Sunday, December 31, 2006
Stock markets have been red hot in China and India for the past year. This month's pick is a Chinese stock, PacificNet (PACT). The TradeRadar BUY signal was first flashed on 12/19/06 at $5.23. Since then, the stock has seen more good news and has moved up to $6.18 as of the last trading day of 2006. To see this TradeRadar BUY signal, click here. Note that the signal strength is pretty decent and the signal shape is quite well-defined. This leads me to believe we have a real reversal underway and that the newly established trend upward will continue. PACT has exhibited plenty of volatility over the years though so I am sure the path upward will not be smooth.
PACT had recently taken a hit as a result of taking charges for exiting a business segment related to telecommunications. They are continuing with their involvement in providing CRM products and services for large companies doing business in the Asia-Pacific region. They currently have a roster of clients that includes Motorola, Nokia, HSBC, American Express and China Telecom.
More significantly, they are now concentrating on electronic gaming in the region, especially Macau, and have recently landed some contracts from major casinos there. This upswing in business activity is lending credence to the message management gave concerning focusing the company on areas of higher growth. Macau is projected to surpass Las Vegas in total gambling revenue within a year or two and, in anticipation of this, PACT has established an office in Macau which, it appears, is already beginning to yield fruit.
PacificNet employs over 1,400 people in its various subsidiaries throughout China with offices in Hong Kong, Beijing, Shenzhen, Guangzhou, Macau, and branch offices in 28 provinces in China. It is headquartered in Beijing and Hong Kong.
Sunday, December 24, 2006
There are more financial sites out there on the web than can be counted. Most of them are looking to make money through paid subscription. I have listed sites that provide a significant amount of free content or tools. They are serious about providing a "try before you buy" experience for their customers.
I have categorized the sites based on their strengths and have provided comments on what is best or most unique about each site. Some sites are mentioned more than once because they are strong in more than one category. Speaking of which, the categories are as follows:
- Stock Signals and Technical Analysis
- Big investing sites
- Track the Market - Live (quotes, news and charts, delayed 15 minutes)
- Stock Screeners
- Analysis and Commentary
- Download Historical Quotes
- Investor Education
Friday, December 22, 2006
I have pulled together financial news, opinion, analysis and commentary from a variety of sources across the web. Some sources are well known, some are not. All are of high quality and are updated throughout the day. If you are an investor, you will appreciate getting all this in one place:
- Seeking Alpha
- Ticker Sense
- Business & Finance from Digg.com
- ETF Trends
- Schaeffer's Daily Market Recap
- Scheaffer's Daily Market Blog
- Financial blog posts from Tailrank
- Yahoo Business News
Read the Daily News and be prepared for your trading day. More important than your first cup of coffee!
Thursday, December 21, 2006
The screenshots of the TradeRadar application are in place with explanations of what each screen does.
I have deployed the Tracking page where I keep the status of past TradeRadar picks updated. You will see a ticker with the latest prices and a table describing the current situation. Here is where I will admit to failures and revel in successes.
For those of you who have downloaded the TradeRadar application, I intend to update the Help file soon and will be posting it on the Download page. It should be ready within the next week.
I have also added some cool new tools to this blog. Those of you who have visited lately may have noticed the Trade Radar Stock Consultant form in the left sidebar. The Stock Consultant site provides automated technical analysis of stocks and options including charts, timing indicators, support and resistance, etc.
I have joined an excellent blog directory called Tailrank. I have created a custom Tailrank search that I am hosting on this blog that retrieves posts from financial blogs. An interesting feature is that Tailrank also displays who is linking to a particular post so you can follow the conversation from blog to blog.
Finally, I have also added a form from AmericanBulls.com, a site I discovered while researching mashups. They use candlestick analysis to generate automated buy/sell/wait signals for short term trading. The explanations provided are quite detailed and they are honest enough to post how their calls have worked out over the past two years.
Thursday, December 14, 2006
Gloom and Doom
Everyone has heard that the real estate bubble has burst, interest rates are not conducive to homebuying, it's a buyers market, new home construction is plummeting, houses are sitting unsold for longer periods of time, etc. Stocks of most builders are well off their highs. Some say we have not yet seen the bottom in this market.
All this is enough to attract those with a contrarian bent. If you are looking to buy when the news is bad, could this be a good time to jump in?
