – Discounted Cash Flow – Valuing a stock based on a company’s future cash flows.

Cash Flow is the movement of cash into or out of a business.

GM% – gross margin – gross profit divided by revenue or sales

EV – Enterprise Value – Market cap plus total debt minus total cash. The main purpose of which is to define the value of a company if someone were to purchase it. When a company buys another they inherit that company’s debt or cash. The debt lowers the value, and any cash on hand acts like an instant rebate.

EBITDA – Earnings before interest, taxes, depreciation and amortisation. The point is to isolate operational earnings, but folks have all sorts of ideas as to why they want to look at this value. Taxes and interest are not absolute so this allows looking at valuation without them. Depreciation and amortization are “non-cash charges” that some think mask the representation of cash flow on the income statement.

 

 

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