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Saturday, March 29, 2008

Market internals continue to improve despite down week

This week market statistics are again positive. This is despite the fact that two of four major averages finished the week on a downbeat note. With the Dow and the S&P 500 losing 1.2% and 1% respectively we have apparently been saved by the NASDAQ, which gained a slim 0.1%, and the Russell 2000, which gained 0.3%. It was enough to keep the market internals on an up trend for the week as a whole.

Chart of market statistics
Looking at the chart above, we see that over the course of the last six weeks there has been significant weakness followed by recovery.

This week we have the highest number of stocks above their 20-day moving average that we have seen since we started gathering these statistics. That's the good news. The bad news is that it is still less than half of all stocks that we test (each week we look at about 7200 stocks).

The number of stocks above their 50-day moving average also improved compared to last week and has finally gotten back up to the level we saw when we started collecting these statistics.

The Aroon indicators show that the number of stocks showing strong down-trends is declining rapidly while the number showing strong up-trends in increasing slowly. This is somewhat of a mixed result but at least things are going in the right direction for the bulls.

This week we finally see a small increase in the number of stocks whose 20-day moving average has exhibited a bullish crossover above the 50-day moving average. Last week, this statistic continued down while the others we track all headed up. Nevertheless, investors shouldn't get too excited as the improvement was slight. It continues to show how far many stocks have to go before it can be said an up-trend is in place.

An ominous note is sounded by the Chaikin Money Flow statistics. We have only been capturing this indicator for three weeks now and it is not yet on the chart. Based on the first two weeks we saw a positive progression. This week we see the number of stocks exhibiting strong distribution has increased while the number of stocks exhibiting strong accumulation has declined. In other words, selling has strengthened and buying has weakened.

Conclusion --

The interesting aspects of stock market analysis are often the divergences. This has been a week full of divergences. Some major averages up, some down. A lack of follow-through after a strong rally. A large number of stocks starting to show the beginnings of positive performance but other indicators signaling the progress is precarious. And though progress has been made, many stocks are still digging out from significant declines.

Should this week's statistics lead one to be cautiously optimistic? The trends are starting to look positive but the absolute numbers are still weak. As I said in last week's post, we are not out of the woods yet.

Alert HQ for the week ending March 28, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ.

The week on Wall Street started out OK but ended with several days of losses. It appears that the major averages are falling back after the recent Fed-led rally. A retracement is under way; how far it goes remains to be seen.

Despite the weakness in evidence in the last half of the week, market internals showed a continued slow improvement from the very depressed levels of a few weeks ago.

As a result, this week we have an alert list of 23 BUY signals and 4 SELL signals.

Later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated and hopefully I'll get around to discussing the performance of some of the picks from past weeks.

Thursday, March 27, 2008

Durable Goods report supports cautious stance on Communications Equipment

Goldman Sachs just came out with a call indicating they have turned cautious on the communications equipment sector.

With this sector comprising one of the buckets of data available in the U.S. Census Durable Goods report (M3 Survey), I thought I'd take a look at the government data that came out yesterday and see if it was consistent with Goldman's view.

In particular, I looked at New Orders and Shipments for the communications equipment category including both defense and non-defense manufacturing.

In yesterday's Durable Goods report, it appears that January's New Orders number was revised down slightly to $5.106 billion from the previously released $5.186 billion. This has the effect of making the January to February increase in New Orders 6% rather than 4.3%. Similarly, January's Shipments number was revised downward from $5.376 billion to $5.341 billion. This has the effect of making the January to February increase in Shipments go -0.3% rather than -0.9%.

In general, though, the numbers don't look too bad.

For example, in the last sixteen years, New Order growth in the January to February time frame has been higher only seven times. Over the last five years, the current level of growth in New Orders is right in the middle of the pack.

The chart below plots the New Orders and Shipments numbers from January 2006 through February 2008.

Chart of Communications Equipment - New Orders and Shipments
What pops out is the fact that New Orders look to have way more variability than the Shipments numbers. I have in the past assumed that New Orders would make a good predictor of future Shipments. It sure doesn't look like it.

How the numbers are generated --

At this point, I'd like to digress a bit and point out some facts on how the Durable Goods report numbers are generated:

1. The figures published are calculated by applying monthly ratios of change from the Census Bureau's reporting panel (which accounts for about 60% of the U.S total value of shipments) to the Universe levels estimated by the Annual Survey of Manufactures. This is clear as mud but serves to inform the reader that the government is applying some kind adjustment to numbers obtained by surveying a subset of manufacturers and then extrapolates the results to create the report.

2. New Orders (NO) are derived based on the value of current shipments (VS) plus current unfilled orders (UO) minus prior month unfilled orders. The formula for calculating new orders is:

NO's (current) = VS's (current) + UO's (current) - UO's (prior)

Note that for some companies that ship within the same month that orders are received, new orders are equal to shipments. In addition, there are numerous companies that are able to report unfilled orders, but are not able to report new orders.

According to this equation, it appears that the volatility in New Orders that we see on the chart is actually the result of volatility in Unfilled Orders. Unfilled orders will turn into shipments only as long as they are not canceled. New Orders may be filled out of inventory so they may not contribute to future demand; hence, Unfilled Orders are used as the better indicator.

What do the numbers tell us?

What is disconcerting is the fact that the general trend for both New Orders and Shipments seems to be slightly but clearly downward.

In looking at the values of New Orders, there has been a very visible slowdown starting in August of last year. Shipments began to decline one month later.

To deal with the volatility, I thought it might be useful to try some moving averages. Taking 6-month moving averages of New Orders and Shipments since January of 2006, it appears that New Orders are almost always higher than Shipments; however, when the New Orders moving average begins to turn down growth in Shipments becomes essentially flat or negative for one or more quarters. You can see this in the chart below.

Chart of Communications Equipment - New Orders and Shipments with Moving Averages
Given that Shipments translate directly into revenues, it certainly looks like we are in for flat performance at best over the next quarter or two. Goldman seems to have made the correct call.

Wednesday, March 26, 2008

Durable goods - the case for shorting industrials strengthens

I recently wrote a post describing what I saw as a weakness in manufacturing. That weakness, I felt, justified taking a position in the ProShares UltraShort Industrials ETF (SIJ). My timing for this trade was astonishingly bad as markets immediately staged a strong rally, driving this ultra short ETF into the ground.

What about the premise of the post mentioned above? It seems that today's February Durable Goods report from the U.S. Census Bureau bears out the original analysis. All is not well in the manufacturing sector.

My previous post talked about a string of reports showing slowing growth or outright contraction. Sources included the Federal Reserve, the Philadelphia Fed, the New York Fed and the ISM.

Today the Census Bureau weighed in and it wasn't pretty. Many headlines indicated the bad number was a surprise. To me, it seems to continue a trend.

Here is the summary statement on New Orders from the Census Bureau's web site:

"New orders for manufactured durable goods in February decreased $3.6 billion or 1.7 percent to $210.6 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 4.7 percent January decrease. Excluding transportation, new orders decreased 2.6 percent. Excluding defense, new orders decreased 1.6 percent."

Here are some highlights on a few of the categories contained in the report.

