Saturday, May 31, 2008

Markets rebound - is the danger of new lows over?

Markets made solid gains this week though in most cases the gains were not enough to reverse the previous week's losses.

Investors cheered the moderating in oil prices mild though it may have been and market sentiment took a turn for the better. We had another week of economic reports that were at least not horrible. As such, bulls could point to the fact the reports did not paint a picture of an economy in a tailspin. On the other hand, the bears could easily say that the reports did not send an "all clear" signal either. Sentiment this week, then, seemed to be slightly in favor of the bulls.

Some examples: consumer spending in April was flat in real terms. While this does not imply a consumer-led rebound in the economy it also doesn't imply an economy plunging into recession. Durable goods orders surprised investors with a 2.5% gain ex-transportation, implying that the manufacturing sector is still standing despite the woes in the auto and airline industries. First quarter GDP was revised from an anemic 0.6% to 0.9%, still weak but at least the revision was upward. Initial claims came in flat at 372,000, signaling a job market with plenty of room for improvement but with unemployment still well shy of recession levels.

Against this backdrop, investors decided it was safe to bid up stocks. Not aggressively but in an orderly manner with the Dow and the S&P gaining more than 1% on the week and the NASDAQ and the Russell 2000 gaining more than 3%.

An overview of the short-term technical picture is presented in the following chart of market statistics collected by our Alert HQ process. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. We also collect various technical information that we roll up into a chart like the one below:


As can be seen, we plot six different indicators. After this past week's market action we now have mixed results with many of them moving in a direction that indicates a rebound in the market and few signaling caution.

Moving average analysis --

We see good news and bad news in the moving averages. The good news is that the number of stocks trading above their 20-day and 50-day moving averages has rebounded strongly from the previous week's big decline, with about 58% of stocks now trading over these levels. Though the rebound was strong, we are still below previous peaks.

The number of stocks whose 20-day moving average is above their 50-day moving average just barely registered an increase. We see in the chart above that this indicator has flattened out with just under 58% of stocks in this bullish configuration.

Looking at buying and selling pressure --

This week we see a divergence in signals from Aroon and Chaikin Money Flow analysis.

The Aroon analysis we do shows stocks in strong up-trends or down-trends. The chart shows the number of stocks found to be in strong up-trends has dropped again for the second week in a row, from 2660 down to 2145. The number of stocks determined to be in a strong down-trend has increased for the last two weeks, reaching 1600 this week. Still, it is no where near the level we saw back in early March.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying has made a nice rebound, going from 695 last week to 872 this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator stopped increasing last week, declining very slightly to about 600.

Conclusion --

All told, the moving averages are telling a good story of resilience in stocks and reasonably broad-based participation. There is room to advance without stocks appearing to be too oversold. On the other hand, on the chart it looks like we are establishing a series of lower highs in the numbers of stocks trading above the various moving averages and that is worrisome.

We see Aroon indicating that many stocks no longer qualify as being in confirmed strong up-trends. On the other hand, we have Chaikin Money Flow indicating that more stocks are seeing buying pressure. This is consistent with a situation where stocks are recovering from a sell-off. The apparent divergence may actually represent a positive outlook for the markets.

Once again, market statistics seem to support the idea that the path of least resistance is up. We may meander in a trading range for a while but the market seems to be saying that a break to new lows is unlikely.




Alert HQ for the week ending May 30, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. This week's results are now available.

Markets gained this past week though only the NASDAQ managed to gain as much as it lost in the previous week. Nevertheless, investors should be happy to see the slide in stocks prices slow and the gains in oil moderate. Economic news wasn't bad considering the situation the U.S. economy is in currently. All in all, it was a reasonably quiet week of modest gains.

Last week markets were down significantly and it was tough to find stocks that were generating BUY signals. With some strength returning this week, Alert HQ was able to identify a very interesting mix of stock alerts. As a result, this week we have a good list of 15 BUY signals and only 5 SELL signals available at Alert HQ.

Looking back --

Here are a couple of examples of BUY signals from last week's TradeRadar Alert List and the gains they generated in just five days:

  • An oil refining company gained 6%
  • A health services company gained 2%
These BUY signals were on the TradeRadar Alert List one month ago. Here are the gains they generated in just four weeks:
  • A real estate investment trust that is now up 31%
  • A U.S. telecom company that has gained 18%
  • A regional bank that is up 11%
Looking ahead --

As usual, later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated. Last week market internals looked terrible. This week was a definite improvement. Are we poised for more gains? We'll have to see what the numbers reveal.

[UPDATE] This week TradeRadar Alert HQ is pleased to offer an added bonus: Anyone who purchases this week's lists of 15 BUY signals and 5 SELL signals based on daily data will also receive a list of 23 BUY signals based on weekly data at no extra charge!



Tuesday, May 27, 2008

Using the new TradeRadar software - a more complete strategy

With the latest release of the TradeRadar software (we're up to version 3.0.1 now), I thought I should provide a description of the trading system the software supports.

History --

The earlier releases of the software focused on technical analysis of closing price data.

We started out with the basic BUY/SELL signal logic including measures of how strong the signal is, how well-shaped the signal is, etc.

The next version added trend lines whose angles were measured and used to determine whether the signal was strong enough.

With these indicators, we added what look like colored LEDs on the Dashboard screen of the software where the detail of the indicator computations is presented. The LEDs would be set to Red/Yellow/Green based on whether the individual indicator was strong enough to support the BUY or SELL signal. For example, if you are looking for a BUY signal and the LED is Red, then the indicator is saying that a BUY signal is not confirmed. If all or most of the LEDs are Green, then the BUY signal is confirmed.

Since the TradeRadar software attempts to identify changes in trend, version 2.0 brought a set of technical indicators that are commonly used to identify or confirm trends. We added Aroon analysis, DMI and Chaikin Money Flow. We also provided an indicator that showed where the stock was in terms of its 50-day exponential moving average. All these indicators also had LEDs to quickly show the outcome of the computation and whether they confirmed the BUY or SELL signal.

The latest TradeRadar system --

With version 3.0 we added fundamental indicators to the program. This is a departure from the previously purely technical approach; however, it makes sense.

Let's look at what's going on when we use TradeRadar to identify a BUY signal. We look for a stock that has been in a prolonged down trend over the course of six months to a year and then we try to identify whether a trend reversal is taking place. What does this imply?

We are trying to catch a stock soon after it bottoms and begins to turn up. In other words, we are looking for a stock when it is relatively cheap. What does this sound like? It sounds a lot like value investing.

Momentum investors are well-known chart users. Value investors focus on the fundamentals. We have now added a number of fundamental indicators specifically chosen to help determine whether the stock is over-priced, fairly priced or a good value.

