Saturday, June 28, 2008

Alert HQ for the week ending 6-27-2008

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.

The markets tumbled again this week, with the S&P 500 down 3.0% after falling about 3.1% the previous week. At this point the Dow, the NASDAQ and the S&P 500 all have double digit losses year to date.

The Fed met this week and kept rates unchanged. Having delivered hawkish comments on inflation prior to the meeting, the statement merely echoed the recent party line. Economic reports such as durable goods and PCE came in at levels that supported the Fed's characterization of economy activity as "expanding". Nevertheless, the combination of further downgrades of financial stocks, rising oil prices and tech bellwethers offering downbeat guidance conspired to keep stocks on a downward path.

As can be expected, this is making it difficult to find good stock alerts on the BUY side and is putting pressure on previous BUY signals. Again this week, the SELL signals based on daily data greatly outnumber the BUY signals: 44 SELL signals and 9 BUY signals.

As I am traveling this weekend, I will not have time to generate the list of stock alerts based on weekly data.



Wednesday, June 25, 2008

ProShares ETFs - why trading volume makes a difference

ProShares has a diversified lineup of ETFs that allows investors to adopt various strategies based on individual sectors, market-cap, desire to be long or short, etc.

Of the 64 ETFs currently offered, it is clear that some are more popular than others. This popularity is translated into trading volume.

Why volume matters --

The greater the volume, the smaller the bid/ask spread tends to be. Higher spreads are like a hidden fee that subtracts from investor returns. This is especially of concern to short-term traders.

On a related note, an investor might ask if this is a liquidity issue. Is it related to the liquidity of the stocks that make up the ETF? According to IndexUniverse.com, research shows that it is the liquidity of the ETF, and not the liquidity of the underlying components that really matters.

Lower volume can be associated with higher expense ratios. The heavier trading volumes associated with larger funds implies that these ETFs can spread their expenses over wider ownership bases.

The greater the volume, the closer the ETF seems to track its associated index. This effect seems to especially come into play with the ultra ETFs that are supposed to generate 200% of the change in their associated index on a daily basis. The smaller the volume, the more inconsistent the ability to achieve the 200% move. For non-leveraged ETFs, this effect can manifest itself as a divergence between the price
of the ETF and its net asset value (NAV).

Below we present a table listing all but two of the ProShares ETFs and their average daily volume (shares traded) as calculated over the last two years or the life of the fund, whichever is less.


SymbolNameAverage Daily Volume
QIDUltraShort QQQ20042421
SDSUltraShort S&P50010640286
TWMUltraShort Russell20004337620
QLDUltra QQQ4171179
SKFUltraShort Financials3778876
UYGUltra Financials3778258
DUGUltraShort Oil & Gas3703700
DXDUltraShort Dow302454753
SSOUltra S&P5002368347
FXPUltraShort FTSE/Xinhua China 252260873
SRSUltraShort Real Estate892856
EEVUltraShort MSCI Emerging Markets563881
DDMUltra Dow30528774
UWMUltra Russell2000475894
MZZUltraShort MidCap400451919
SMNUltraShort Basic Materials390431
SHShort S&P500174924
DIGUltra Oil & Gas162924
DOGShort Dow30157933
TBTUltraShort Lehman 20+ Year Treasury156322
MVVUltra MidCap400123451
EFUUltraShort MSCI EAFE104662
PSQShort QQQ100591
UREUltra Real Estate81689
USDUltra Semiconductors65585
MYYShort MidCap40064646
SDDUltraShort SmallCap60060777
ROMUltra Technology52511
RWMShort Russell200043922
PSTUltraShort Lehman 7-10 Year Treasury40535
SJHUltraShort Russell2000 Value40356
SKKUltraShort Russell2000 Growth39434
REWUltraShort Technology37704
EUMShort MSCI Emerging Markets33837
SDPUltraShort Utilities28313
SCCUltraShort Consumer Services27736
UYMUltra Basic Materials27550
EWVUltraShort MSCI Japan24811
SSGUltraShort Semiconductors24423
SIJUltraShort Industrials17818
UKFUltra Russell1000 Growth17312
SAAUltra SmallCap60014532
SZKUltraShort Consumer Goods13972
EFZShort MSCI EAFE12423
UKKUltra Russell2000 Growth11173
UPWUltra Utilities10043
SDKUltraShort Russell MidCap Growth9104
SFKUltraShort Russell1000 Growth8403
SJLUltraShort Russell MidCap Value7639
SBBShort SmallCap6007392
UVTUltra Russell2000 Value7349
UKWUltra Russell MidCap Growth6863
UXIUltra Industrials6775
SJFUltraShort Russell1000 Value6667
RXLUltra Health Care6507
UGEUltra Consumer Goods4853
RXDUltraShort Health Care4822
UVGUltra Russell1000 Value4665
UCCUltra Consumer Services4264
UVUUltra Russell MidCap Value3433
LTLUltra Telecommunications1596
TLLUltraShort Telecommunications368

ETFS missing from table: Short Financials (SEF), Short Oil & Gas (DDG).

Stick to those ETFs in the top one third of this list and you will be able to avoid the the problems inherent in the less popular ETFs.



Tuesday, June 24, 2008

Two ProShares inverse ETFs not yet overbought

I wrote a post this past weekend that identified the strongest BUY and SELL signals in the ProShares lineup of ETFs.

All the strongest BUY signals belonged to the short and ultra-short ETFs.

With the market looking shaky today amid bad news from UPS, continue strength in oil, further weakness in home prices, etc., it didn't seem unreasonable to think about a little downside protection.

In the weekend's post, I cautioned readers that it is dangerous to chase the ultra ETFs. They can change direction on a dime and moves of 2%, 3% or more per day are far from uncommon. It may be best for now to stay away from those ETFs that are already on the list of strongest performers.