The Manufacturing category showed declines in both shipments (-1.4%) and new orders (-1.6%). Machinery showed a sizable decline of 13% in new orders.

As is often the case, however, there are mixed results in the Computers and Electronic Products category. Across the board there are negative numbers for shipments in all the sub-categories. The Computers and Communications Equipment sub-categories, though showing declines in shipments, both actually saw an increase in new orders. On the other hand, Semiconductors showed a whopping 31% decrease in shipments which seems to me to be worse than a typical seasonal slowdown.

Fianlly, you know it's bad when new orders for defense goods are off 10% despite Bush's wars continuing unabated. And this is after a 15% drop in the December to January time period.

I generally focus more on the New Orders numbers as I consider them to be more forward looking and predictive in nature when trying to determine the direction of stocks. Still, shipments do provide good information on the current level of manufacturing activity. The summary statement from the Census Bureau web site is as follows: "Shipments of manufactured durable goods in February, down three of the last four months, decreased $6.0 billion or 2.8 percent to $210.5 billion. This followed a 2.3 percent January increase." To me, this is further evidence a slowdown in manufacturing is already underway.

All told, today's report does nothing to dissuade me from my original position: there is weakness in manufacturing and shorting industrials should be a profitable trade. Eventually.


Disclosure: author is long SIJ

Money left on the table - a cautionary tale

Yesterday I was stopped out of my position in the ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP).

I managed to obtain an 18% gain on the trade in FXP but this is actually a pretty lousy result because there were other opportunities to sell at a much better price. Why didn't I? Because I ignored my rules for trading.

Trading is not like buying and holding for the long term. Nevertheless, both types of investing should be pursued with a set of rules, a discipline if you will, that guides your decisions. The rules may be different in these two cases but you should define your rules and stick with them. Unless, of course, they seem to get you into trouble on a regular basis in which case perhaps they should be revised.

First, let's talk a little about the rules I try to follow. They're pretty simple and not particularly original but they are what I use. Here they are:

Stops should be employed at all times. Support and resistance levels should be looked at in order to determine stops. Also look at trend lines and moving averages. Stops should be re-evaluated and updated as a stock moves up.

Stops must be really wide for Ultra ETFs.

Don't chase performance.

You must have an exit strategy when you initiate a trade. The exit strategy must always take into consideration what kind of gain is reasonable for a trade as opposed to a long-term buy-and-hold. Stops or trailing stops should be part of the exit strategy. Put some time into getting familiar with the stock's chart.

Avoid buying or selling in the first hour of trading. Sometimes, when economic data is released before the opening bell, this rule can be broken but only if you are confident the data will support one-way trading that day.

Look at over-bought and over-sold indicators (RSI, Bollinger Bands) when looking to time a trade. This goes back to the rule about not chasing performance. Be patient!

So what rules did I break with the FXP trade?

To begin with, I ignored my exit strategy. Since FXP is basically the double inverse of the iShares FTSE/Xinhua China 25 ETF (FXI), it seems reasonable to track FXI when trying to determine expected moves in FXP. In looking at FXI, I identified several support levels. I waited patiently for FXI to violate one more support level at around $140 and drop down to the next level below. I had decided that at that point, it would be time to sell FXP. As FXI began to move in the expected direction, I needed to answer some questions to validate my exit strategy: Was there a chance FXI would break down below this new lower support? Was my gain on the FXP trade at this point good enough? Would holding on for the next leg down in FXI be too risky and jeopardize my hard earned profits?

The correct answer would have been that current profits were good enough. FXI had already fallen over 30% from its peak and the easy money had been made on the short side. Accordingly, FXP had hit a new high and the profit on my trade, having opened the position at $86, would have been in the neighborhood of 30% to 35%. That was a reasonable gain. In order to preserve this gain, this would have been the time to tighten stops. Which leads me to the next rule that I broke.

It's true I had a wide stop in place but I had not re-evaluated it as FXP surged upward. When the markets began to bounce off their recent lows last week, FXP fell fast and hard. Now I was in a position where I was worried about preserving some kind of profit. This is when I was stopped out of the position.

So the moral of the story is that you must be willing to put in the effort to maintain a discipline or you should avoid trading for the short-term. As for myself, I hope I have learned a lesson from this experience.

Postscript: So this morning I saw an opportunity for a quick trade in the ProShares UltraShort Financials ETF (SKF). There were a number of news items that I knew would affect the financials: downgrades, estimates of further writedowns, slashed earnings estimates, the Clear Channel deal falling apart and the bad Durable Goods report. SKF had fallen right down to its trend line. I bought just after the open at $107. The ETF closed at $110.98.

So did I follow my own rules? The ETF was certainly not over-bought, so that was good. It looked like it couldn't be any lower and still be a buy. I did buy at the open instead of waiting but, given the news, it seemed the day's trade would go in a consistent down direction. My exit strategy is more conservative than it has been in the past with this ETF. Instead of expecting the ETF to rise to the $140 level again, I intend to tighten stops considerably as the ETF gets to the $120 level. We'll see how this plays out.

Tuesday, March 25, 2008

Alert HQ - first list of stock picks based on weekly data

As many readers may know, I have been running a scan of about 7200 stocks each weekend looking for TradeRadar BUY and SELL signals based on daily data. I have been making these signals available on the Alert HQ page of this site.

Today, I ran the first scan based on weekly data. As this is still in a beta stage of development, i.e., working but with potential for further improvement, I thought I would make this first list available for free. Here goes.

This first table is a list of all BUY signals:

Symbol Name Last Price Signal Strength Aroon Indicator
ABFS Arkansas Best Corporation $35.20 60% Strong Up trend - Up: 100 Down: 45 Osc: 55
MKSI MKS Instruments, Inc. $21.84 76% Strong Up trend - Up: 100 Down: 55 Osc: 45
PRAA Portfolio Recovery Associates, Inc. $47.82 77% Strong Up trend - Up: 100 Down: 55 Osc: 45
WRLD World Acceptance Corporation $34.09 61% Strong Up trend - Up: 100 Down: 55 Osc: 45

This next table lists the SELL signals:

Symbol Name Last Price Signal Strength Aroon Indicator
BIOD Biodel Inc. $10.59 85% Strong Down trend - Up: 50 Down: 95 Osc: -45
CCPCN Capital Crossing Preferred Corporation $22.49 61% Strong Down trend - Up: 70 Down: 95 Osc: -25
EMKR EMCORE Corporation $6.60 67% Strong Down trend - Up: 40 Down: 95 Osc: -55
IBKR Interactive Brokers Group, Inc. $27.16 67% Strong Down trend - Up: 60 Down: 95 Osc: -35

Disclosure: author holds no positions in any of the stocks listed

Monday, March 24, 2008

IT makes a difference - look at Level 3

Information technology is generally a function that is hidden behind corporate walls. This is true even for technology companies. But IT is too important to be ignored.

OK, I have worked in IT in various stages of my career so perhaps I am predisposed to blowing the IT horn. Sometimes, the horn rings out loud and clear. Other times, however, it sounds with a whimper.

Typcially, it seems like the good news from IT is not widely broadcast but the failures are more well known. Look at Citigroup (C). They announced ambitious plans to reap cost cutting and new efficiencies from major IT simplification and reorganization. So far, IT costs have risen 20% and have stayed at that level. Citi seems to have a ways to go before realizing their IT goals.