It all depends on how you approach the real estate market. What we have seen in the real estate market is the demise of easy money and, with it, the demise of the McMansion. There is still significant activity in more modest homebuilding as well as in urban apartments, offices and condominiums. The companies that are diversified or derive significant revenue from these still active areas are prepared to rebound or, indeed, already have. Those companies that are still addicted to the wide margins available on luxury housing will see their stocks underperform. To use an old adage: "It has now become a market of stocks." Even Toll Bros, known for their suburban McMansions, is shifting resources into building urban apartments now. (For a couple of pro and con opinions, see this article on CNNMoney.com describing the recent trend of movement out of the suburbs and back into the city and, on the other side of the argument regarding the growth potential of apartments and condominiums, see this article at TheStreet.com)
Speaking of contrary opinions, if you look at sentiment indicators based on option put/call ratios, you will see that the outlook for the housing industry is very pessimistic. To the contrarian, the deeper the pessimism, the greater the potential for a rally. (See Shaeffer's Research web site for more background on put/call ratios and market sentiment).
Are prices too high?
During the housing bubble, especially in frothy areas like California, Phoenix, Las Vegas, etc., prices reached the point where many home buyers could not afford to buy. Now, as demand has softened, prices are falling back. As a result, we are seeing some first-time home buyers return to the market. This in turn will help other segments of the market as current homeowners will have an opportunity to move up. There is no stampede of first-timers as of yet but at least the trend is starting to turn up.
Are interest rates really killing the real estate market?
Look at the 10-year note (chart). Even as the Fed has raised rates and is now in a holding pattern, we have seen the yield on the 10-year stabilize and actually fall back to levels we have not seen since the latter part of the housing boom. With mortgage rates typically tied to the 10-year note, this is good news for credit worthy buyers. This is echoed in a recent WSJ article that puts the blame for the downturn on unsustainably high demand, not high rates. Indeed, lower rates have been a factor in a recent rebound in mortgage applications.
What about buyers who are not so credit worthy?
Ah, the Fed has done this group of consumers no favors. All the various exotic (and risky) loan products that peg payments to interest rates are starting to cause increases in defaults. The companies that are serving the sub-prime market are the companies to stay away from. Once again, it's a market of stocks so choose carefully.
Which investments to consider?
Here are a few I believe are worth investigating:
- Tarragon Corp. (TARR) - I have highlighted this one as my Pick o' the Month for December for all the reasons listed above as well as a TradeRadar buy signal. This stock has not yet rebounded as vigorously as some of the larger players in the industry so we are just now coming off a bottom. This will help reduce downside risk. They are also more diversified than many of the single-family home builders as they have a significant revenue stream from building and managing urban properties.
- REITs are not home builders; they typically invest in commercial property, a segment that is not doing badly. There are a number of ETFs available that allow you to play the real estate market without having to sift through dozens of REITs looking for a reasonable investment candidate. A good investment in this area is the iShares Dow Jones U.S. Real Estate Index Fund (IYR). It has had a good run over the last few years (it is now richly priced with a yield of only 3.1%) and seems to be taking a little breather since mid-November. Nevertheless, the overall trend is still clearly up with just a modest pullback during the middle of the year. More ETFs to consider are the streetTRACKS Wilshire REIT (RWR) and the iShares Cohen & Steers Realty Majors (ICF). Their charts are nearly identical to that of IYR. Speaking of charts, all these ETFs are significantly above their 200-day moving averages and are just about at the point where they usually begin to weaken. That dip would provide a good buying opportunity.
Which ones to avoid?
The usual suspects in residential construction I would avoid for now. These include Toll Bros, Pulte Homes, KB Homes, DR Horton, Hovnanian, etc. Some of these stocks have bounced back more than I think is warranted. This increases the risk of buying them today. Most of them focus on the higher end of the home market and that, I believe, is where the risk lies. Most of these guys are also taking big write-downs on land and projects that are not going to generate returns sufficient to cover fixed costs.
For an overview of the biggest names in the residential construction industry, see the Industry Center page at Yahoo! Finance.