The new indicators are as follows:

  • Price to Sales Ratio - the lower the number, the better value a stock is
  • Price Earnings Ratio - the lower the number, the better value a stock is
  • Market Capitalization - this number is intended to help identify whether a stock is a micro-cap and is also used in the Cash Flow Yield calculation
  • Price Earnings Growth (commonly known as PEG) - the lower the number, the better value a stock is
  • Cash Flow Yield - the higher the number, the more cash per share is being generated by the business that is available to shareholders. Data from most recent quarter is used and then annualized.
As with all the other indicators, we have the Red/Yellow/Green LEDs to show when the individual indicator is in a good range. As a user, you do not have to become an expert in financial ratios any more than you need to become an expert in technical indicators. The program does the work for you.

Note that for more detail you can look up all these fundamental indicators at various web sites such as Investopedia.

Using the fundamental indicators --

Taken together these indicators provide a good picture of whether the company is profitable, whether its price fully reflects its growth rate and whether it is generating enough cash to run the business. Whether a company is profitable or not, price-to-sales is a good way to determine whether the stock is over-valued.

There are many stocks that do generate good technical BUY signals. As an investor, however, wouldn't you rather choose the company that is in the best financial shape?

Hopefully, the new TradeRadar software will help you separate the weak stocks from those about to become resurgent. The combination of technical and fundamental indicators should help minimize downside risk and provide a good analysis framework for your investing decisions.



Sunday, May 25, 2008

Stocks drop - are we in a trading range or in free fall?

Many analysts and investors have been saying that the market is ready to take a breather. This week it took a really deep breath...

We have seen over the last couple of months that all news, good or bad, was mostly taken in stride. This week, it was a different story.

Things this past week didn't seem any worse than they had been in previous weeks. Economic reports were not particularly bad though the PPI report heightened concern that inflation is creeping though the supply chain. There was a drop in existing home sales, but then we already knew that housing was in trouble. Financials are still in trouble as evidenced by problems reported at Moody's, UBS and AIG but that shouldn't be a surprise either. Airlines and auto makers also contributed to the negative tone but why that was a new factor I don't know.

What really stopped the market in its tracks was the combination of oil and the Fed. Oil turned in another strong performance this week, closing over $131 per barrel. The Fed released minutes of their last meeting and language was quite negative. The Fed implied that further rate cuts were unlikely as the risk of inflation appeared to be equal to the risk to growth. And speaking of growth, the Fed also revised their estimates of GDP downward while increasing their estimates for unemployment and inflation. Some of this was telegraphed by the statement at the time of the last FOMC meeting but the language of the minutes provided insight that served to frighten investors out of stocks.

All told we have seen a real shift in sentiment. Much of what hurt this week's market was not particularly new. Indeed, the news could be categorized as more of the same. Yet this time the market sold off.

An overview of the short-term technical picture is presented in the following chart of market statistics collected by our Alert HQ process. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. We also collect various technical information that we roll up into a chart like the one below:

Market Statistics, week ending 5-23-2008
As can be seen, we plot six different indicators. After this past week's market action we now have many of them moving in a direction that indicates weakness in the market.

Moving average analysis --

The picture here is not pretty. The number of stocks trading above their 20-day moving average has taken a huge tumble, falling from over 4800 down to 3350, a drop of 1450. In percentage terms, we used to have 66% of stocks above their 20-day MA and now we have 46%.

The 50-day moving average reacts more slowly than the 20-day moving average but here too the damage was surprisingly severe. Last week we had over 4670 stocks trading above their 50-day moving average, this week the count is down to 3900.

One of the most solid indicators we have been tracking is the number of stocks whose 20-day moving average is above their 50-day moving average. This indicator has been marching steadily upward since March. This week it actually declined slightly. We can expect to see further deterioration in this indicator now that so many stocks are trading below their 20-day and 50-day moving averages.

Looking at buying and selling pressure --

This week we see more consistent signals from Aroon and Chaikin Money Flow analysis.

The Aroon analysis we do shows stocks in strong up-trends or down-trends. The chart shows the number of stocks found to be in strong up-trends has dropped by a modest 240. The number of stocks determined to be in a strong down-trend has increased by about 220. 1420 stocks, or roughly 20%, are now in a strong downtrend.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying has decreased from about 1100 last week to only 695 this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator increased last week, with the number of stocks in this category going from 440 up to 600.

Looking at the S&P 500 --

As we usually do, we will use the SPDR S&P 500 ETF (SPY) as a proxy for the market in general. In the chart below we see that SPY sold off strongly this week and failed at several technical levels.

Chart of SPY, week ending 5-23-2008The list of technical tests that failed is long: SPY failed to stay above the 200-day moving average, it dropped below support in the $140 range, it failed to stay above the downward trend line whose high point was established last October and it dropped below the upward trend line whose low point was established in March. Other technical indicators are equally weak: DMI is somewhat bearish, MACD has turned down and SPY is below its 20-day moving average.

That said, there is technical hope. SPY is sitting right at its lower Bollinger band and is still a bit above its 50-day moving average. According to RSI, it is no longer over-bought and Aroon analysis shows that SPY is still in a general up-trend.

Conclusion --

The sentiment, fundamentals and technical indicators all argue for further consolidation. I don't believe stocks are in free fall; for now, the operative word is consolidation.

Moving averages show stocks have broken down but will they drop further? Three weeks ago stocks advanced to a point where I didn't think they could keep up the pace of the rally. The post I wrote at the time predicted a trading range. There was a pullback and then a move higher. Now, here we are three weeks later with roughly a 5% pullback from the high. I suspect we could see stocks give up another few percent before the bottom of the range becomes clear.

Fundamentals in a number of industries were not great to begin with even as stocks rose. Some of those industries such as financials, homebuilding, autos and airlines continue their tough times. Other industries like technology and those involved in commodities continue to at least muddle along and provide support to the market.

Negative sentiment prevailed this past week. Positive sentiment could return and drive the market higher again but only if this week's economic reports cooperate. We have a full slate of reports coming up and if the majority turn out to be passable to decent, stocks should hold the bottom of their range and perhaps move up a bit.

As a result we will have to keep an eye on the economic calendar and be ready to duck. We will be seeing consumer confidence, new home sales, durable goods orders, preliminary GDP, initial unemployment claims, crude inventories, personal income and personal spending and Chicago PMI. This should give us a pretty complete read on the state of the economy.

It should be an interesting and possibly very exciting week. And let's hope oil doesn't set any more records again this week.



Saturday, May 24, 2008

TradeRadar software - Online version discontinued

I have discontinued supporting the online, browser-based version of the TradeRadar software.

There have many new improvements to the desktop version of the software that I would like to add to the online version. Unfortunately, the install process is getting too complicated with multiple sets of components that need to be loaded to a user's PC.

It would be best if all online users would convert to the desktop version which, in addition to all the new indicators, also provides portfolio tracking tools.

I apologize for any inconvenience this may cause. Please try the new version 3.0 of the desktop TradeRadar software. It is definitely the best version yet!



Alert HQ for the week ending May 23, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. This week's results are now available.

Oil prices hit new highs this week but this time major stock averages tumbled. Sentiment turned negative as inflation became a concern and Fed minutes showed little sign of further rate cuts. As a result, this week we have only 5 BUY signals and 10 SELL signals.

