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.
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.
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.