Then there is Level 3 (LVLT). Here is a company that has assembled, from a series of acquisitions, one of the largest Internet backbone telecommunication systems in the world. Yet they can't turn a profit. In 2007, the company lost $1.1 billion on $4.3 billion revenue. The company's string of acquisitions have left it with over $6.8 billion of debt.

Level 3 has found that system integration has been a stumbling block on the way to profitability. Decisions on the approach to take have led to occasional missteps and the costs just continue to ratchet up. In 2007 integration costs were well over $100 million. Despite a strategic plan known as Project Unity, Level 3 has found efficiency and cost saving elusive. The work is complex and has proceeded more slowly than expected. Analyst David Holt, in a November 2007 report for market researcher Current Analysis, pointed to Level 3's problems integrating back-office systems for the various acquired carriers as a primary reason "for difficulties in converting high order levels to revenues and a subsequent reduction in the growth of its core communications revenues during the second and third quarters of 2007." These issues continued in the fourth quarter, as well.

Are Level 3's integration issues behind it now? 2008, the company says, will be another year focused on integration. Systems are commonly considered to consist of "layers". The distinction is often made along the lines of front end, middle layer and back end. Typically, the front end is closest to the customer. The back end ties together much of the financial aspects including billing and accounting. The middle layer is where the work is performed.

At Level 3, the front end - opportunity management, quoting tools and order entry - has been well integrated with a single system in use company-wide. There has also been progress on the back end – billing and customer care.

The company has a way to go before the middle layer - provisioning, activation, testing, etc. - is well integrated. In fact, the major activity, consolidating network elements into one common inventory platform, is work that is not likely to be done until sometime in the first half of 2009. When sufficiently integrated, Level 3 can begin to remove portions of the network that are redundant and overlapping. This will result in simplification and direct cost savings. As an example of the simplification potential, the company says that it has approximately 67,000 intercity route miles in North America, which is expected to be reduced to approximately 38,000 intercity route miles after completing the integration of acquired companies. With a more straightforward, unified network it will easier, quicker and cheaper to ramp up new customers and new services. The faster those things can be done, the faster the company can begin to recognize revenue. Maintenance, training and probably staffing costs will be reduced, as well.

Due to the number of acquisitions the company has made, integration is a significant issue. Level 3 has acquired more than 20 companies or business units between 1998 and the present. In 2003, Level 3 acquired substantially all the assets of Genuity (a spin-off of BBN). Since the end of 2005, Level 3 has made further significant acquisitions including Wiltel Communications , Progress Telecom, ICG Communications, Telcove (formerly Adelphia Business Solutions), Looking Glass Networks, Broadwing Corporation, the content delivery network of SAVVIS and, most recently, Servecast Limited. There is obviously plenty of work to be done getting all these systems to play well together.

The question, though, is can investors wait for all this work to be done? The stock has been in a downward trend since early in 2007 and is now trading at a level barely over $2 per share. I have focused on Level 3's IT challenges but the company has other issues on its plate including a business slowdown, high debt service, etc. There are blogs calling for Level 3 to be absorbed by a stronger player. If the company is to survive in its present form, it needs to first get its IT house in order.

Disclosure: author has no position in LVLT

Saturday, March 22, 2008

Market internals improving - still not out of the woods

This week we can see what looks like a bottoming out in the markets but the indicators still signal caution. The chart below summarizes data from the last five weeks obtained by scanning about 7200 stocks each weekend using our Alert HQ process.

Market Statistics, week ending 3-0-2008

The fastest moving indicator is the number of stocks above their 20-day moving average. We have now seen an improvement in this number for two straight weeks though it is still a bit below where we were five weeks ago. Unfortunately, despite the rallies this week, less than half of the stocks we tested are above their 20-day MAs.

The situation is similar when it comes to the number of stocks above their 50-day moving average. Two weeks of improvement but it hasn't even gotten us back to where we were at the end of February.

The Aroon indicators tell a mixed story, as well. For the first time in five weeks we see the number of stocks that are signaling an up-trend has increased. And we have now seen two straight weeks where the number that are signaling a down-trend have decreased. This is a good trend to see but according to Aroon, there are still approximately 2000 more stocks still in a down-trend than there are in an up-trend.

In last week's post, I pointed out that the number of stocks whose 20-day moving average is above their 50-day moving average has continued to decline. I interpreted this to mean that many stocks have quite a ways to go before they exhibit bullish performance. We see that this dismal trend has continued this week with the number dropping for the fourth week in a row. This kind of cross-over event, when the 20-day crosses above the 50-day, is normally interpreted as quite bullish. The fact that we continue to see a decline in this measure is troubling.

We now have two weeks of data on Chaikin Money Flow. Things are starting to look a bit bullish here. The number of stocks undergoing reasonably strong accumulation (buying, with indicator greater than 0.22) has moved up from 536 to 600. The number showing reasonably strong distribution (selling, with indicator less than -0.22) has moved down from 760 to 643. Those being sold still outnumber those being bought but not by much.

The data this week show that by some measures, market internals are starting to look more positive. Still, we only have two weeks of improvement and the improvement is definitely not across the board. It it still too early to assume this bear market is over. We're not out of the woods yet.

Alert HQ for the week ending March 20, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ.

It was another volatile week on Wall Street with major averages showing solid gains. This time the financial sector outperformed and the rest of market managed to follow along. All this action was good for generating TradeRadar signals.

As a result, this week we have an alert list of 20 BUY signals and 9 SELL signals.

Later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated and to discuss the performance of some of the picks from past weeks.

Tuesday, March 18, 2008

Has the Fed ended the recession?

Markets heaved a huge sigh of relief today and rallied strongly.

So much of today's euphoria was due to the recent hyperactivity of the Fed and Secretary of the Treasury.

This past week saw the collapse and eventual takeover of Bear Stearns. The Fed was a major player in that drama as was Henry Paulson (The Wall Street Journal had a fine article on the how it all went down. It is also available on online here). I can only say that it certainly appears to have been the right thing to do. All concerned deserve kudos from the investing public for the urgency shown and hard work performed to pull things together in such a short time.

Goldman Sachs and Lehman Brothers both beat severely reduced expectations when announcing earnings today. This was another huge relief for the markets and got today's rally off to a good start.

Later during the day the Fed cut interest rates 75 basis points. Markets were looking for a whole percentage point but three quarters was deemed good enough and stocks rallied further, eventually closing with gains in the neighborhood of 4%.

I am pleased to see the Fed is active and willing to try numerous different methods to accomplish their ends of ensuring proper functioning of our financial system and supporting our economy. Nevertheless, I suspect that today's rally may hit some headwinds. We are still seeing poor numbers from the manufacturing sector. Consumer spending is flat at best. Inflation, as noted in the Fed statement today, is not to be ignored. The dollar is weak, helping exporters and hurting consumers. The financial sector is not yet out of the woods. The housing sector is still in a deep downturn. Banks still have plenty of questionable securities on their balance sheets. Company earnings are projected to be weak. Certain aspects of the credit crunch continue. The list goes on.