Looking back --

Here are a couple of examples of BUY signals from last week's TradeRadar Alert List and the gains they generated in just five days:

  • A digital identity assurance company gained 7%
  • A pharmaceutical company gained 3%
These BUY signals were on the TradeRadar Alert List one month ago. Here are the gains they generated in just four weeks:
  • A real estate investment trust is now up 25%
  • A regional bank that is up 11%
  • A U.S. telecom company that has gained 10%
Looking ahead --

As usual, later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated. Market internals clearly reflect the decline in markets this week. Momentum appears to have stalled. Is this just a healthy consolidation or something worse? Stay tuned for the full analysis.



Friday, May 23, 2008

TradeRadar software version 3.0 - Bug Report

This past weekend, without much fanfare, I rolled out the latest version of the TradeRadar software, version 3.0.

The software now retrieves some fundamental data from Yahoo Finance to help in making your trading decisions. Yesterday, Yahoo changed something in the URL for financial data retrieval and it no longer works as it used to. This broke my various web widgets as well as TradeRadar and I have been scrambling to roll out fixes.

This post is to announce that the fix for TradeRadar version 3.0 has been deployed to the Trade Radar web site and is available for download.

If you have already downloaded the full version, you will only need to download the upgrade. Here is a link that will take you directly to the upgrade page:

Download Version 3.0 Upgrade

As an added bonus, I have added a new feature to the Dashboard screen: Cash Flow Yield. This indicator is computed by taking the most recent quarter's free cash flow (operating cash flow minus capital investments) and dividing by the market capitalization. I multiply by four to generate an annualized number. By converting cash flow to a yield (ie, a percentage) it has the same form as a per share dividend yield.

What is important about this indicator is that it tells you if a company is generating enough cash to run the business and whether any cash is left over. It is less susceptible than earnings to accounting shenanigans.

As we typically look for reversals to generate BUY signals using the TradeRadar software, we only take into account the most recent quarter. The assumption is that previous quarters were probably bad and that the most recent one might show the beginnings of a turn-around.

Note that in my rush to get the software fix rolled out I have not updated the help file yet. I will announce when the new help file is available for download.



Thursday, May 22, 2008

Chip makers and semi equipment manufacturers on divergent paths

I have come out bearish on the semiconductor equipment industry before and the latest numbers from SEMI do nothing to change my attitude.

The chart below shows the dismal trend. Bookings are about 8% less in April than in March. More ominously, the April 2008 number is 32% lower than April 2007. Associated with this, the book to bill ratio has now dropped to 0.81, indicating orders are coming in at a slower rate than shipments are going out. In general, growth in the industry can be considered to be flat to down.


We have in the past pointed out that over-capacity in the memory industry is keeping a lid on semiconductor equipment sales growth. On the flip side, red-hot growth in the solar industry is providing some support to those semiconductor equipment manufacturers that offer a product in this segment. Applied Materials (AMAT) comes to mind. Without the solar mini-boom I suspect this chart would look even worse.

In contrast to the equipment makers, we have the semiconductor manufacturers themselves. Below we see a chart of worldwide chip sales.


The chart shows the usual end-of-year boom-to-bust seasonality that chip sales tend to display. It also shows the beginning of a rebound in sales in March.

Now look at the chart of the PowerShares Dynamic Semiconductor Index ETF (PSI). It almost the inverse of semiconductor sales! Note that this ETF contains a mix of chip makers and semiconductor equipment makers though the chip makers are in the majority.


The industry in general is kind of a mess. A small minority of the semiconductor equipment companies are doing well; the rest not so much. This remains a sector to avoid.

The chip makers are also turning in mixed results but at least worldwide sales are starting to show an upswing. If the consumer can afford to continue his/her love affair with electronics the upswing will continue. The semiconductor ETFs have been rallying which indicates to me that the large and mid-cap companies are finding favor with investors. There have been many disappointments among individual stocks, however, making the sector a tricky place to put money to work.

For now, the semiconductor ETFs seem the best way to play the sector, especially as the recent pullback begins to make them more attractive. Having rallied 33% from the January low, PSI, for example, is still up 27% even after the two big days of selling we saw earlier this week. I suspect it will get cheaper still and provide a more conservative entry point within the next week or two.

Disclosure: author has no positions in any stocks or ETFs mentioned in this article

Sources:

NORTH American Semiconductor Equipment Industry Posts APRIL 2008 Book-to-Bill Ratio of 0.81

STATS: Global Billings Report History (3-month moving averages) 1976 -March 2008



Wednesday, May 21, 2008

Can AOL stop dragging Time Warner down?

AOL and parent Time Warner (TWX) have been in the news quite a bit lately. Time Warner today reported it is spinning off its cable unit and will receive a $9.25B dividend in return.

So the ongoing transformation of the company continues.

With the ebb and flow of Microsoft/Yahoo! deal rumors Time Warner's AOL unit has occasionally popped up as a potential player. With AOL, their transformation has been a public and often-criticized drama that seems to go on without end.

This might be a good time to see what progress AOL has made.

AOL is pursuing a three-pronged strategy. They are working to extend and capitalize on their most popular products, properties and features. They are looking to profit from the long tail. They are committed to creating a formidable ad network. Let's look at each in turn.

Product extension --

AOL has recently closed the purchase of Bebo, the British social network. Bebo has more than 40 million members worldwide. In the United States, however, it ranks a distant third behind MySpace and Facebook.

Here's why this is significant for AOL:

Bebo will form the centerpiece of AOL's newly created People Networks business unit. People Networks will integrate AOL's other community applications and tools, including instant messaging, chat and e-mail into Bebo. Users will be able to merge AIM and Bebo profiles so they can use common screen names without re-registering. In addition, People Networks will integrate other recent AOL acquisitions, including widget technology company Goowy Media and social search question and answer
service Yedda.

Here's why it may not be all it's cracked up to be:

It is becoming common knowledge that it is hard to monetize social networks. The merging of profiles provides at least an improved advertising potential for AOL. The hope is that AOL will be able to monetize this audience in ways that other social networks haven't. Even if they can pull it off, the modest audience size in the U.S. may make it hard for AOL to see the benefits they are seeking.

Despite the caveats, the acquisition does make sense. Bringing Bebo in-house and integrating all of AOL's community tools into it does provide AOL with a more complete social networking platform. With all the kids who are using AIM and ICQ, AOL can make a play at early acquisition. By providing the one-profile approach, it is easy to become a Bebo user as a side activity to using AIM or email.

Profit from the long tail --

AOL has said it will focus on serving niche audiences with the launch of dozens of specialty web sites.

Why this is a good idea:

AOL is attempting to do a better job of attracting advertising revenue to offset its rapidly declining Internet access business. The company is hoping that by providing a more targeted experience for users, more accurately targeted ads can be served. As a result of more accurately targeted ads, there should be higher click-through rates. That means ad rates can be raised and AOL's revenue will climb.