An alternative is to look at those ETFs who were not on the list of strongest signals. Notable by their absence in the list of strongest BUY signals were the Ultra-Short MidCap 400 (MZZ) and the Ultra-Short QQQ (QID).

These two inverse ETFs having been moving up since the recent market peak in mid-May but not nearly as aggressively as the Ultra-Short DOW 30 (DXD), for example. This is due to the fact that NASDAQ and mid-cap stocks have held up decently during the current down-turn.

If you believe the recent market peak was a sucker's rally and that stocks are headed for further lows, these two ETFs may be good choices. Note that they both trade with decent volume, especially QID.



Monday, June 23, 2008

The Trouble with Trend Reversal Indicators, Part 2

Having been working with the Trade Radar trend reversal indicator for over a year, it is time to talk about insights I have gained. This article is a continuation of the original post titled "The Trouble with Trend Reversal Indicators".

This post is concerned with "follow-through" or the ability for a new trend to fully establish and maintain itself. In other words, did the stock throw a head-fake or did it truly do an about face?

Trend reversals tend to be driven initially by internal factors affecting a stock: earnings or buy-out rumors, for example.

There are also external factors that affect a stock. In the first post we talked about "event risk" or things that come out of the blue that would not have been predictable after having read an 8-K.

One of the more formidable external factors for an individual stock is the market itself.

In my observations, I have seen a number of stocks generate great looking BUY signals. Many of these stocks did see some good follow-through for a time and initially did provide share price gains. Fundamentals for many of these stocks were decent. Then the stocks took a tumble. Why?

Market risk --

It is difficult for a stock's price to avoid being affected by gyrations in the broader market. You may have heard of the term "beta". Beta is a measure of a stock's volatility in relation to the rest of the market. Cash would have a beta of zero. A stock that is exactly as volatile as the market would have a beta of one. A stock that bounces all over the place would have a high beta.

"Correlation" is another term that investors use to describe how closely a stock mirrors the behavior of a particular index or other investment. Correlation ranges from 1 (highly correlated) to -1 (the two investments tend to move in opposite directions).

When you combine beta and correlation you begin to see how the market can impact an individual stock. A plunging market can stop a rallying stock in its tracks. On the other hand, a rallying market can pull up a stock that perhaps doesn't deserve it.

In tracking the performance of our various stock alerts we have seen both of situations play out. If the market turns downward, it often takes many stocks down with it. The opposite situation is captured in the old saying: "a rising tide lifts all boats."

As an added variation on the theme, keep in mind that a sector is really just a subset of the overall market. When a particular sector heads for bear territory, it can easily take down both the good stocks and the bad stocks that make up that sector.

Internal risk --

Stocks making a reversal to the upside are, almost by definition, formerly weak stocks that ran into problems severe enough to cause prolonged down-trends. At the point where a reversal appears to occur, enough investors have bid up the stock to create a bump up in the stock price. If the down-trend is steep enough and the up-turn is steep enough and high enough, we get a TradeRadar BUY signal. If investors become convinced that it's now safe to buy the shares, the reversal is confirmed and the price increases.

What this means is that stocks that have recently begun a trend reversal are vulnerable. They are vulnerable to a withdrawal of confidence on the part of investors. They are vulnerable to declines in sectors and markets. They are not perceived to be as solid as another stock that has proven itself over time. Essentially, there is a lack of trust. When markets turn down, it becomes easy to cut loose the riskiest stocks, those with a poor track record. Our trend-reversal candidates often fall into that category. And sometimes the perceptions are accurate, especially in those cases where the financial good fortune only lasts for one quarter.

Another aspect of being a reversal-candidate is that gains often come quickly after the stock bottoms out. At least that is the kind of chart formation that TradeRadar often identifies. In a down market, these initial spikes upward can lead to a quick retracement as early investors take profits while they can. For low priced stocks, the initial spike up can result in 50% to 100% gains from bottom to peak. It's hard to keep the upward momentum after those kinds of gains, especially if the overall market is working against you.

Conclusion --

Our first post on trend reversal indicators discussed how the lag built into some reversal indicators cause the signal to be generated late.

This post points out that good reversals to the upside can sometimes collapse. The reasons can be related to overall market or sector weakness as well as a lack of confidence on the part of investors.

In these kinds of situations an investor has to make a decision: hold on to the stock or sell it. From a discussion of technical factors, we are now brought full circle to a focus on the fundamentals. If the reversal was based on a jump in earnings, for example, an investor must decide if it was a one-time event or if the company is on a sustained path to increased profitability. In other words, the decision to hold should be based on the financial prospects for the company.

As always, an investor can't live by technical analysis alone. Ultimately, the fundamentals must be acknowledged. And as we pointed out above, general market forces will always have their say.



Can the Saudis keep us from testing the March lows?

I keep thinking things can't get any worse and then they do.

For example, I felt that whether or not all the bad news was revealed by the large banks, it was a foregone conclusion that these stocks would be dogs for months to come. Along came more news of write-downs and capital raising and, to my surprise, it took the market down as if it was something unexpected. Add to that the downgrade of the bond insurers and we had all the excuses needed for a sell-off.

Then we had the sectors most affected by high oil prices. Ford, GM and Fed Ex all contributed to the negative mood in the market this week but, once again, who would ever expect these stocks to do well in the current high cost energy environment?

I have pointed out that recent economic reports continue to be better than awful and that it indicates to me perhaps stocks have room to advance. That idea was overlooked this week as stocks tumbled despite core PPI that was moderate, a suggestion that housing starts are not decreasing so fast anymore and the fact that unemployment claims at least did not increase. A slight dip in industrial production supported the bears but the numbers are nowhere near recession levels.

In any case, investors were intent on selling stocks this week and they did so agressively.

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:

Stock Market Statistics, week ending 6-20-2008
We plot six different indicators. This week, pretty much all of them reflect weakness in the broad stock market.