The Fed has managed to avert a disaster in the financial system and we are seeing a rally as a result. It still seems, however, that there are a number of issues still lurking in our economy that will take a while to resolve. The Fed has done a good job trying to stay ahead of all the problems but I don't think they have managed to eliminate all the recessionary factors currently at work in the economy. Lowering interest rates and providing multiple lending facilities for banks and investment houses are all good moves but, by themselves, can't solve everything. I think we will enjoy another brief rally and then the markets will return to the doldrums until the economy works its way into a more positive position.

Monday, March 17, 2008

Manufacturing - another area of weakness

In a post written over the weekend, I described why I thought the financials sector is now close to a bottom.

What was implied but not fully elaborated on is the idea that different sectors will bottom at different times. This concept is certainly nothing that most investors don't already know. We always see market leadership rotate from one group of stocks to another. The group may be based on market-cap or it may be based on business sector.

The question for investors today is: what sector rotation is taking place at the moment?

If the financials have bottomed, does this mean we should go long financials immediately? The conventional wisdom is that it will be a long hard road for the financials to battle back to a point where they would be worth buying. The issue here is patience. Values are compelling now but there may be a long wait to truly reap the rewards.

For those with a shorter term horizon, perhaps it would be interesting to look in another direction.

Just today we got two reports that indicate manufacturing activity is slowing. If you buy into the idea that the U.S. is now sliding into a recession, it is not a stretch to assume that industrial stocks will decline. The question is, are we closer to the beginning of the decline or closer to the end?

Let's take a look at today's two reports.

Here a couple of quotes from the Federal Reserve announcement:

"Industrial production fell 0.5 percent in February after having increased 0.1 percent in January. Much of the decrease in February resulted from a weather-related drop of 3.7 percent in the output of utilities. In the manufacturing sector, output decreased 0.2 percent in February, and declines were fairly widespread across industries. The output of mines moved up 0.4 percent. At 113.7 percent of its 2002 average, total industrial production was 1.0 percent above its year-earlier level. The capacity utilization rate for total industry in February fell 0.6 percentage point, to 80.9 percent, the lowest rate since November 2005."

"The factory operating rate fell 0.3 percentage point in February, to 79.3 percent, a level 0.5 percentage point below its 1972-2007 average. The production of durable goods moved down 0.4 percent. Large production declines were recorded in wood products, primary metals, motor vehicles and parts, furniture and related products, and miscellaneous products."

All told, production of both non-durables and durable goods declined. In addition, capacity utilization was seen to be slightly less. It can't be said that the wheels are coming off manufacturing but on the other hand the numbers are not particularly encouraging either.

The Federal Reserve Bank of New York released their Empire State Manufacturing Index. It fell to a negative 22.2 in March from a negative 11.7 in February. A number below zero indicates contraction. The report showed somewhat of a mixed picture as new orders edged up slightly but stayed in negative territory. Inventories and shipments both fell further below previous unexpectedly negative values.

As readers may recall, the Philadelphia Fed also had a surprisingly bad read on manufacturing in their report last month. That was followed by a bad number from the Institute for Supply Management whose factory index dropped below 50 and pointed to a more widespread contraction in manufacturing.

After today's market action, one could argue that I might have been premature in determining the financials had bottomed. It appears from the latest batch of reports, however, that industrials are just building up some momentum on the downside.

Many U.S. manufacturers have been benefiting from the weak dollar and bolstering their income statements via strong exports. There is discussion that, with financial and economic problems spreading, other countries may begin to lower their interest rates, making the dollar look stronger in comparison. Overseas demand may also begin to flag if the malaise in the U.S. continues to spread globally.

Are we on the verge of an acceleration in the decline of the manufacturing stocks? Industrials, as represented by the SPDR Industrials ETF (XLI) are off about 16% from their peak in October 2007. XLI, which closed today $35.90, is currently well above the January intraday low of $32.40.

If you believe that the industrials have room to fall further, you may be interested in the ProShares UltraShort Industrials ETF (SIJ). At about $67, SIJ is riding along above its 50-day moving average which at the beginning of this year crossed above its 200-day moving average. The Aroon indicators show the strong up-trend that has been in place may be weakening but the Chaikin Money Flow indicates there is still plenty of buying pressure. The RSI measurement looks like the ETF has a way to go before it could be considered over-bought. This ETF is somewhat thinly traded but it could be the right investment to play a recession-driven slowdown in manufacturing.

Disclosure: author has a small position in SIJ

Sunday, March 16, 2008

Market Statistics - indecision

This week our Alert HQ market scan process has provided a set of mixed signals. Is this evidence of investor indecision or consolidation or just a brief stop before the next big move? We now have four weeks worth of data, as seen in the chart below, and all in all, it is hard to interpret this data in a bullish manner.

Market Statistics, WE 3-14-2008
For those of you who are new to this weekly post, here is the background: We scan about 7200 stocks and ETFs each week after Friday's close. We apply a number of tests to each stock. The chart below shows how many stocks fell into which buckets. The following items are measured and tracked each week: number of stocks above their 20-day moving average, number of stocks above their 50-day moving average and number of stocks having a 20-day moving average above their 50-day moving average. In addition, an Aroon evaluation is performed to identify if each stock is in a down-trend or and up-trend.

Our first three weeks of data showed all positive indicators trending down, reflecting a widespread deterioration in stock prices.

This week, we actually have a jump in the number of stocks that are above their 20-day moving average. Similarly, we have a slight increase in the number of stocks above their 50-day moving average.

Unfortunately the number of stocks whose 20-day MA is above their 50-day MA has continued to decline in a straight line for three weeks now. This indicates to me that most stocks have a ways to go before the short-term moving average crosses above the longer-term moving average. Until we see more of these bullish cross-overs, it is safe to assume that the primary trend is still down.

We get similarly mixed indications from the Aroon measurements that we make. It is a positive that the number of stocks showing a down-trend has decreased. On the other hand, we have also seen a decrease in the number of stocks in an up-trend.

A new statistic was added this week: Chaikin Money Flow. This indicator attempts to quantify buying or selling pressure and can be used to identify a tradable trend. I only counted stocks that indicated a strong trend up or down. This first week, we see only 536 stocks exhibiting strong buying but 760 stocks exhibiting strong selling. It appears the bears have the edge here.

So this data provides some mixed messages from a weekly perspective. Looking at the data for general trend indications, however, it is clear that there has been no dramatic increase in bullish activity. When stocks truly begin to turn around, we will see the most recent data points for the positive indicators begin to climb above the earliest data shown on the chart above. We are clearly not there yet. It appears we have seen a week of market volatility and the result was indecision in stock prices. We can only assume the current trend remains in place: down.

Saturday, March 15, 2008

Alert HQ for the week ending March 14, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ.

It was an eventful week on Wall Street with major averages finishing more or less where they started despite significant volatility. The financial sector fell again but the rest of market managed to at least tread water. Tuesday's huge rally was undone by Friday's decline after news of the Bear Stearns bailout. Still, there were a few signs of hope as the market has still not broken below the January lows.

We had less negativity in the overall market this week so thankfully we didn't have a repeat of last week when we had no BUY signals at all.

As a result, this week we have an alert list of four BUY signals and one SELL signal.