This approach is an effort to begin building web ad inventory that is separate from the AOL portal. The knock against portals is that they are too general in their content and therefore, it is harder to ensure marketers are reaching the customers they are looking for. By moving down the "long tail" and capitalizing on many users in numerous smaller, more defined groups, AOL expects to actually increase the total size of their audience, even as it fragments that audience.

Ironically, it is the AOL portal, with its millions of daily visitors, that provides the launch pad for all the niche sites that AOL intends to create.

Why this is harder than it looks:

AOL refers to the niche sites as "passion points" but the success or failure of the niche sites may indeed depend on the passion of those in charge of generating content. If the niche sites have a corporate feel, lack a strong point of view and fail to provide a compelling reason to users to visit and return, AOL may end up just squandering capital and distracting management by going in too many directions.

There are some early signs of success. According to traffic measurements by comScore Inc., AOL has had seven consecutive months of year-over-year growth in both unique visitors and page views. For the entire first quarter, page views for AOL's content-focused sites, which exclude e-mail, instant messaging and the general AOL.com portal, grew 22 percent to 9.5 billion compared with the same period in 2007. The content sites had 55 million visitors in April, up 12 percent.

The traffic growth, however, hasn't translated to ad dollars, which were flat in the first quarter.

Ad Network Expansion --

"Platform-A is AOL's way of turning itself inside-out, and refocusing on serving ads outside of AOL across the Web." AOL has taken the opportunity to focus on serving ads for any advertiser on any web property. The company is not limiting itself to just serving pages of its own content.

Why this is a good idea:

According to ComScore, AOL's Platform-A is the leading online advertising network, reaching 167 million unique visitors in February and edging out Yahoo! by 5% and Google by 10%.

AOL has built Platform-A by acquiring a series of advertising companies such as Advertising.com, Tacoda, Quigo and Third Screen Media at a cost of about $1 billion.

AOL Chairman and CEO Randy Falco says that at this price, Platform-A was a bargain compared with Microsoft's $6.1 billion purchase of aQuantive and Google's $3.1 billion acquisition of DoubleClick, about 10 times DoubleClick's revenues. According to TechCrunch, that would give Platform-A a top-end valuation of around $20 billion, which is what all of AOL was valued at when Google took its 5% stake.

Why this is harder than it looks:

AOL has made mistakes integrating all these acquisitions into a single "Platform-A" advertising unit. Its sales forces weren't aligned, and in some cases they were undercutting one another on prices. Early results, accordingly, were mixed. Non-search ads on AOL sites declined 18 percent compared with the same period in 2007 and ad dollars were flat in the first quarter. Yet, Platform-A saw big growth in ads that AOL brokers for third-party sites. You guessed it: these are the sites vying for the same eyeballs as AOL's new niche sites.

Conclusion --

The re-invention of AOL continues. The most conspicuous success is Platform-A but even the new expanded network of web sites including the AOL portal and all the niche sites are showing growth. Management has at least committed to experimenting and trying new things (Bebo, for example) and inevitably some of the things will work and some won't. In the meantime, the Internet access business continues to wither away and AOL is pushing hard to be one of the top players in the ad network space.

It seems that AOL is at least being somewhat conservative in how much they are paying for some of these moves. Platform-A was put together without breaking the bank. Bebo's price seems too high to me but then the company could have gotten really carried away during the some of the recent mania for social networking sites and paid a lot more. The niche sites AOL is creating may not be terribly expensive as each is quite focused and has many characteristics of blogs. Blogs tend to not be that expensive to set up and run so the incremental cost will revolve around the acquisition of talent to create content.

So AOL is working to attack the dual problems of sagging revenues and becoming an Internet has-been. They are seeing traffic improve and that is an important first step. If they can just start to monetize more of that traffic and see some of the revenue numbers start to improve, that would be the confirmation investors need to accord the AOL unit a higher valuation. And that would certainly benefit parent Time Warner and its stock price.

Disclosure: at time of writing author is long TWX



Saturday, May 17, 2008

Stocks show broad strength - is a breakout in store?

In last week's post we saw stocks were weakening but we said "don't throw in the towel yet". This week we reaped the rewards of holding steady.

An overview of the short-term technical picture is presented in the following chart of market statistics collected by our Alert HQ process. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. We also collect various technical information that we roll up into a chart like the one below:

Market Statistics, week ending 5-15-2008
As can be seen, we plot six different indicators. After this past week's market action we now have all of them moving in a direction that indicates continued strength in the market.

Moving average analysis --

Markets did well this past week and it is clearly reflected in the moving averages. The number of stocks trading above their 20-day moving average rose sharply, increasing by almost 800. Similarly, the number of stocks trading above their 50-day moving average also rose, increasing by almost 600.

We see a continued increase in the number of stocks whose 20-day moving average is above their 50-day moving average. This bullish indicator has continued climbing steadily for 8 weeks now.

All told, between 4000 and 5000 stocks out of about 7200 are trading above important moving averages. There may be some flavor of being over-bought in these numbers but it is undeniable that stocks are exhibiting broad-based strength.

Looking at buying and selling pressure --

Last week we saw some mixed signals from Aroon and Chaikin Money Flow analysis. This week we see consistency across both types of indicators.

The Aroon analysis shows stocks in strong up-trends or down-trends. The chart shows the number of stocks found to be in strong up-trends has increased slightly. The better news, however, is that the number of stocks determined to be in a strong down-trend has decreased, dropping by almost 400.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying has increased from about 1000 last week to about 1100 this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator decreased again last week, with the number of stocks in this category going from 480 down to 440.

Looking at the S&P 500 --

In the chart below we see that the SPDR S&P 500 ETF (SPY) has continued to make good steady progress. As we usually do, we will use SPY as a proxy for the market in general.

Chart of SPY, 5-16-2008
We can see on the chart that SPY has held above the downward sloping trend line, the upward sloping trend line and the horizontal support line. SPY almost touched its 200-day moving average during Friday's trade.

Looking at other technical indicators, we see the following:

SPY has a relatively strong DMI reading. Indeed, 182 of the stocks in the S&P 500 are registering up-trends with decent strength according to our DMI analysis.

In terms of Aroon, fully 306 stocks in the S&P 500 are exhibiting strong up-trends. Unsurprisingly, SPY itself is also showing a strong up-trend according to Aroon.

The number of stocks in the S&P 500 whose 20-day moving average is above their 50-day moving average now numbers 358 or almost 72%. SPY also has its 20-day moving average above its 50-day moving average. Indeed, the ETF is pretty much following its 20-day moving average upwards.

Conclusion --

Many financial bloggers have been complaining that recent rally attempts have not been accompanied by adequate volume. The chart shows that recent up volume has not been as strong as the down volume we saw at the January and March lows. Nevertheless, the analysis presented above demonstrates that a large majority of stocks are participating in this recent up trend. Granted, volume is not through the roof. Still, the broad-based nature of the current advance, the confluence of indicators and fairly decent volume all provide a degree of confidence that this rally has further to go.

Having said that, we all know that stocks do not going up in a straight line. I have discussed in a previous post that a new trading range could be in the making and I have admitted in this post that stocks could be over-bought. Regardless of these caveats, everything we have discussed in this post seems to point to continued strength.