Moving average analysis --

The bad news in the moving averages just got worse this week. We have seen the number of stocks trading above their 20-day moving average and above their 50-day moving averages decrease dramatically. Less than 2000 stocks are trading above their 20-day MA and only 2275 are trading above their 50-day MA. These are the worst numbers since March.

As a further effect, this week the number of stocks whose 20-day moving average is above their 50-day moving average also plunged. This is typically a somewhat slow moving indicator but this week's action tipped the balance for about 1000 stocks. Less than half of all stocks can now boast that they are trading in a bullish manner based on the 20-day MA above the 50-day MA .

Looking at buying and selling pressure --

Last week the signals from Aroon and Chaikin Money Flow analysis were fully in agreement with all of them painting a bearish picture. This week we have a small divergence that may be cause for hope.

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 dropped yet again last week. That makes four out of five weeks we have seen the number decrease. The number of stocks determined to be in a strong down-trend increased this week also, encompassing nearly 50% of all stocks we examined.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying managed to increase a tiny bit to about 530. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator decreased a bit to under 900. These are slim factors to hang our hopes on but it's about all we've got from a technical point of view.

Looking at the S&P 500 --

The good news is that the S&P 500 managed to avoid falling below the support level in the range around 1310 to 1320. A break down through this level and there is precious little that would keep us from revisiting the March lows or worse.

Chart of SPX, week ending 6-20-2008
Looking at how the sectors in the S&P500 fared, we see that things have gotten even worse than the previous week. There is really no positive news here unless you are overweight energy stocks and perhaps utilities.


Conclusion --

The technical picture as described above is pretty bearish. Last week I mentioned that we were hitting oversold levels but that didn't prevent us from getting more oversold. As a result I am hesitant to bring up that old tune but it still applies. The S&P managed to hold an important support level and that is encouraging as is the slight improvement in Chaikin Money Flow.

It looks like fundamentals are key to this market, especially oil and the state of the financials.

With respect to oil, the news this weekend is that the Saudis have committed to raising production. It seems like only a couple of weeks ago they said they were raising production by 200,000 barrels per day. This last increase did nothing to boost the stock market. Now they say they are offering to increase output by another 200,000 barrels per day "if demand for such quantities materializes and our customers tell us they are needed." Will it even offset the decline in Nigerian production?

As for the financials, thank goodness it has been a quiet weekend, with no new shoes dropping other than a report Citi is laying off investment bankers. Citi has been talking about cost and staff reduction for months now so I assume this shouldn't be a market moving event.

Next week we will see a good number of economic reports that could indeed move the market. There is the FOMC meeting (what will they say? will they change rates?), consumer confidence, durable goods orders, new home sales and existing home sales, revised GDP and initial jobless claims among others.

If these reports continue as they have been, somewhere better than awful and worse than good, we will get to see a demonstration of investor sentiment. Will the glass be viewed as half full or half empty?



Sunday, June 22, 2008

ProShares ETF Report - Strongest BUY and SELL Signals

This is the first of what will be a recurring series of posts where I publish the results of running a number of technical analysis screens against all of the ProShares ETFs. Below we have the list of those ETFs with the strongest technical underpinnings as well as a list of those ETFs that are the weakest.

Strongest BUY Signals --

The following chart lists only those ProShares ETFs where both DMI and Aroon evaluation indicates they are in reasonably strong up-trends.


Symbol Signal Type Name Category 20-Day MA above
50-Day MA
DMI Aroon
DOG BUY Short Dow30 Short Market Cap Yes DMI: strong trend Up (ADX: 26 +DI: 33 -DI: 11) Strong Up trend - Up: 100 Down: 8 Osc: 92
DXD BUY UltraShort Dow30 Short Market Cap Yes DMI: strong trend Up (ADX: 25 +DI: 32 -DI: 11) Strong Up trend - Up: 100 Down: 8 Osc: 92
EFU BUY UltraShort MSCI EAFE Short International Yes DMI: strong trend Up (ADX: 24 +DI: 39 -DI: 17) Strong Up trend - Up: 100 Down: 8 Osc: 92
EFZ BUY Short MSCI EAFE Short International Yes DMI: strong trend Up (ADX: 30 +DI: 54 -DI: 20) Strong Up trend - Up: 100 Down: 24 Osc: 76
SH BUY Short S&P500 Short Market Cap Yes DMI: strong trend Up (ADX: 22 +DI: 30 -DI: 13) Strong Up trend - Up: 100 Down: 8 Osc: 92
SJF BUY UltraShort Russell1000 Value Short Style Yes DMI: strong trend Up (ADX: 28 +DI: 37 -DI: 15) Strong Up trend - Up: 100 Down: 8 Osc: 92
SKF BUY UltraShort Financials Short Sector Yes DMI: strong trend Up (ADX: 35 +DI: 25 -DI: 9) Strong Up trend - Up: 100 Down: 4 Osc: 96
SZK BUY UltraShort Consumer Goods Short Sector Yes DMI: strong trend Up (ADX: 23 +DI: 34 -DI: 12) Strong Up trend - Up: 100 Down: 8 Osc: 92
TLL BUY UltraShort Telecommunications Short Sector No DMI: strong trend Up (ADX: 43 +DI: 69 -DI: 26) Strong Up trend - Up: 100 Down: 40 Osc: 60

After this past week, which saw the market drop by over 3%, it is not surprising to see the short and ultra-short ETFs on a list of gainers. What is significant is that the trend indicators for these ETFs are so strong. Given that these are all inverse ETFs, it indicates a sustained weakness in the underlying sectors.

It is interesting to see that the short and ultra-short international ETFs (EFU, EFZ) are on the list. Remaining bulls have been hoping that global economic activity will support a weak economy in the U.S. From the looks of this chart, that confidence may be eroding.