Later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated and to discuss the performance of some of the picks from past weeks.

Friday, March 14, 2008

Bear Stearns situation is bad - will things get worse?

Bear Stearns (BSC) needed a bailout and the Fed accommodated. A big-name financial company was so wounded that JPMorgan Chase (JPM) and the New York Fed had to arrange to provide funding. At first, I thought this is really bad. And it certainly is. By the end of the day, however, I began to think that this signals that we are close to the bottom for financial stocks. There are a number of reasons.

First, though the Bear Stearns situation is a real negative for the markets, it did demonstrate that the government is willing to step in to insure that our most important financial companies survive this downturn. Say what you will about moral hazard and what have you, the bottom line is that the Fed will not let major financial institutions go down the drain. From the point of view of investors in financial stocks, that is a positive.

Second, there have been a number of bloggers and analysts who have pointed out that the bottom won't be reached until institutions that are sitting on excessive amounts of risky assets pay the ultimate price: potential insolvency. We have now seen the first occurrence. Action in the options markets indicates that investors think Lehman Brothers might be the next. Citi is rumored to be getting ready to divest billions of dollars worth of assets to streamline the company and bolster the balance sheet. It looks like we have reached the phase where just deserts will be handed out to those who were reckless.

Third, market trends don't always line up with economic trends. It appears we are in the midst of a recession and a bear market. Financial stocks have led the market down and are significantly underperforming most other sectors. Today's events, however, could be marking a turning point for the sector. Could we see further declines in the financials? It's certainly possible. On the other hand, I get the feeling the duration of further declines may not be so long. Calling a bottom is not an exact science. It may be that we are getting close to the bottom in financials while we may still see further significant deterioration in other sectors. The financials led the market down but they might halt their decline before the economy does.

Fourth, sentiment on the financials is so negative that it is worth stepping back and trying to determine whether it is time rethink the case for further bearishness.

Fifth, as I alluded to earlier in this post, the government is committed to supporting the financial system. They are being creative and proactive lately. The old saying "don't bet against the Fed" may have some truth to it, especially as the Fed seems to be coordinating actions with central banks in other countries. It is clear that they are willing to keep trying different approaches to reducing the severity of the current recession and keeping the banks and brokers afloat. With the FOMC meeting quickly approaching, who knows what they will pull out of their hat next?

As a result of all I have detailed above, I decided that it might be worthwhile to take profits in my position in the ProShares UltraShort Financial ETF (SKF). By the end of the day today we had picked up about a 35% gain since January. If we are close to a bottom, then that is good enough for me. If it looks like we are headed for another leg down in the financial sector, I am sure I will have another buying opportunity for this bearish ETF at some point in the future the next time we have a short-lived bear market rally.

Tuesday, March 11, 2008

Flash memory prices pressure chip manufacturers

In an article presented today at DigiTimes, there was more bad news for manufacturers of NAND flash memory. And perhaps another negative for Apple (AAPL) was revealed.

The reporters announced that Apple has not yet started making big procurements of NAND flash memory thus far in 2008. With NAND already selling below cost, according to sources at Taiwan memory makers, this lack of demand from a major customer could make a bad situation worse for NAND manufacturers. We have already had an announcement from Intel (INTC) that their margins are being hurt by the persistent pricing problems in NAND flash. It can only be a matter of time before we hear the same tune from SanDisk (SNDK), Micron (MU), Samsung and others.

As for Apple, a number of their new product announcements have involved flash, such as the solid state drive in the MacBook Air. Many existing products are heavily dependent on flash including the iPod and iPhone. Having purchased approximately $1.2 billion worth of flash in 2007, the perceived lack of orders is unnerving to flash vendors. Is bellwether Apple seeing weaker demand?

As for the flash manufacturers, consider this quote from the DigiTimes article: "As memory makers can now hardly tune their capacity mixture with DRAM when the DRAM industry is also experiencing a trough, the downward NAND flash price trend seems to have no catalyst to make prices trend upward in the near term..."

Looks like it could be a tough few quarters for the memory makers and those companies that sell semiconductor manufacturing equipment to them. And maybe Apple, too.

Monday, March 10, 2008

Why Yahoo is worth buying

It's the data, stupid!

Instead of simply measuring numbers of visitors or pageviews, comScore, at the request of the New York Times, developed a different approach to analyzing the ability of the major media web sites to gather data about users.

The new method is based on "data collection events" or opportunities for web site operators or marketers to gather a data point about a user. Four of these events are actions that occur on the sites that the online companies run: pages displayed, search queries executed, videos played, and advertising displayed. Each time one of those four things occurs there is an interaction between the user's computer and the server of the company that owns the site or serves the ad. That creates an opportunity for that server to store the bit of information just collected in a database.

comScore also looked at ads served on pages anywhere on the Web by advertising networks owned by the media companies. These include text ads provided by Google’s AdSense network, for example, and display ads from AOL’s unit. In these cases, as well, there is the opportunity to collect a data point about a user and store it in a database.

Why is this seemingly anonymous data so important?

Much of this data may not be tied to a user by name but could be tied to one PC via the IP address of the PC itself or a cookie. In this way, the profile of a user can be assembled in a general way and more targeted ads can be served to the user of that PC.

So what sites are best at capturing data collection events? Just look at the chart below that is just for the month of December 2007:

Data collection points
Yahoo, by far, came out with the most data collection points in a month on its own sites — about 110 billion collections, or 811 for the average user. In addition, Yahoo has about 1,700 other opportunities to collect data about the average person on partner sites like eBay, where Yahoo sells the ads.

It is clear that Yahoo has built into their own sites and their partner sites a tremendous number of customer interactions that can be captured to a user-tracking database. As always, you have to wonder why Yahoo can't seem to do a better job at taking all this information and monetizing it.

The point of all this, though, is that Yahoo has a potential goldmine of data. And that may be reason enough to acquire the company.

In a quote from the New York Times article: “So many of the deals are really about data,” said David Verklin, chief executive of Carat Americas, an ad agency in the Aegis Group that decides where to place ads for clients. “Everyone feels that if we can get more data, we could put ads in front of people who are interested in them,” he said.

Despite access to all this data, many of these sites don't put it all together in a way that improves their picture of individual users. This is an opportunity for the company with the resources and the drive to take data-driven advertising to the next logical level. The company that can offer better targeting can charge more for ad placement. This is the path to higher click-through rates and superior monetization.

If Microsoft can reel in Yahoo, they may get the opportunity to realize the benefits of all that data rolling in.


To Aim Ads, Web Is Keeping Closer Eye on You

How Do They Track You? Let Us Count the Ways

Saturday, March 8, 2008

Market Statistics - more deterioration

This week our Alert HQ market scan process has provided further evidence of a deterioration in market internals. Since we now have three weeks worth of data, I have chosen to present the latest data in chart form.

We scan about 7200 stocks and ETFs each week after Friday's close. We apply a number of tests to each stock. The chart below shows how many stocks fell into which buckets. The following items are measured and tracked each week: number of stocks above their 20-day moving average, number of stocks above their 50-day moving average and number of stocks having a 20-day moving average above their 50-day moving average. In addition, an Aroon evaluation is performed to identify if each stock is in a down-trend or and up-trend.