For those who watch charts, it can be seen that each of the major averages is currently closing in on its 200-day moving average. If the strength I am detecting continues, we will be seeing each of them break through this important level in the very near future. I would expect that would bring a lot of more buying into the market and maybe even power the averages into positive territory for the first time this year.



Alert HQ for the week ending May 16, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. This week's results are now available.

Oil prices hit new highs this week but major stock averages managed to gain anyway. Sentiment continued to improve as retail sales turned out to be decent, housing starts surprised to the upside and weak manufacturing surveys were shrugged off. As a result, this week we have 16 BUY signals and only 2 SELL signals.

Looking back --

Here are a couple of examples of BUY signals from last week's TradeRadar Alert List and the gains they generated in just five days:

  • An oil and natural gas company gained 17%
  • A company engaged in the purchasing and managing of charged-off consumer receivable portfolios gained 6%
These BUY signals were on the TradeRadar Alert List one month ago. Here are the gains they generated in just four weeks:
  • An insurance company received a buyout offer and is now up 44%
  • Another oil and natural gas company has gained 32%
  • A telecom company operating in Latin American has gained 26%
Looking ahead --

As usual, later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated. At first glance, it appears that market internals are rebounding after a couple of lackluster weeks. Are we gathering the momentum for a breakout? Stay tuned for the full analysis.



Thursday, May 15, 2008

TradeRadar Version 3.0 - Advanced Release Available

As a courtesy to those who use the TradeRadar software and read this blog or subscribe to the RSS feed, I wanted to provide advance notice that the version 3.0 upgrade package is available at the following link:

Download Version 3.0 Upgrade

This download page is not yet public and can only be accessed from this blog post.

Note that this assumes you have installed one of the previous versions of TradeRadar. This upgrade download package includes new or updated components; it is not the full install.

What's new in this version --

The software adds a number of new indicators. Rather than making users become experts on numerous kinds of technical and fundamental analysis, we have extended the simple color-coded system we introduced in previous versions to cover the new indicators. As always, Green is good, Red is bad and Yellow implies caution.

There are several bug fixes and improvements in the trend line angle analysis. You can read the details in the TradeRadar help file that is included in the download package.

Some of the new features are described below:

New technical indicators --
  • Aroon - Shows whether a stock is trending or oscillating. Also gives an indication of how strong an existing trend may be.
  • DMI - Directional Movement Index. An indicator developed by J. Welles Wilder for identifying when a definable trend is present.
  • Chaikin Money Flow - Combines price and volume to show how money may be flowing into or out of a stock.
  • 50-day moving average confirmation - indicates where the most recent closing price is in relation to this important moving average
As you can see, all the new indicators are most useful for determining trend. Since identifying trend reversals is what TradeRadar is all about, these new indicators will help us decide if the trend reversal is valid.

Fundamental indicators --

The following financial information is now included on the Dashboard screen:
  • Market capitalization - useful if you choose to avoid micro-caps, for example
  • Price/Earnings ratio - can be used as a value indicator, to determine if a stock is too expensive or whether it has earnings at all
  • Price/Sales ratio - another value indicator, especially for stocks that are not profitable
  • PEG ratio - price/earnings growth ratio, a value indicator
Each has a Red/Green/Yellow signal associated with to indicate level of risk based on the value.

The name of the stock or ETF will also be displayed on the Dashboard now.

Email if you experience problems, have questions or want to provide feedback.



Tuesday, May 13, 2008

Finally a bottom in NAND pricing?

I have written before about SanDisk (SNDK) and have owned the stock several times over the years. Recently, the stock seems to have bottomed at about $20 and has now rebounded to over $30.

Today's strong move up was due to a bullish opinion on the company from Citigroup's Craig Ellis. He sees the stock hitting $35 based on tier-1 OEM customers poised to provide large orders, more products designing in ever greater quantities of flash (solid-state disk drives, for example) and a supply environment more conducive to firming prices.

Ellis could be right in his call. SanDisk reported earnings in mid-April that were less than expected but revenues that beat expections. Management pointed to tough pricing that kept margins under pressure.

So has NAND pricing finally hit bottom? Let's hope so. To show how serious the pricing pressure has been, the unit price of the benchmark 8Gb NAND flash chips for high-end handheld devices declined to $2.7 from $8 last September. Here is a quick survey of several sources that might shed some light on the subject.

First, we have a report today from DRAM Exchange. Here is the money quote: "demand for NAND Flash will improve as end product makers stock up in anticipation of 2H08 hot season. Because of the reduction and relatively conservative capital expenditures, we expect oversupply in 2Q08 will improve and reach a balanced condition in 3Q08. Subsequently, we expect NAND Flash price to stabilize and gradually rebound as the 2H08 demand increases."

Next we have a couple of reports from the Korea Times. The first one, from 3-27-08, supports our thesis that supply has stopped growing at a rate exceeding demand. The report states that Hynix Semiconductor, the world's No. 2 memory chip manufacturer after Samsung Electronics, said it will curtail its investment in chip production lines in the latter half of the year as unit prices of both memory and flash chips have fallen below the break-even point.

The second report from the Korea Times, posted 4-3-2008, pertains to Samsung. In this case, the manufacturer has said it has no intention of reducing output.

Finally, there was a report from InternetNews.com from 5-9-2008. The title of the post says it all: "Memory Prices Heading Up." The post quotes Nam Hyung Kim of iSuppli as saying that OEMs used inventory from mid-Q1 to mid-April, resulting in very few orders. This also reduced the amount of memory being ordered, which forced memory makers to cut back their manufacturing. "Price is going up because now is the time for OEMs to acquire more inventory," Kim said. "So we are detecting a lot of orders from OEMs that aren't just for now, but so they can build some inventory for the holiday season. Prices are pretty much at the bottom. If we expect prices to go up, then the best time to get it is now."

So once again, have we really seen the bottom in NAND flash pricing?

Despite Citi's Mr. Ellis, I can't agree that the answer is a clear cut "yes". Hynix has stopped investing in more capacity but, as far as I can tell, they have not actually reduced output of current manufacturing capability.

The good news is that demand appears to be increasing. Some of this is a seasonal effect as manufacturers ramp up for holiday sales. As Mr. Kim of iSuppli says "Flash demand is 85 to 90 percent consumer-driven, and consumer demand slowed down due to weak consumer confidence. NAND flash should be more sensitive to the economic conditions."

So we see that finally we are dependent on the stretched consumer to put a bottom in for the NAND industry by stepping up and purchasing electronic gadgets and PCs. This leads us to the question of whether the consumer has the ability to keep spending on non-essentials in the face of rising gasoline prices, falling housing values, a shaky job market, etc. That, I'm afraid, is a discussion for another time.

Disclosure: at time of writing, author has no position in SNDK



Sunday, May 11, 2008

Rally tires, but don't throw in the towel yet

In last week's post we determined the rally was moderating. This week we got confirmation that this is true.