Also of significance are the ETFs that have not made this list. For example, we don't see the inverse NASDAQ ETFs (PSQ, QID) nor do we see the inverse small cap ETFs (SBB, RWM, SKK). The inverse mid-cap ETFs (MYY, SKD) are also absent. This does provide some small hope that, since the entire market has not broken down completely, perhaps the lagging sectors are close to a bottom.


Strongest SELL Signals --

The following chart lists only those ProShares ETFs where both DMI and Aroon evaluation indicates they are in reasonably strong down-trends.

Symbol Signal Type Name Category 20-Day MA below
50-Day MA
DMI Aroon
DDM SELL Ultra Dow30 Ultra Market Cap Yes DMI: strong trend Down (ADX: 26 +DI: 11 -DI: 33) Strong Down trend - Up: 8 Down: 100 Osc: -92
RXL SELL Ultra Health Care Ultra Sector Yes DMI: strong trend Down (ADX: 24 +DI: 12 -DI: 35) Strong Down trend - Up: 56 Down: 100 Osc: -44
SMN SELL UltraShort Basic Materials Short Sector Yes DMI: strong trend Down (ADX: 24 +DI: 18 -DI: 24) Strong Down trend - Up: 28 Down: 88 Osc: -60
SSO SELL Ultra S&P500 Ultra Market Cap Yes DMI: strong trend Down (ADX: 22 +DI: 13 -DI: 31) Strong Down trend - Up: 8 Down: 100 Osc: -92
UGE SELL Ultra Consumer Goods Ultra Sector Yes DMI: strong trend Down (ADX: 24 +DI: 15 -DI: 44) Strong Down trend - Up: 8 Down: 100 Osc: -92
UVG SELL Ultra Russell1000 Value Ultra Style Yes DMI: strong trend Down (ADX: 23 +DI: 21 -DI: 46) Strong Down trend - Up: 4 Down: 100 Osc: -96
UXI SELL Ultra Industrials Ultra Sector Yes DMI: strong trend Down (ADX: 22 +DI: 18 -DI: 35) Strong Down trend - Up: 8 Down: 100 Osc: -92
UYG SELL Ultra Financials Ultra Sector Yes DMI: strong trend Down (ADX: 37 +DI: 9 -DI: 27) Strong Down trend - Up: 25 Down: 100 Osc: -75

In many ways this chart reflects the opposite of what is going on in the chart of strongest BUY signals but there are a couple of differences. Here we see that investors are fleeing from the Health Care, Basic Materials and Industrials sectors.

With stocks getting cheaper by the day lately, one would think that the value investing style might start to gain some popularity. We see, however, that the Ultra Russell 1000 Value ETF (UVG) has gotten hammered. Apparently, stocks aren't cheap enough yet.

Conclusion --

It is clear from looking at the sectors reflected in the two charts that large swaths of the market are out of favor. Worse, even the defensive sectors are not particularly strong. It appears that the majority of ProShares investors are betting heavily on a select number of sectors.

Does that mean we should rush in and buy the ETFs on the strongest list? If you believe in momentum then the answer is yes. I would caution, however, that it is dangerous to chase these ETFs, especially the ultra ETFs.

Oh, and by the way, the strongest ETF of all is the Ultra-Short Financials ETF (SKF).


Disclosure: none



Saturday, June 21, 2008

Alert HQ for the week ending 6-20-2008

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 can only be termed "scary".

The markets took a real tumble this week, down about 3.1%. As can be expected, this is killing the performance of recent stock alerts. More significantly, this week the SELL signals based on daily data greatly outnumber the BUY signals. We have 48 SELL signals, a record quantity for one week for Alert HQ compared to only 11 BUY signals. Perhaps this lopsided situation is a signal in itself.

This week we have produced a small selection of 3 BUY signals as well as 11 SELL signals based on weekly data. As you can see, SELL signals outnumber BUY signals when looking at weekly data also.

All in all, for the bulls, this ain't pretty. You may want to use our list of SELL signals to help cut losses if you are not someone who is comfortable shorting stocks.





Tuesday, June 17, 2008

NII Holdings - still plenty of opportunity

I have written previously on NII Holdings (NIHD) in a post titled "NII Holdings bounces off bottom - can it keep up the momentum?" The company sells Nextel-branded cell phone service in Latin America including Brazil.

The company recently reiterated that it sees no slowdown in sales and the stock responded by continuing to climb.

In an article entitled "1.2 Billion Mobile Subscribers!", eMarketer discusses how cell phone use is growing in the BRIC countries (Brazil, Russia, India and China).

The article says that cell phones are increasingly the primary on-ramp to the Internet for users in these countries. From a marketing standpoint, the Internet companies with solid mobile offerings will benefit. Yahoo! (YHOO) has made a point of focusing on mobile perhaps even more than Google (GOOG) has. We will see the two companies continue their rivalry on cell phones and maybe there will be an opportunity for Yahoo! to gain some ground.

Getting back to NII Holdings, however, the article provides some positive macro background that supports NIHD's contention that growth remains on track. In Brazil, mobile phone penetration has reached 73% of the population but only 5.1% of mobile phone users access the Internet via their phone. This indicates plenty of room for growth, in terms of new users and especially in terms of up-selling existing users to more comprehensive service plans and higher end phones.

The outlook for NIHD remains positive and, with the stock trading just above its 200-day moving average, it may not be too late to take a position.

Sources: 1.2 Billion Mobile Subscribers!

Disclosure: author is long NIHD at time of writing



Industrial Production - tech propping up the numbers?

The Federal Reserve today reported Industrial Production for May. Production unexpectedly declined 0.2% from the prior month, which was worse than the forecast of a 0.1% increase. Manufacturing output was unchanged in May, the output of utilities shrank 1.8 percent, and the output at mines rose 0.1 percent. Capacity utilization slipped 0.2% to 79.4%.

The following set of graphs comes from the Federal Reserve's web site and show the relationship of high tech manufacturing to industrial production overall.