As can be seen, all the positive types of indicators are trending down. The only thing that is trending up is the Aroon Down indicator that is used to identify stocks in a down-trend and that one jumped sharply.

Alert HQ Market Statistics, WE 3-7-2008.
It appears that the deterioration picked up speed this week. This can be determined by noting that the change from the previous week is greater than that in the week before.

Given that in this last week the Dow lost 3%, the S&P 500 lost 2.8% and the NASDAQ lost 2.6%, it is not surprising that the positive indicators are trending down. What is surprising is how widespread the damage is. Looking at the Aroon down indicator, it appears that nearly half the stocks out there are in a short term down-trend. Only 1500 stocks are still above their 20-day exponential moving average. That is barely 20%. Stocks aren't doing all that much better in terms of their 50-day moving averages, either.

The picture is unrelentingly bearish.

This week, financials did their part to sour investors attitudes. Reports of Thornburg and Carlyle being hit with margin calls weighed on the market. Standard & Poor's downgraded Washington Mutual. Ambac finally announced their recapitalization plan and it was a huge disappointment. Widening spreads are showing up all over the place but this week's news related to elevated spreads between 10-year Treasuries and agency debt such as that issued by Fannie Mae and Freddie Mac. It is becoming harder and harder to trade even the most solid debt instruments.

Payrolls were the other big news. ADP came in negative earlier in the week and the government's February Non Farm Payrolls numbers followed suit on Friday. The government reported a loss of 63,000 jobs rather than a small gain. This makes two months in a row showing declines, something that always seems to precede a recession.

What had been expected to be a big drop in the markets Friday actually turned into only a modest sell-off of less than 1% in the major averages. Are investors just getting tired of bad news and now rally when news is not as bad as it could be? I also noticed that in the afternoon on Friday the market took off when it was announced that consumer spending in February was up about 3% from the weak level in January. On the face of it, this seems like good news. I read, however, that this was nearly all in the form of credit card debt. Already over-indebted consumers getting more in debt. With credit card payment delinquencies already rising at lenders, I'm not sure this spending news was so great after all.

Where do we go from here?

This coming week, has a long list of reports including the following: weekly crude inventories, retail sales, initial claims and CPI. The first could move oil prices, the last three could certainly move the markets. With stocks looking oversold, any positive surprises could cause an enthusiastic rally.

On the technical side, the charts look awful. The S&P 500 closed below 1300 on Friday, the lowest level since summer of 2007. It has blitzed down through support in the 1325 area. In terms of closing prices, it is well below the January low though it has not quite fallen past the January low intra-day price. If we don't see some strength creeping back into the market soon, we could easily see 1275 on the S&P as the next stopping point. This would be only a further 1.3% decline. If that level doesn't hold, we might see a slip down to 1230.

With my current trading portfolio mostly in ProShares UltraShort ETFs, I am making some money as the market slides. Nevertheless, it is painful to see the averages decline, job losses mount and homeowners face foreclosure. I certainly look forward to reporting better days on this blog.

Alert HQ for the week ending March 7, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ.

It was another awful week on Wall Street with major averages falling between 2.6% and 3.0%. The financial sector fell 6%. This kind of action is grinding down many of the picks that generated BUY signals in past weeks.

With such negativity in the overall market, I shouldn't be surprised that this week we have absolutely no BUY signals at all. The list of BUY signals has been shrinking over the last few weeks and now we are down to none.

We do, however, have an alert list of five SELL signals this week. As mentioned in last week's post, it appears that many stocks currently in the SELL zone generated their initial SELL signal weeks or months ago. This week we got another batch that are finally throwing in the towel.

Later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated and to discuss the performance of some of the picks from past weeks.

Thursday, March 6, 2008

Citi's Levkovich - buy banks now!

Tobias Levkovich, Citi's chief U.S. stock market strategist, was recently interviewed by the Swiss financial publication Finanz und Wirtschaft.

He is currently bullish on banks. Yes, the financials are currently the most out-of-favor sector out there but Levkovich is not alone in declaring that value is available today.

Levkovich makes a number of good points, some from a historical perspective and some from a contrarian perspective.

Despite his feeling that we are already in a recession, he feels it is already priced into certain market sectors. Overall, he points out, recessions have typically resulted in market drops in the 15% to 20% range with the exception of the deeper bear markets in 1974 and 2001. 1974 and 2001 had extreme circumstances that cause Levkovich to exclude them from his analysis. With markets having already declined into this 15% to 20% range, Levkovich feels that the bottom will be established very soon.

At this point, readers may want to point out that the current real estate mess and credit crunch are also extreme circumstances that may make this market react more like it did in '74 and '01 and move beyond the level of a 20% decline. Levkovich points to the U.S. consumer and indicates that if things were as bad as '74 and '01 that consumption would have collapsed. So far, there has been a contraction but not a collapse.

Within the financial sector, Levkovich is especially favoring insurers and diversified banks. This is despite Warren Buffet recently saying that insurer profits will be under pressure.

When questioned on how he could be recommending banks at this time, Levkovich responds that the time to buy shares is when no one else will, when there is panic in the air. This is spoken like a true contrarian and value investor. One of the points he makes is that it is unlikely that investors will be surprised with further bad news on the scale which has already been revealed in the second half of 2007 and so far this year. By the time we reach the second half of 2008, all the negative news will be fully known and bank shares will be ready to rebound. Furthermore, he says banks are more undervalued today than they were during the savings and loan crisis. As a final note, Levkovich points to the steepening of the yield curve as a positive for banks.

Levkovich makes some of the same points as some of the other well known value investors. I suspect that for patient investors that can afford to average down into the financials and wait for the rebound this is reasonable advice.

There are those who might say that Levkovich works for a bank, one that is in trouble, so of course he is going to be positive on banks. That could be true but I prefer to hope that he is independent enough to have his own opinion.

So, do I agree with Levkovich or not?

I think it is a matter of timing. At some point, financial firms will certainly get their houses in order. The stocks will more than likely begin to recover well before the healing process is complete. I suspect there is no hurry to begin buying banks. And so, in the meantime, I will hold on to my investment in the ProShares UltraShort Financial ETF (SKF) a little while longer.

Wednesday, March 5, 2008

Allis-Chalmers post-earnings update

Allis-Chalmers Energy (ALY) formally announced their Q4 and full year earnings. Things were pretty much as they said they would be back on January 31 when they presented their preliminary unaudited results for 2007.

Here are the final numbers:
  • For the fourth quarter of 2007, the company earned $5.8 million, or 16 cents a share, compared with $10.4 million, or 40 cents a share, a year earlier.
  • Revenue in the quarter rose 25 percent to $143.8 million compared to $114,898 million a year earlier.
  • On an annual basis, the company earned $50.4 million versus $35.6 million in 2006
  • Revenue in 2007 came in at $571 million compared to 2006's $311 million.
Management's message on Q4 is as follows: "as we reported in our January 31, 2008 press release, our results in the fourth quarter were affected primarily by weakness in demand for drill pipe in the Gulf of Mexico due to the hurricane season and the departure of rigs to the international market, start up costs and low utilization of our coil tubing units, pre-election labor slow downs and strikes in Argentina, and flooding in Mexico.”