An overview of the short-term technical picture is presented in the following chart of market statistics collected by our Alert HQ process. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. We also collect various technical information that we roll up into a chart like the one below:

Market Statistics, week ending 5-9-2008As can be seen, we plot six different indicators. After the past week's market action we now have three moving in a direction that indicates continued strength in the market. The other three are registering the opposite.

Moving average analysis --

This week we saw a clear decrease in the number of stocks trading above their 20-day and 50-day moving averages. This is a definite sign of weakness. Nevertheless, the total count of those stocks trading above these levels is still around 4000 and that is well over half of all stocks. So generally speaking, there is still a reasonable amount of broad-based strength that remains.

At first glance it appears odd that the number of stocks whose 20-day moving average is above their 50-day moving average has increased again this week given what we just described in the preceding paragraph. We need to keep in mind that the moving averages lag the actual price action, hence the seeming incongruity. In the previous paragraph we discussed how the actual price had closed above or below a particular moving average. Here we are talking about how two moving averages are behaving in relation to each other.

In any case, the fact that this indicator has continued to increase should be taken as a positive for now. Unless we get a good bounce in this week's trading action, though, we will probably see the number of stocks whose 20-day moving average is above their 50-day moving average begin to decline. That would definitely be of some concern.

Looking at buying and selling pressure --

We see on the chart above that our remaining indicators are painting a mixed picture again this week. The Aroon analysis shows stocks in strong up-trends or down-trends. The chart shows the number of stocks found to be in strong up-trends has decreased slightly. However, we also see that the number of stocks determined to be in a strong down-trend has decreased.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying has increased from about 850 last week to about 1000 this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator has decreased after a jump last week, with the number of stocks in this category going from 580 back down to 480.

Looking at the S&P 500 --

In the chart below we see that the SPDR S&P 500 ETF (SPY) has failed to break out completely but is still in the game.

Chart of SPY, 5-9-2008
After breaking above resistance at 140 or so, the ETF has fallen back to under $139. The ETF got close to the 200-day moving average but didn't manage to touch it let alone break above it. Volume has been decreasing slightly even as the ETF has moved up strongly from its March low. All these are cautionary indications.

On the other hand, there are two trend lines in play and the ETF has managed to stay just above both of them. Note in the chart above how the downward sloping trend line meets the upward sloping trend line just about at the point where SPY is currently sitting.

Conclusion --

The moving average analysis seems to show a market that for the short term has peaked and is retracing it earlier advance. The Aroon and DMI analysis indicates that the weakness may not be accelerating. The S&P 500 seems to be hanging in there, just barely. All in all, things are somewhat precarious but not outright bearish. We could be in a simple consolidation phase or beginning of a new trading range.

This upcoming week, however, has a very full economic calendar. Now that we have laid out the technical situation, we should be prepared for the reports that are coming that could cause the market to jump or to plunge. Some of the big ones to watch out for: retail sales, CPI, initial claims, the NY Empire State Index, the Philadelphia Fed manufacturing survey, building permits and housing starts. In other words, we will get a read on consumer spending, inflation, manufacturing and housing - all the important indicators of economic health.

It is likely that at least some of this week's economic reports will disappoint. So be prepared for more volatility. Until proven otherwise, though, I am sticking with my thesis that we will not be seeing a precipitous fall to the neighborhood of the January and March lows. Don't throw in the towel on this market, yet.



Moving averages and DMI for stocks in the S&P 500 - what can we learn?

Here are some interesting tables of data I just derived from running the Alert HQ process. We scan about 7200 stocks and ETFs each weekend looking at various technical analysis characteristics. The following tables show some numbers for the stocks in the S&P 500.

Moving Average Analysis --

Here we present the number of stocks in the index whose 20-day moving average is above their 50-day moving average. The data is presented by industry sector.

20-day MA above 50-day MA Industry Sector
55 Consumer Discretionary
25 Consumer Staples
33 Energy
57 Financials
25 Health Care
44 Industrials
49 Information Technology
17 Materials
6 Telecommunications Services
23 Utilities

When the 20-day moving average of a stock is above its 50-day moving average, it is generally considered to be a bullish sign of strength in the chart.

From the table we see that after the recent down week in the markets there are still 334 stocks out of 500 with a 20-day MA above a 50-day MA. That is roughly equal to two thirds of the stocks in the index.

The good news is that it indicates the stocks comprising the index are in a strong position.

The bad news is that this seems to indicate a continued overbought situation.

The unexpected news is related to the industry sectors.

The numbers are highest for Financials and Consumer Discretionary. These are the two sectors that most analysts, pointing to the ongoing credit crunch, housing problems, a weary consumer, etc., consider to be the weakest from a fundamental viewpoint. It proves, however, that the stocks that were most beaten down a couple of months ago have made quite a comeback. Well over half of the stocks in each of these sectors are doing well. Can they hold onto their gains?

Many analysts have also been surprised that the Health Care sector has not performed better given that it is often a refuge when markets are in trouble. We see here that Health Care isn't doing all that badly with approximately half the stocks in the sector reflected in the number above.

Large cap tech was expected to do well and we see that the Information Technology sector is indeed delivering sizzling strength with 49 of 71 stocks still bullish.

There are no surprises in the Energy sector. With oil prices going through the roof, it would be natural to expect this sector to be leading the market and we see 33 of 36 stocks with their 20-day MA above the 50-day MA.

DMI Analysis --

The chart below presents the result of applying Wilder's DMI analysis to the stocks in the S&P 500. This chart paints a distinctly different picture.

DMI - UP Trend Industry Sector
22 Consumer Discretionary
10 Consumer Staples
16 Energy
19 Financials
9 Health Care
23 Industrials
31 Information Technology
8 Materials
6 Telecommunications Services
12 Utilities

DMI, or Directional Movement Indicator analysis, attempts to determine the direction of a trend and how strong that trend may be. The TradeRadar software interprets a decent value of ADX, over 20, to be sufficient to make it on this list.

We have a total of 156 stocks registering an UP trend. This is less than one third of the stocks in the index.

Looking at DMI, suddenly the Financials don't look nearly so strong. Same with Consumer Discrectionary.

Energy stocks are still doing well but it is clear there has been a weakening in trend.

Conclusion --

What are these market statistics telling us? Don't be surprised if we see a rotation out of over-bought and weakening Financials and Consumer Discretionary and into other sectors. The recent market rally has crested and general weakness in stocks was detected again this week. This was especially evident in Financial stocks.

The combination of DMI and moving average analysis indicates that many stocks have reached a peak and their short-term trend is no longer up. The 20-day MA may still be above the 50-day MA but the direction of the 20-day MA is now probably down. The question is whether the support of the 50-day MA will hold for many of these stocks whose DMI already says the trend has become neutral or down.

If we are actually in a new trading range as I discussed in a post last week, it might make sense to see some of the former leaders decline, making room for a new set of market leaders on the next upswing. It would also be expected to see DMI registering less stocks in a clear UP trend.