US Industrial ProductionTake a look at the middle chart, the one that shows percent change year over year. It's interesting to see that the recession in 2000 (gray highlight) and its accompanying brutal bear market in stocks did not see a dip in industrial production as severe as those seen during the 1970's and 1980's recessions.

Looking at the most recent data points in the same chart, it is also interesting to note that without the positive contribution of tech, the percent change in industrial production would now be slipping negative.

It has been documented that manufacturing is no longer as important to the general economy as it used to be. The middle chart seems to support this concept as it clearly displays the percent increases in industrial production have become narrower over time. The top chart also shows how industrial production has been somewhat flat, or at least growing very slowly, over the last decade or so when compared to previous decades of stronger growth.

It's always worthwhile to poke around in the data the Fed makes available to see what's behind the headline announcements that show up on most news sites.

Sources: Federal Reserve Statistical Release - Industrial Production and Capacity Utilization



Sunday, June 15, 2008

S&P 500 Weekly Sector Stats, 6-13-2008

Each week we gather some technical analysis statistics on the overall stock market and in particular the S&P 500. This week's post provides some insight into the continued deterioration of the S&P 500 and the performance of the various industry sectors represented in the index.

The following chart is for the week ending June 6, 2008. It gives a breakdown of the industry sectors and the results of running a number of technical indicators on the stocks in each sector.

SP500 Statistics, week ending 06-06-2008
These stats were captured for a week that ended with a big sell-off on Friday. On the whole, Energy is the strongest sector (no surprise there). Telecom, Utilities and Tech turned in decent performances as well.

This next chart is for the week ending June 13, 2008.

SP500 Statistics, week ending 06-13-2008
During this week stocks sagged further and then staged a decent rally on Friday. Despite the rally, stocks did not regain much momentum. Now we even see Energy giving ground a bit. In nearly every category we see the percentage of stocks generating bullish indicators has decreased. Even the defensive categories weakened.

Below we have the daily chart of the S&P 500. We can see the failure to cross above the 200-day moving average and the failure of support in the area of 1390 to 1400. We now have a downward sloping trend line that, even with Friday's rally, we are no where near crossing.

SPX daily chart, week ending 06-13-2008
The good news is that the S&P seems like it might be holding above support in the 1325 area.

Aroon and DMI show that most stocks in each sector are not exhibiting strong up-trends. The numbers have, for the most part, dropped so low it is reasonable to assume they are over-sold or pretty close to it.

The moving average results, however, still look fairly solid with the exception of the Financial sector and Consumer Discretionary. With more than half of the stocks in each of the remaining sectors still showing their 20-day moving average above the 50-day moving average, there is room for further weakness before the index makes a sustained move upward. On the other hand, the continuing strength in the moving averages despite recent sell-offs might argue that the index has not broken down completely and is poised for gains.

Against a backdrop where most economic reports are less than great but better than awful, I lean toward the bullish camp. The pain in the Financials is a drag on the index as a whole but it is not necessarily detrimental to many individual sectors. As they say, it is a market of stocks...

In any case, at these levels it shouldn't be too risky to be an optimist.



Saturday, June 14, 2008

Can stocks extend Friday's party?

It was another tough week for stocks. As a result of a decent rally on Friday, the more narrowly focused indexes managed to show some strength but the broader market wallowed in weakness. For example, the Dow managed to gain 0.8% this week and the S&P 500 finished unchanged. The NASQDAQ, however, finished the week down 0.8%, the Russell 2000 index of small-caps was down 0.9%. The Russel 3000, which is more representative of the entire U.S. equity market, finished the week down 0.24%

As a result, it seems Friday's strength was centered in a modest selection of large-caps and the broader market continued to suffer or tread water. The narrowness of Friday's advance is borne out by the following market statistics which show stocks in general continuing the downward slide that began several weeks ago.

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 6-13-2008
We plot six different indicators. All of them reflect weakness in the broad stock market.

Moving average analysis --

We continue to see bad news across the board in the moving averages. The number of stocks trading above their 20-day moving average decreased again. If a move upward was being signaled, we would expect to see this indicator increase as more stocks moved above this short-term average. Unfortunately, that is not the case.

We see the same kind of continuing weakness with respect to the 50-day moving average, as well. This is a good indicator of how much damage the last few weeks have done to stocks in general. Well less than half of all stocks have managed to stay above this important moving average.

The number of stocks whose 20-day moving average is above their 50-day moving average has continued to decline also. In the previous week, the decline was small but this week the decline actually accelerated. If there's any consolation, it is that at least the number is still above 50%.

Looking at buying and selling pressure --

In past weeks we have seen small divergences in signals from Aroon and Chaikin Money Flow analysis. This week they are fully in agreement.

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 dropped precipitously last week. That makes three out four weeks we have seen the number decrease. The number of stocks determined to be in a strong down-trend jumped steeply this week, moving all the way up to over 3000 or about 42% of all stocks we examined.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying fell to only about 500 or a mere 7% of all stocks. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator has increased to nearly 1000.

Conclusion --

Once again this week economic reports were reasonably benign. The CPI came out on Friday and showed core inflation rising but under control. This was the impetus that encouraged Friday's rally in stocks. With the dollar showing strength, oil prices at least finished the week off their all-time record high. M&A activity showed that there is still sufficient liquidity in the market to support significant buyouts. Finally, the Fed signaled that rate cuts have probably come to an end. None of this implies that markets should fall off a cliff nor does it imply markets are poised for double-digit gains.

With respect to the technical analysis data though, the outlook is decidedly negative. The only good news in this week's data is that things look so bad it appears stocks are at a significantly over-sold level. A little help from a decrease in oil prices, a benign reading from the Producer Price Index and less than horrible earnings from the several investment banks reporting this coming week could see this market turn around. Absent those catalysts, the technical trends indicate we could see a further slow grinding downwards.