In looking at the 8-K, several items jump out.

First, the good news. Top line growth has been quite satisfactory. Income from operations is up 84% in 2007 compared to 2006.

Unfortunately, the company has not been able to convert revenues into earnings at a comparable rate. In addition to the problems specific to the fourth quarter described above, it seems various expenses in 2007 have served to reduce both net income and earnings per share.

Weighted average shares of common stock outstanding on a diluted basis increased 62.1% in 2007. This dilution significantly impacted earnings per share. This share issuance was related to the need to pay for acquisitions, some of which were executed in 2006. Additionally, one of the biggest factors reducing profitability involved interest expenses which in 2007 were more than double those in 2006. I assume these interest expenses are related to the spate of acquisitions the company made.

Where does that leave us?

The stock price took quite a hit in the last few days despite the fact that all this information was announced over a month ago. Interestingly, the stock was first brought to my attention early last week by generating a BUY signal during a test run of the Alert HQ software. By the end of the week, however, the decline in the price had prevented the stock from showing up on the weekly BUY list. Still, this could be an opportunity to buy the stock while it is down but not out.

The company has moved to increase its international footprint by acquiring Bronco Drilling and by obtaining more rigs that can also be deployed internationally. This is meant to offset the flat growth being experienced in the U.S. and Gulf of Mexico. These moves will not begin to bear fruit until the second or third quarter of 2008.

Some of the situations that hurt Q4 in 2007 are not expected to re-occur. Flooding in Mexico and strikes in Argentina are somewhat unusual one-time events that don't typically impact company earnings to the extent they did this time.

The hurricane season seems predictable so it is unclear to me why that was used as an excuse. As rigs leave the Gulf for international sites, service companies like ALY lose customers. This is another reason why the company is so intent on increasing both its international reach and its capabilities.

In summary, with the energy industry continuing to look robust and Allis-Chalmers making the right moves to expand capabilities and geographic reach, it is still reasonable to think we have seen the low for the company's stock price. Despite recent weakness, there is a good expectation that an investor's patience will be rewarded.

Last minute rally but breadth is weak, support just barely holds

Last night I wrote a post about Merrill Lynch's concept of a weakening or reduction in leadership being a result of a slowdown in profit growth.

This morning it occurred to me that yesterday's rally into the close showed the principle at work. The image below from the Wall Street Journal Online shows the advancers and decliners in yesterday's trade.

Wall Street Journal Markets DiaryYesterday the major averages were down well over 1% for most of the day. At the last minute, there was a rally based on more rumors of a recapitalization for Ambac, Cisco's CEO saying long term growth is on track (which he also said when Cisco earnings were released) and Apple saying they are sticking to their guidance on iPhone sales.

Should we take heart from this rally or regard it with skepticism? On the NYSE, which finished with a small loss, losers outpaced gainers two to one. On the NASDAQ, which actually managed to eke out a gain, only 39% of stocks managed to end the day in positive territory, let alone exceed the gain in the NASDAQ Composite index. On the AMEX, losers exceeded gainers by three to one.

You may also notice that new lows swamped new highs on all three exchanges.

It is clear that leadership is narrow indeed, even on a day when there is a rally attempt. As I said in yesterday's post: investors beware.

Support levels in play --

One of the other things that played out yesterday was the recovery of the S&P 500 from a drop below significant support. Back in May of 2006, the S&P 500 made an intermediate high at 1325. That level now comes into play as a support level. We have bounced off that level several times already.

Yesterday, the index spent most of its time below that level but just managed to climb above it to close at 1326.75.

The Dow is in better shape, its May 2006 high was down at 11,700 and the average closed yesterday comfortably above that level at 12,213.80.

The NASDAQ Composite is in the worst shape. Its high in May 2006 was 2375. Even with yesterday's rally, the index is well below that level at 2260.28. To make matters worse, the index has twice failed to break above that level which is now acting as resistance.

Conclusion --

All these signs indicate the primary trend is still down. If the S&P 500 breaks decisively below its support at 1325, I suspect we will see a big move down. Hopefully, that will be the climactic move that will signal a market bottom.

Tuesday, March 4, 2008

Merrill Lynch - profits decelerate as market leadership weakens

I enjoy reading the monthly Merrill Lynch Research Investment Committee report, known as the RIC Report. There is always some concept that is new to me and sheds some light on current market conditions.

February's report had an interesting chart detailing the percentage of stocks that outperformed the S&P 500 index in a given calendar year.

Percent stocks outperforming
Merrill contends we are currently experiencing a serious slowdown in global corporate profit growth. Merrill further contends that "historically, leadership in the financial markets tends to narrow (i.e., fewer and fewer investments tend to outperform) when the profits cycle decelerates because growth becomes a scarce resource".

As can be seen in the chart, prior to the Internet bubble, the percentage of companies outperforming the S&P 500 stayed within a modest range under 50%.

In the 1998-1999 timeframe, with the tech bubble in full swing, fewer and fewer stocks outperformed the S&P 500 despite profit acceleration.

Post-Internet bubble, we see a significant jump in the number of stocks outperforming the index. This indicates a broader participation in profit growth. Merrill indicates this is the longest period of broad market outperformance in the the history of their data. In terms of absolute numbers this did continue for a number of years but, on average, it has been declining steadily since the peak in 2001. In 2006 and 2007, we see that percentage has now dropped below 50%.

So where does that leave us?

Declining leadership, Merrill feels, is an indicator of slowing profit growth. When leadership falls below the long-term average, as it has today, investors should beware.

My solution to the mortgage mess

Ben Bernanke spoke today before a group of community bankers in Orlando, Fla. He encouraged bankers to find creative ways to address the problems in the mortgage market. Preventing foreclosures, he implied, should be a priority as it would "help not only stressed borrowers but also their communities and, indeed, the broader economy."

Mr. Bernanke, here is my suggestion. Instead of banks reducing principal or instituting artificially low interest rates, why not have borrowers move into homes they can actually afford. If done in a coordinated manner, the process could cascade down from the most expensive homes to the least expensive. Essentially, everyone moves down a notch to a more reasonably sized home with a more affordable mortgage.

Those at the lowest end of the spectrum who, based on their financial condition, should never have become homeowners in the first place would be expected to return to the rental market.

This would keep the majority of troubled homeowners in a home of their own. It would keep the majority of homes occupied. It would protect most communities from a wave of foreclosure signs. The only downside would be those over-sized McMansions at the high end that may not be able to find purchasers as their over-extended owners trade down to an affordable house.

Instead of the government giving $150 billion away and hoping we all go to the mall, perhaps the money could better be spent to set up a program to help borrowers and banks make the arrangements necessary to carry out this process.

In the end, these homeowners would not end up with more house than they should ever have had by being bailed out by the government. I think this would make those of us who were prudent in buying our homes feel a little better about the fairness of the process.

Saturday, March 1, 2008

Weekly Market Update and comments on Alert HQ stock picks

Markets this week --

Earlier this past week, much was made of how it looked like the S&P 500 and the Dow were breaking upward out of triangle chart patterns. By end of day Friday they had broken out, alright. Unfortunately they broke out to the downside.