And if the major indexes indeed test their lows again, we might see numbers for Utilities and Consumer Staples rise even further.

NOTE: this post is a correction and expansion of yesterday's post which had some incorrect numbers.



Saturday, May 10, 2008

Alert HQ for the week ending May 9, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. This week's results are now available.

This week the major averages were down roughly 2%. Oil, AIG and the perennial party pooper Citigroup were the major drivers. As we wrote last week, the current rally was weakening and a potential new trading range might be developing. Against this backdrop it was hard to find too many stocks going up. As a result, our Alert HQ list of signals has shrunk this week to only 9 BUY signals. In addition, we have 4 SELL signals.

Looking back --

Here are a few examples of BUY signals from last week's TradeRadar Alert List and the gains they generated in just five days (and during a down market, too):

  • A company providing business process outsourcing to the financial industry gained 19%
  • A semiconductor designer and intellectual property provider gained 8%
  • A marketer of a range of information technology products and services gained 7%
  • A home-based health care provider gained 6%
These BUY signals were on last month's TradeRadar Alert List. Here are the gains they generated in just four weeks:
  • A pharmacy benefit manager has gained 22%
  • A semiconductor manufacturer has gained 21%
  • A diversified industrial and engineering company has gained 15%
  • A provider of worker's compensation and liability insurance has gained 13%
Looking ahead --

As usual, later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated. At first glance, it appears that market internals are weakening, as can be expected when the markets experience a down week. How bad is the damage? Stay tuned for the full analysis.



Wednesday, May 7, 2008

How vulnerable is the economy to individual industry sectors?

I recently wrote a post where I offered that the economy was seeing bear markets in certain specific industries. I mentioned the airline industry, homebuilding and financials and that it seemed that the other sectors of the economy were in OK shape.

In thinking about this I began to wonder how much impact the industries in bear markets would have on the economy as a whole. As a way to begin to gain some insight on this, I looked at the details of the government's Gross Domestic Product report. The GDP report provides a number of data tables that break down the headline number into various components.

Unfortunately, the numbers provided are not quite specific enough to zero in on airlines, for example or even financials. Still, it has been a useful exercise.

The approach I took was to look at two aspects of the issue. First, what percent of GDP a particular industry represented. Secondly, how had that percentage changed from a year ago.

In the first quarters of 2007 and 2008, we had the following results for industries that are in trouble:







Sector% of GDP,
1Q-2007
% of GDP,
1Q-2008
Motor vehicles and parts3.3%3.0%
Furniture and household equipment3.1%2.9%
Residential Investment5.1%3.8%
Transportation2.6%2.6%


In the following table, we show some sectors that are thought to be causing consumers pain:




Sector% of GDP,
1Q-2007
% of GDP,
1Q-2008
Food9.7%9.7%
Gasoline, fuel oil, and other energy goods2.4%3.0%

It's true that I'm no economist, but what I think can be derived from these tables is that the U.S. economy is so huge and complicated that problems that are isolated to a few sectors may not actually tip the economy as a whole into a severe recession. As can be seen in the tables above, no one sector comprises more than a few percent of GDP.

The auto industry is clearly in trouble and as a percentage of GDP we see it has fallen about 9% (from 3.3% to 3.0%) over the last 12 months. Nevertheless, as only about 3% of GDP, this sector cannot alone be considered the driver of a recession.

We see a similar situation with Residential Investment. It has dropped 25% but it was only 5.1% of GDP to start with.

There are areas where inflation may be causing price increases that may force certain sectors to become larger as a percentage of GDP. Food, for example, is a large component at 9.7% but it is holding steady. Gas and fuel are obviously climbing, registering a 25% increase, but as a percent of GDP are still in low single digits.

The conclusion I draw from this is two-fold. First, if we see enough industry sectors decline, we will indeed see a meaningful drop in GDP that would lead to recession. Secondly, if some sectors decline but most stay steady, as we are seeing in the most recent GDP report, there is a good chance we will avoid recession or perhaps only experience a mild recession.

Source:
Bureau of Economic Analysis, National Economic Accounts
(http://www.bea.gov/national/index.htm#gdp)



Tuesday, May 6, 2008

Nextel better off on its own?

Sprint Nextel (S) has been in the news quite a bit lately. First, there is news that Deutsche Telekom might make a bid for the company. Then we hear that Sprint may be seeking to spin off Nextel. The latest news is that the Sprint Clearwire (CLWR) WiMax combination is on again with backing from a number of big players.

In all the discussion, most writers take pains to point out what a disaster the original Sprint-Nextel merger has been. The finger is usually pointed at Nextel which has established a dismal trend of losing customers and is now embroiled with the FCC in a disagreement over how to handle network interference with radios used by police and firefighters.

Do Nextel's problems indicate something inherently wrong with the franchise or are these problems the result of the merger?

It may be instructive to look at how the Nextel brand is doing in a situation that doesn't include Sprint.

NII Holdings (NIHD) is a company I have written about before (read earlier post). The company essentially provides Nextel service in Latin America using the same Motorola iDEN technology and the Nextel brand.

Where Nextel's U.S. customer base declined by 2.8 million in 2007, NII Holdings saw their customer base grow from 3 million to over 5 million at latest count.

On April 4, NII Holdings announced that its first-quarter net profit rose 35% to $113.6 million, or 65 cents per share, from its year-ago profit of $84 million, or 47 cents per share. Analysts had predicted a profit of 63 cents per share. Operating revenue climbed 39% to $993.2 million as the company added 321,700 subscribers.

Profitability for the Nextel segment of Sprint Nextel? The company is not breaking Nextel out separately; it is lumped into the wireless category. What we see is that in the fourth quarter wireless segment revenues experienced a 2% sequential decline and a 6% decline from the fourth quarter of 2006. Adjusted Operating Income was $168 million in the fourth quarter, compared to $514 million in the third quarter and $652 million in the fourth quarter a year ago. Suffice to say that these numbers are not pretty.

Conclusion --

Nextel's best chance to prosper may indeed be if Sprint spins it off on its own. The success of NII Holdings indicates that Nextel has a viable product and a viable brand. The problem is that here in the U.S. the brand has been eroded. The confusion of trying to combine the Sprint and Nextel networks has served neither company well.

With Nextel's easy to use push-to-talk technology still a product differentiator there could still be a place for the company in the U.S. telecom market. Perhaps it won't be the biggest player but, by concentrating on core markets that value the technology Nextel offers, they could return to profitability and reverse the exodus of customers.

This is not to say that an acquisition by a company that understands and supports the brand might not also result in a positive outcome. It is not clear that Sprint did anything other than try to buy Nextel's customer base. An acquirer with deep pockets could provide the capital needed to get Nextel moving, straighten out the back-end technology issues that will surely result from splitting from Sprint and begin to drive a marketing plan to return Nextel to the public's good graces. There is still potential in the Nextel brand and product.

Disclosure: at time of writing author is long NIHD but has no position in S



Sunday, May 4, 2008

Rally moderating - new trading range in store?