Alert HQ for the week ending 6-13-2008

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.

Despite Friday's rally, there has been a continued deterioration in the market overall. This is reflected in the poor performance of recent stock alerts and the fact that this week the SELL signals based on daily data slightly outnumber the BUY signals.

This week we have again produced a selection of BUY signals based on weekly data. We include all the stocks that have maintained good performance during the last four weeks such that it leads to continued generation of a BUY signal.



Thursday, June 12, 2008

Big gap in social networking site audience

Much has been made about the seeming difficulty of monetizing many of the social networking sites like MySpace and Facebook.

I just came across an article that sheds some light on the subject at eMarketer. The article, titled Baby Boomers and Social Networking, describes the results of a study by ExactTarget. The study reveals that the baby boomers are not particularly fond of social networking sites. For example, only 13% of 55 to 64 year-olds used social networking sites.

Why is this important? A bank robber was once asked why he robbed banks. He replied "because that's where the money is." Well, it's the baby boomers who are most affluent compared to the younger cohorts of social networking site users. This is especially true with respect to the youngest users in middle school, high school and college. It is only reasonable to assume that monetization will lag if the segment of the online audience with the most money to spend stays away.

This gap in the audience for social networking sites may not be so easy to fill. Generational differences in preferences may mean that the typical social networking by definition has little appeal to baby boomers. The sites may do better by focusing on more precise targeting of ads in order to separate users from what little money they do have.




Wednesday, June 11, 2008

Ocwen Financial - making the best of hard times

Everyone knows the current environment has been hard on financials, especially those that have any involvement in residential mortgages.

There are a few firms that are managing to use certain company-specific advantages to hold their own and even prosper. Ocwen Financial (OCN) may be one of these.

Background --

Ocwen Financial Corporation is a business process outsourcing provider to the financial services industry, specializing in loan servicing, mortgage fulfillment and receivables management services.

The company currently operates within two lines of business:

Ocwen Asset Management - comprised of the Servicing, Loans and Residuals and Asset Management Vehicles segments

The Servicing segment provides outsourced loan servicing for subprime loans but does not own the loans. Many of the loans are actually securitized and owned by trusts. The Loans and Residuals segment does hold loans for resale. Asset Management Vehicles holds loans as investments and does securitizations.

Ocwen Solutions - comprised of the Technology Products, Mortgage Services and Financial Services segments.

Technology Products comprises a set of systems that provide support for life of loan activities from origination to servicing to collections. Mortgage Services facilitates loan origination as an outsourcing provider. Financial Services provides debt collection and receivables management.

Risks --

Delinquencies are up industry-wide. Delinquencies and foreclosures result in "advances" and other costs to the company.

During any period in which the borrower is not making payments, the company is required under most servicing agreements to advance funds to the investment trust to meet contractual principal and interest remittance requirements for investors. Luckily, as the servicer, Ocwen is obligated to advance funds only to the extent that they believe the advances are recoverable. In addition, for any advances that are not covered by loan proceeds, most of the pooling and servicing agreements provide for reimbursement at the loan pool level, either by using collections on other loans or by requesting reimbursement from the securitization trust. This at least limits Ocwen's exposure.

Ocwen is also required to pay property taxes and insurance premiums, to process foreclosures and to advance funds to maintain, repair and market real estate properties on behalf of investors.

The bottom line is that it costs the company money to finance these advances and there is a potential that some of the funds will not be recovered.

The company also has a host of derivatives, auction rate securities and various other financial vehicles that have seen some stress in the current environment.

Prepayments are another risk as they tend to reduce the amount of profit derived from the loans.

Ocwen's Advantages --

The company has developed a set of proprietary software tailored to its business. This expertise in software helps make the company a low-cost competitor.

The company has long had a business segment focused on debt recovery. Ocwen last June acquired NCI, one of the largest collections companies in the U.S. With the difficulties in the mortgage market currently, there is no lack of business in this segment. Though recoveries may not be as large as in normal times, the increase in volume more than makes up for it.

Ocwen has used their systems and process expertise to ramp up collections operations offshore. This is further reducing costs for the company even as more collections agents are brought online.

Ocwen has focused on creating repeatable processes and models that can be taught to collections agents and has created flexible systems with scripting engines to ensure that collections processes are consistent.

As NCI is further integrated into Ocwen, NCI will be moved over to the Ocwen systems and the benefits of Ocwen's scripted approach will be used to reduce variability of collectors' performance, enhancing recovery.

Conclusion --

Ocwen is a small cap company that is surviving the mortgage meltdown. Since they do originations, servicing and collections for other financial companies, they have been less hurt by the current environment. They expect to be able to pick up market share as other similar companies withdraw from the industry.

The strong technology segment and offshoring initiatives allow Ocwen to operate as a low-cost provider of business processes.

The company's strength in collections positions it well to benefit from the tough times and the struggles of lenders and borrowers alike.

The company is profitable and reasonably well financed for its size. It suffers by association with the financial sector in general. Given how out of favor financials are now, the stock can be acquired at a reasonable price even as Ocwen is positioning itself to come through the current troublesome environment as a stronger, more efficient company.

Disclosure: author is long OCN at time of writing



Sunday, June 8, 2008

S&P 500 - defensive sectors and energy lead

This post is intended to provide some insight into the deterioration of the S&P 500 and the performance of the various industry sectors represented in the index.

The following chart is for the week ending May 30, 2008. It gives a breakdown of the industry sectors and the results of running a number of technical indicators on the stocks in each sector.

S&P 500, market statistics for week ending 5-30-2008As can be seen, Energy, Telecom, Information Technology and Utilities are the leading sectors with Health Care and Financials bringing up the rear.

This next chart is for the week ending June 6, 2008.

S&P 500, market statistics for week ending 6-6-2008After the past week, Financials take the honors as the absolutely worst performing sector. Consumer Discretionary has also weakened significantly.