This week we had the third regional manufacturing survey come in well below expectations. This time the Chicago PMI delivered the bad news with numbers indicating contraction. Like the Fed's New York and Philadelphia surveys, Chicago's report quickly deflated the markets.

More bad news came in reports on the producer price index, consumer confidence, durable goods orders and weekly initial claims. PPI showed clear signs of commodity inflation, consumer confidence hit a 19-year low, etc., etc.

About the best news available was that personal income and spending were flat in real terms. This indicates an economy that is clearly slowing but at least flat is better than declining. Maybe we're not in a recession yet. Still, these numbers were nothing to get excited about and served to further sour investors moods.

Chart damage was bad. Note that we have now established a lower high as compared to the last rally attempt that peaked in the first days of the month. This does not bode well at all. In looking at the RSI for the S&P 500, we are not even oversold yet so it would not surprise me if we went lower from here.

At least it can be said that the averages finished a little off their lows on Friday. Still, there will certainly be some work to do before we get back up to the levels of earlier in the week.

Market Statistics --

We now see a clear deterioration comparing this week to the previous week that ended Feb 22.
  • Stocks above their 20-day exponential moving average have declined from 3079 to 2459
  • Stocks above their 50-day exponential moving average have declined from 2594 to 2396. Note that at this level only one third of stocks are currently above their 50-day MA. Are we oversold? Definitely. Is this the bottom? Who knows, the numbers could get worse before they get better.
  • As can be expected after reading the first two points, we now see an increase in stocks whose 20-day MA has crossed below their 50-day MA. Fully two thirds of stocks are in this bearish situation.
  • The previous week we pointed to a glimmer of hope for the markets as the Aroon indicators had identified more stocks in a short-term up-trend than in a down-trend. This week the tables are turned with down-trends numbering 1950 and up-trends numbering 1893. The difference in favor of down-trends is small but the telling detail is that this is a significant change from the previous week when there were only 1233 down-trends identified.
Alert HQ performance --

This has been a tough market lately. In many cases, stocks that look promising on the charts surprise investors with a bad earnings report. In other cases, stocks that look promising on the charts are just pulled down by the wider currents caused by sell-offs in the overall stock market. This is why it is important to do a little research on the stock picks in the Alert HQ lists to ensure you are comfortable with the longer term prospects for a stock you are buying.

As for some of the picks, here are a few comments. To start with, the very first Alert HQ list that was published looked at a four week window and picked up hundreds of stocks with charts that appeared to reveal reversals in the making. Since that first week, the lists are based on the previous week only and there has been a large reduction in the number of stocks making the list, especially the lists of SELL signals.

Some of the best BUY signals from the early weeks have succumbed to the recent market malaise. Bassett Furniture (BSET) gained 16% in the first week and moved up further in the second week after being recommended. Now, its gain has been reduced to only 2%, a victim of the downturn in the housing market, this week's sell off and what appears on the chart to be a consolidation phase after a steep run-up.

Another stock from the first list that has actually held up very well is American Biltright (ABL) which is now up 25%. This unlikely investment, a company that makes jewelery and floor tiles, is an unexpected winner.

Corporate Express NV (CXP), since being recommended in the February 9 Alert list has gotten a buyout bid from Staples and is now up 62%. TradeRadar couldn't have predicted that but it's interesting to note that something must have been going on with the stock before the buyout announcement was made.

I am no expert on pharmaceutical companies but one of our recommendations, Alpharma (ALO), has done well since being recommended in early February. It is now showing a 23% gain.

We have had a dearth of SELL signals since the first alert list was published but the TradeRadar system was very successful here. I'll list a few of the best SELL signals: MedcoHealth Solutions (MHS) down 54%, CBeyond (CBEY) down 47%, Astronics (ATRO) down 45%, IntriCon Corporation (IIN) down 38%, Suntech Power Holdings (STP) down 29%, Autodesk (ADSK) down 27% and Chipotle Mexican Grill (CMG) down 25%. Most of us who are individual investors are probably not short sellers but this list could have been very lucrative for those who are willing to short stocks.

Unfortunately, I can't say that the Alert HQ lists of stock picks have a perfect record. There have been a few picks that really went the wrong way. Let's see what we have learned.

For example, a number of bank stocks and other financial stocks showed up on the BUY list in the February 2 alert list. This was the result of the rally in financials the previous week. Since that time, banks have again been under pressure and all these picks are now underwater. Since then, I have added the Aroon tests to the selection algorithm and I now require that a stock be trading above its 50-day moving average before it gets on the BUY list. This more rigorous testing should prevent this kind of situation from happening again.

Office Depot (ODP) was another pick on that same list that looked really promising on the chart. Shortly after the Alert HQ recommendation, ODP came out with a disappointing earnings report and it is now down a whopping 26%. I have written in an earlier post that buying stocks immediately before an earnings report can be risky. This is certainly a case in point. The software, however, only looks at the latest price activity which, leading up to that earnings report, sure looked like a solid reversal was underway.

Some of our SELL signals also went wrong. The software doesn't care about industry segments, only price action. Owens-Illinois (OI), a major packaging company in the consumer staples sector, got the sell signal in our first alert list. With the troubles in the markets, consumer staples have been a defensive play for investors and have held their value better than other sectors. Still, the stock was declining, possibly due to a bad quarter and the perception its business supplying solar energy and fiber optics companies was too volatile. Eventually, OI came out with a solid earnings report and benefited from a raised investment rating from S&P. Once again, investing prior to an earnings report can be dangerous whether you are going long or short.

Arch Coal (ACI) is pretty much a similar situation. Strong long-term up-trend with a short-term decline generating a SELL signal based on daily data. When this signal was generated, the stock was down but had bottomed and was already moving up. Today, we would not have generated this false SELL signal because we require that a stock be trading below its 50-day moving average in order to verify the SELL signal. That wasn't the case at the time we recommended ACI as a SELL.

Summary --

As we have worked with the software to generate the weekly Alert HQ lists of stock picks, the system has been refined. We have added the Aroon test for short-term trending, the DMI test as informational data for those considering investing in one of the recommended stocks and the 50-day moving average confirmation. These measures, in combination with the original TradeRadar signal and trend analysis, should go a long way toward reducing false signals.

Still, the stock market is unpredictable, especially during earnings season. I can only advise caution when taking positions immediately prior to an earnings report.

As time goes on, further refinements will be made to the software and I'll be writing about it here. In the meantime, thanks to everyone who has purchased an Alert HQ list of stock picks. I am always interested in everyone's experiences with the lists or with the TradeRadar software.

Alert HQ for the week ending Feb 29, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ.

It was an awful week on Wall Street with a big sell-off on Friday. As can be expected, this made it difficult for last week's alerts to hang on to profits and it also made it difficult to unearth good BUY signals for this week's alerts. This week our list contains only 10 BUY signals, one less than last week.

To my great surprise, this week we have absolutely no SELL signals at all. With the downdraft in the market I had expected to see a hefty list of SELL signals. In digging through the data, however, it appears that many of the stocks currently in the SELL zone, and there are plenty of them out there, generated the initial SELL signal weeks or months ago. Many other stocks are stuck in consolidation patterns with no clear trend apparent.

Later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated and to discuss the performance of some of the picks from past weeks.

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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.