Now that the S&P 500 has broken above 1400, we will be looking to see if the index can hold its gains and build on them. Many technical analysts believe that piercing this level makes a significant move upward very likely.

There is a vocal camp that takes the opposite position. Based on the economic backdrop, this group thinks that we deserve to be deeper in bear market territory. Though the worst of the credit crunch may be behind us, these bears say that there is plenty more bad news out there waiting for investors.

It is a fact that whole industries are in bear markets of their own right now though the stock market and economy as a whole has managed to avoid that state. It is clear that financial companies, despite the rebound in their stock prices, are undergoing a severe contraction. Airlines are going bankrupt left and right. Homebuilders, though it looks like their stocks have bounced lately, are still caught in a situation where the demand for their product, new housing, is practically non-existent in many parts of the country. We could see similar action in commodity-related companies if it turns out we are witnessing a bubble bursting in that sector.

As we review various surveys and government reports, certainly the news is not particularly bright. On the other hand, it is not getting any worse. The various manufacturing surveys show that sector is still in contraction, just barely, but that the amount of contraction has not increased. It is the same with durable goods. The numbers are certainly not great but they haven't fallen off a cliff yet. In both cases, strength in exports has supported activity in the manufacturing sector and provided a floor under the numbers.

We see the same kind of pattern in the employment and unemployment numbers. The layoffs are coming from the industries mentioned above that are in bear markets of their own. The remainder of the economy continues to more or less tread water. This past Friday's Non-Farm Payrolls report indicated the economy lost 20,000 jobs. This is nothing to brag about but it sure beats the loss of 85,000 jobs many economists expected would be reported.

The Fed has just reduced rates by a quarter point and has hinted that it may pause. The markets have taken a schizophrenic reaction to this news. Commodity stocks have fallen on the assumption that the dollar will rise, making commodities themselves less expensive in dollar terms. Stocks rallied based on the belief the Fed will cut again if necessary but in the mean time the rising dollar will lower gas and food prices for struggling consumers. Let us not forget, however, the rising dollar will hurt those manufacturers who are dependent on growth in exports.

When the backdrop is as confusing as this, I tend to look at the charts for clarity. Let's start with the chart of market statistics collected by our Alert HQ process. Each weekend we scan over 7200 stocks and ETFs looking for BUY and SELL signals. We also collect various technical information that we roll up into a chart like the one below:

Market Statistics, week ending 05-02-2008
As can be seen, we plot six different indicators and four are moving in a direction that indicates continued strength in the market. The other two are registering increased selling and distribution.

Moving average analysis --

We continue to see more stocks whose prices are rising above their moving averages. The number of stocks trading above their 20-day moving average has increased again to about 4670. The number of stocks trading above their 50-day moving average has increased to about 4445. What worries me about these two indicators is that the rate of increase has slowed down and, in the case of the 20-day MA, we still have not exceeded the peak reached one month ago.

What is more encouraging is that the number of stocks whose 20-day moving average has made a bullish cross-over above their 50-day moving average has continued increasing at the same rate we have seen for six straight weeks now.

All told, the moving average analysis shows that the majority of stocks continue to make gains and that the major market averages are not rising solely as the result of a few big bellwethers. On the other hand, it looks like the gains in many stocks may be moderating as the 20-day MA statistics begin to slow.

Looking at buying and selling pressure --

We see on the chart above that our remaining indicators are painting a mixed picture. The Aroon analysis shows stocks in strong up-trends or down-trends. The chart shows the number of stocks found to be in strong up-trends has increased again. However, we also see that the number of stocks determined to be in a strong down-trend is also increasing.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying has declined from about 1180 last week to 850 this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator has increased, with the number of stocks in this category jumping from 480 to 580.

It appears that these two indicators are telling us a somewhat different story than the moving averages.

The next chart to review is that of the SPDR S&P 500 ETF (SPY). As discussed last week, we were on the verge of breaking through resistance (denoted by the horizontal line) and above the downward sloping trend line.

Chart of SPY, week ending 5-2-2008This was indeed accomplished this past week. Skeptics would point out that volume was not especially heavy. Was this a significant breakout, then, one from which there will be no looking back? That was not quite proven last week. Nevertheless, this was a very positive development and bodes well for future gains.

In the short term, SPY could do some backing and filling around the 140 level which should now act as support. Note that SPY is just below its 200-day moving average. This will probably provide another challenge as SPY at first fails to break through. With the old trendline now providing support though, I think it won't be long before we pierce the 200-day MA also.

Conclusion --

The economic backdrop remains less than ideal but at least the horrible news seems to be abating. Whether you believe the government numbers or not, things do seem to be less bad than they were. With respect to stock prices, markets will experience continuing economic headwinds as a moderating influence, preventing euphoria. Will it be the wall of worry the markets like to climb? Let's hope so.

The market internals we track seem to be signaling the rally in stock prices is slowing down but not giving up. Given the number of stocks that are above their moving averages, however, it also seems that there is very broad-based strength in the market today. This should continue to mitigate against a significant drop in the major stock indexes.

I believe the indicators such as Chaikin Money Flow and Aroon are showing two forces at work. First, the stocks that reported poor earnings are being punished. Secondly, there is some profit taking or selling into strength that is occurring. That is not unexpected as SPY, for example, has moved up over 11% since its March bottom.

The most likely outcome over the short term is a new trading range developing. The market will need to digest the breakout we just saw and balance the desire to drive prices higher with the realization the economy still has pockets of significant weakness. The breakout indicates to me that we will see higher prices but the indexes will not skyrocket. On the other hand, when the inevitable profit-taking kicks in, I don't believe we will see new lows.

All told, it isn't a bad time to be long equities.

Disclosure: author has no position in SPY



Saturday, May 3, 2008

Alert HQ for the week ending May 2, 2008

This post is to announce that the latest list of stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. This week's results are now available.

This week markets logged some solid gains on economic news that pleasantly surprised investors by not being as awful as expected. The Fed and earnings reports likewise failed to derail the major indexes. The S&P 500 even broke through a significant technical resistance level. Against this reasonably positive backdrop we see the strength noted in past posts continuing. As a result, this week's Alert list contains 36 BUY signals, an increase from 22 in the prior week, and only 7 SELL signals.

Looking back --

Here are a few examples of BUY signals from last week's TradeRadar Alert List and the gains they generated in just five days:

  • A real-estate investment trust that gained 18%
  • A semiconductor equipment manufacturer that gained 7%
  • A bank that gained 7%
  • A food company that gained 6%
These BUY signals were on last month's TradeRadar Alert List. Here are the gains they generated in just four weeks:
  • A semiconductor manufacturer that gained 22%
  • A manufacturer of truck components that gained 21%
  • An IT infrastructure company that gained 21%
  • A telecom/cable company that gained 18%
Looking ahead --

As usual, later this weekend I will be writing another post to describe my analysis of the market statistics the Alert HQ software has generated. At first glance, it appears that market internals are gaining strength except for a couple of indicators. Do we need to worry? Stay tuned for the full analysis.




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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.




 
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