It is interesting to note that the Consumer Staples sector actually improved last week. And Utilities and Health Care held their own. These classic defensive sectors showing strength indicate how worried investors were last week.

Energy continues to be the leading sector and why not, with the price of oil setting new records every other day. Other leading sectors, however, have begun to get shaky. Information Technology, though still strong, is showing the first signs of weakness, especially when looking at the Aroon analysis. Telecom has weakness in Aroon but manages to maintain its strength in the other indicators.

Industrials continue their slow descent. Materials took a big hit this week as investors probably see the slowing of the manufacturing economy reducing the demand for materials.

All in all, it is clear that not all sectors are moving in lock step though most stocks did decline somewhat during the last week. What is alarming is to see the defensive sectors begin to take the lead as Energy hits new highs. This implies risk aversion and a further bet on rising oil prices. This is not a positive development for the markets



Oil jumps while the stock market slides down the drain

What a week! Can you spell O-I-L?

Things started out OK. We had another series of economic reports that came in slightly better than consensus estimates. Unfortunately, every week ends with Friday and this Friday was not kind to investors. The May employment report hit and payrolls showed another modest decline though not as bad as expected. The headline unemployment rate, however, jumped from 5.0% to 5.5%, the largest jump in years. Analysts felt that this was explained by an influx of college and high school students just hitting the job market rather than a large decrease in unemployment. Nevertheless, it set a negative tone in trading for the day.

The other bomb that dropped on Friday was the total craziness in the oil market. Crude prices jumped $10 and triggered circuit breakers. The climb in prices resumed, however, and oil ended the day up 8.4%, setting a new all-time record at $138.45. The higher oil climbed, the further the stock market plunged. Aggravating the situation was the dollar, which fell in value and ended the week down 0.6%.

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:

Stock Market Statistics, week ending 6-6-2008
We plot six different indicators. After this past week's market action, to say we have mixed results would be an exercise in extreme optimism. Most of our indicators are moving in a direction that indicates a market that is breaking down.

Moving average analysis --

We see bad news across the board in the moving averages. The number of stocks trading above their 20-day and 50-day moving averages has fallen again, much as it did two weeks ago. We have to go back to April 11 to see numbers this bad with less than half of stocks below their 20-day MA.

The number of stocks whose 20-day moving average is above their 50-day moving average has finally started to decline also. We see in the chart above that this indicator flattened out last week with just over 60% of stocks in this bullish configuration. Now, we see this formerly solid advancing indicator taking a bearish turn downward.

Looking at buying and selling pressure --

This week we see only a small 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 dropped for two weeks and but actually increased a tiny bit last week. The number of stocks determined to be in a strong down-trend, however, has now increased for three weeks in a row, reaching 1850 this week. It is still no where near the level we saw back in early March but the percentage of stocks exhibiting a strong bearish trend has now reached 25%.

We also plot the results of Chaikin Money Flow analysis. The number of stocks undergoing strong accumulation or buying made a nice rebound last week and managed to hold steady this week. Not shown on the chart is the number of stocks shown to be undergoing strong distribution or selling. This indicator stopped increasing two weeks ago, declining very slightly to about 600 last week and declined again this week to just under 580.

Compare to the S&P 500 --

Below we show the daily chart of the SPDR S&P 500 ETF (SPY). You can see the some of the recent peaks in SPY correspond to the recent peaks in the number of stocks trading above their 20-day moving averages.


A more ominous feature of the chart of SPY is the problem with the moving averages. SPY is one of those who are now trading below their 20-day, 50-day and 200-day moving averages. SPY has made two attempts to cross over the important 200-day moving average. It did manage to close above it for a few days but has now fallen well back.

This problem crossing above the 200-day moving average is something many stocks and the major indices seem to be having a great deal of trouble doing.

Conclusion --

I have been expecting the market to move sideways before moving upward but the indicators presented in this post tend toward the pessimistic. If trends can be expected to continue, then the latest trends seem to be moving in the wrong direction. Looking at the chart of SPY, for example, there aren't many levels of support left before we are back at the levels last seen in January and March.

Despite the negative outlook provided by the technical indicators we have discussed above, the economic reports we have received lately still leave some doubt as to whether we are in the midst of a real recession. Our work today is not to provide a prediction but to provide information that may perhaps help you come to your own conclusion.



Saturday, June 7, 2008

Alert HQ for the week ending June 6, 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 took a real beating this week at the hands of oil and a surprising unemployment number didn't help either. This makes three weeks of declining performance in the Dow and the S&P 500 with only the NASDAQ managing to tread water. Friday provided the indignity of the Dow dropping almost 400 points as oil hit a new record and investors tried to make sense of the unexpected spike in the unemployment number. Against this tough backdrop, stocks that generated past TradeRadar stock signals, like most stocks out there, are definitely running into headwinds. This week Alert HQ is split 50-50 between BUY signals and SELL signals with 8 of each.

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 company involved in horse racing and gaming gained 13%
  • A manufacturer of optoelectronics gained 9%
These BUY signals were on the TradeRadar Alert List one month ago. Here are the gains they generated in just four weeks:
  • An oil and gas company that is now up 18%
  • A company engaged in the purchasing and managing of charged-off consumer receivables has gained 16%
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 like they were improving. This week markets took a damaging dive downward. Are we heading to new lows? We'll have to see what the numbers reveal.



Thursday, June 5, 2008

TradeRadar portfolio - June review

I have been writing about the TradeRadar software on a regular basis lately but I have not spent much time discussing my results using the software.

The Track Profit & Loss page of the TradeRadar site shows the results for the stocks that are in our trading portfolio. Note that the ETFs were not chosen using the TradeRadar software but all the stocks were.