If you feel that some portion of your portfolio should be dedicated to real estate, there is some good news. This may not be the most lucrative part of the market at this (post-bubble) time but there is still profit to be made if you are careful where you put your money. Avoid high-end residential home builders and sub-prime lenders. Buy the ETFs mentioned above when their prices come down. Focus on companies with significant operations in urban construction and management of condos and apartments. This approach is not for short-term traders but should provide reasonable safety and growth in one segment of a diversified portfolio.
Monday, December 11, 2006
- The Weekly Market Call - here I use the Trade Radar signal to indicate whether the current trend in the three major market averages (Dow Industrials, S&P 500, NASDAQ 100) is steady or changing. This is presented as a simple up or down indicator. The current week is compared to the previous week. If last week was up and this week is down, for example, it means Trade Radar is signalling a top with a reversal to the downside in progress.
- Pick o' the Month - here I will highlight stocks or ETFs that, according to the Trade Radar signal, are undergoing a reversal.
On the web site, I will soon be rolling out a page that shows what the Trade Radar software looks like. Here you can see screen shots of some of the most important features of the program. I will also provide a link to the Help file so you can get an idea of how to set up and use the system.
Tuesday, December 5, 2006
I am always interested in feedback. If the help file doesn't make it clear how to use the software, send your questions to email@example.com and I will be happy to respond. If the program is crashing or otherwise acting strangely, I want to know about that, too.
Have fun generating your own signals. Email or comment to let us know how you are doing.
Go to the download page now.
Saturday, December 2, 2006
Many money management professionals take advantage of various hedging strategies to avoid being whipsawed by the markets and to avoid losing money in down markets. They may use combinations of swaps, options, futures and derivatives to offset risk and to generate returns when traditional investments are losing value.
Some of the investment tools used by these professionals are now available to the public. There are several companies that have developed families of mutual funds and ETFs that bundle all these exotic vehicles into easy to understand funds that track common indexes. I will focus on two companies, Rydex and ProShares, as I describe a strategy that will allow you to invest and profit like the professionals. Both companies have products that track, as a minimum, the Dow, the NASDAQ 100 and the S&P 500. What is interesting and pertinent to our discussion here is that they also have funds that track the INVERSE of the associated index. For example, if one fund tracks the S&P and goes up when the S&P goes up, there is also a fund that tracks the inverse of the S&P and goes up when the S&P goes down. Imagine the next gut-wrenching drop in the market. Instead of sweating it out and biting your nails, you load up on these inverse funds and make money all the way down. Unfortunately, as in most things related to the markets, there are a few complications. If you have experience trading, I’m sure you know where I am going.
As with any equity, the perennial questions are what do I buy and when do I buy it. Ideally, buy the inverse (short) fund at the top of a cycle. Hold it and sell it at the bottom of a cycle at which time you would switch into the normal (long) fund. You would hold the long fund all the way up and sell it at the next top in the cycle. Repeat and retire in luxury.
The issue is being able to call a top or a bottom and being able to do it with confidence. This is market timing in its purest form and there are many stock market experts who believe this is a foolhardy thing for individual investors to do. There are, however, some things we can do to reduce the risk (which is what those pros are doing when they use these funds in their hedging strategies).
First, let's talk about identifying the change in trend. I, myself, use my own custom signal (TradeRadar, available at traderadar.blogspot.com) to identify tops and bottoms. I load historical prices for the indexes into the TradeRadar program and see if it gives a strong enough signal to trigger a trade. I may look at other indicators to confirm the TradeRadar signal, moving averages, for example. Any of the usual indicators that you are comfortable using will work here. It goes without saying that it is important that you also keep a close eye on the markets in general, so you have a good feel for what's going on and what the likely direction of trading will be in the indexes you are following.
Using Long and Short Index ETFs and Mutual Funds
So what do you buy? There are funds that aim to match the performance of indexes and then there are funds that, through the use of various kinds of leveraging, aim to double the performance of indexes. These funds usually have some kind of special designation such as "Ultra" or "Dynamic". If you are confident that the trend is clear, jump in with both feet and buy one these higher performance funds. They are available in both long and short versions and they track the big three: the Dow 30, the S&P 500 and the NASDAQ 100.
For example, you think the NASDAQ has hit its peak and has turned down. You have been enjoying outsize returns all the way up by holding the ProShares Ultra QQQ ETF (symbol: QLD) that tracks the NASDAQ 100. It is now time to sell this ETF and buy the ProShares UltraShort QQQ ETF (symbol: QID) which tracks the inverse of the NASDAQ 100. As the market goes down, this ETF will go up twice as much.
What if you're wrong? These ETFs are your friend as long as the trend is in the direction you expect. If the trend turns against you, however, these ProShares Ultra funds will move twice as fast as the associated index. This is an important consideration. If these funds are used as your sole investment vehicles, you are basically saying you are comfortable with high risk. When used as one part of an overall investment strategy that uses stocks and/or mutual funds in a reasonably diversified manner, this strategy can be used to help increase positive returns, especially in bear markets where even high quality, long-term investments tend to suffer.
These funds have not been around for long (the ProShares funds started trading in June and July of this year) so there isn't a long history to observe. I have played with the data that is available, investigating whether a combination of long and short funds would outperform simply holding the associated index. Sadly, it doesn't seem to work as well as I'd hoped. If the trend is up and you have most of your money in an Ultra long fund and a smaller proportion in a regular short fund, you are reducing your gains on up days. On down days, the Ultra fund will fall twice as far as the short fund. If instead you use an UltraShort fund for downside protection, you reduce your gains on up days too much without sufficiently reducing your losses on down days. In both of these cases, you would be better off just holding the associated index.
As described above, a better scenario is where these funds are used to juice the results of a more balanced and extensive portfolio or to provide some downside protection within the context of the overall portfolio.
These funds tend to have higher expenses than regular index funds. If you just want to buy and hold a simple S&P 500 index fund, you would do better to choose a Vanguard fund or the SPDR (SPY).
This strategy calls for market timing. This has two potential negatives: (1) it can be difficult and (2) it requires trading. Depending on your time horizon, it could take lots of trading. And trading means you will have commission expenses. It is important that you find a good discount broker.
This strategy is best in rising or falling markets. In neutral, or sideways, markets it tends to be more difficult to trade the peaks and valleys. This is when you move out of these funds and let the rest of your portfolio provide the gains (hopefully).
These funds can be volatile due to the nature of their underlying investments such as options, swaps, etc. They may have an objective of doubling the return of a particular index but they may not quite achieve that level of perfomance.
Funds mentioned in this post
The Rydex funds that track the S&P 500 and the NASDAQ 100 have the lowest minimum investment ($2500) in the family. Here they are: Rydex Dynamic S&P 500 C (RYCTX), Rydex Inverse Dynamic S&P 500 C (RYCBX), Rydex Dynamic OTC C (RYCCX) and Rydex Inverse Dynamic OTC C (RYCDX). The classification of "Dynamic" means that they are trying to achieve 200% the performance of the associated index.
The corresponding ProShares ETFs are as follows: Ultra QQQ (QLD), UltraShort QQQ (QID), Ultra S&P500 (SSO), UltraShort S&P500 (SDS), Ultra Dow 30 (DDM) and UltraShort Dow 30 (DXD). The "Ultra" classification means they are also trying to achieve twice the daily performance of the associated index.
If you want the ability to trade in real-time all day long, the ETFs are the better choice. In addition, there is no minimum investment. The Rydex funds are not subject to the standard market-timing restrictions that other mutual funds have. It is recognized that their purpose is to support market-timing investment strategies.
As for the other two picks I have posted about, Generex (GNBT) and Eight-by-Eight (EGHT) have both slowed their advance. Generex continues to put out press releases about successes it is having with its new drug delivery systems and Eight-by-Eight recently announced that Office Max will be carrying it's products. The news is decent but the charts are weakening. An analyst announcing that he still has doubts about EGHT effectively killed a bounce-back in the making in that stock this week but I am still rating it a hold if you had purchased at the time TradeRadar gave the buy signal. I am still holding GNBT, as well.
- ► 2011 (40)
- ► 2010 (189)
- ► 2009 (312)
- ► 2008 (266)
- ► 2007 (200)
- January 2007 Pick o' the Month - PacificNet (PACT)...
- And still another new feature on the web site - In...
- New feature added to web site - Daily News Mashup
- More new features added
- How to Profit in Today's Real Estate Market
- New features: Weekly Market Call, Monthly Stock Pi...
- Trade Radar software available for download
- Use ETFs to profit in down markets as well as up m...
- FCEL - Buy Signal Fails to Materialize, Weekly Rou...
- ▼ December (9)
|Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.|