The good news is that all but one of the stocks (and one ETF) are, as of today, showing gains. Obviously some have done better than others. All of these stocks have, at one time or another, shown up in an alert list from the Alert HQ process where we scan almost all the stocks on the NYSE, the AMEX and the NASDAQ every weekend looking for BUY and SELL signals.

Having used Alert HQ to weed through all the stocks in the general market and provide a short list of investment candidates for the week, I then had to evaluate each one in turn to determine which ones to actually buy. This is easier said than done and it is why I have started adding fundamental information to the technical data provided by the Alert HQ process.

Let's look at one of the recent additions to the portfolio and how it got picked. Delek US Holdings (DK) is a small-cap that operates in several business segments. It has a refinery in Texas and it owns chains of convenience stores. Its refined petroleum products are distributed to its convenience stores as well as to other customers on a wholesale basis. Not exactly a terribly exciting company.

Still, the chart caused it to surface as a potential BUY candidate. The stock had been in a decline since the middle of last July but now looks like it is beginning a reversal to the upside. At the time the BUY signal was generated, the technical indicators were pretty positive: good signal strength on the TradeRadar BUY signal, DMI and Aroon confirmed strong up-trends, decent Chaikin Money Flow and trend-line angles. The fundamental indicators were also looking attractive: the PE was under 10, the PEG was just a little over 1.0 and the price-to-sales ratio was very low, under 0.20; all told, good indications that the stock was not over-priced. Looking at our annualized free cash flow yield indicator which was sitting at around 13%, it appeared the company is doing well at staying cash flow positive.

So here we have a reasonably-valued company that is in decent financial shape with a chart that gives the impression an up-trend is beginning. The risk factor, however, is oil. If crude oil prices stay high or go higher, DK's margins on their refining business will continue to be squeezed. If oil prices come down, though, this stock should take off.

In summary, it appears that using the Alert HQ lists of BUY signal alerts to pick investment candidates is working for me, especially when compared to last year's results when it seemed half of the picks in the portfolio at any one time were generally showing losses. It is clear, though, that the system is not completely automated yet; there is still a good bit of analysis that is required. That is why I encourage users to really review the fundamentals and put the stocks on a watchlist in order to see which ones emerge as the clear winners.



Monday, June 2, 2008

Are semiconductor shipments a leading indicator of tech strength?

In looking at the recent Durable Goods report at http://www.economicindicators.gov/ it was striking to see that shipments for semiconductors were up over 25% from March to April.

Given that electronics manufacturers need to acquire semiconductors before they can assemble and ship their products, it is reasonable to assume that semiconductor shipments are a leading indicator of electronics manufacturing. To be more precise, semiconductor shipments would be a leading indicator of electronics manufacturing sales expectations.

On the surface, the 25% increase in semiconductor shipments appears to be very bullish. April 2008 shipments compared to April 2007 shipments, however, show a drop of more than 13.5% year-over-year. On a year-to-date basis, semiconductor shipments show a 7.9% drop in 2008 compared to 2007.

Looking at the year-to-date numbers for shipments for the other components of the Computers and Electronic Products sector, we see that there have been small percentage increases for both the Computers & Related Products sub-sector and the Communications Equipment sub-sector.

On a month-to-month basis, however, the Computers & Related Products sub-sector and the Communications Equipment sub-sector have both seen flat or declining shipments as 2008 has progressed.

All told, shipments data implies that electronics manufacturing is holding its own but not showing much growth.

What about unfilled orders as a forward indicator?

This information is not provided for semiconductors. It is, however, provided for the overall Computers and Electronic Products sector and also for the Computers & Related Products sub-sector and the Communications Equipment sub-sector. Yet it seems that the increase in unfilled orders in each of these categories is quite slim.

Interestingly, the SIA April Sales report indicates that semiconductor sales in the Americas increased only 1.3% over the March number. I would have expected to see a stronger correlation between sales (per the SIA report) and shipments (per the Durable Goods report). Instead, semiconductor sales according to SIA seem to be much more in the range of the Computers and Electronic Products shipments and unfilled orders numbers from the Durable Goods report.

Conclusion --

If it is true that semiconductor shipments are a leading indicator it appears that electronics manufacturers must have extremely positive outlooks for the second half of 2008.

Still, that 25% growth in semiconductor shipments seems to be the only number available that reflects that kind of bullishness. I am troubled that it is not confirmed by the SIA report.

Perhaps it is too early in the year for unfilled orders or the SIA sales numbers to reflect second half growth. On the other hand, perhaps that growth is going to prove elusive.



Sunday, June 1, 2008

S&P 500 - sector analysis shows more room for gains

In the process of scanning all the stocks on the NYSE, the AMEX and the NASDAQ this weekend, we have gathered the results of technical analysis on the stocks that comprise the S&P 500. The data is summarized in the following table.

S&P 500
Industry Sector
Aroon - UP Trend % Aroon UP Trend DMI - UP Trend % DMI - UP Trend 20-day MA above 50-day MA % 20-day MA above 50-day MA Total Stocks in Sector
Consumer Discretionary 29 34% 17 20% 45 52% 86
Consumer Staples 18 45% 12 30% 24 60% 40
Energy 32 89% 18 50% 33 92% 36
Financials 16 18% 11 12% 44 48% 91
Health Care 20 38% 9 17% 25 48% 52
Industrials 28 50% 26 46% 43 77% 56
Information Technology 43 61% 34 48% 60 85% 71
Materials 16 57% 6 21% 21 75% 28
Telecom Services 5 56% 5 56% 8 89% 9
Utilities 13 42% 17 55% 27 87% 31

Consumer Discretionary has been in rally mode since March but the numbers now seem to indicate that the sector is on the wane. Though the moving averages indicate the sector is in decent shape, Aroon and DMI indicate that up-trends are weakening or reversing.

The situation in the Financials is even worse. Again, the moving averages indicate the sector is in decent shape, but Aroon and DMI indicate that sustained up-trends are few and far between.

With oil prices where they are it is no surprise to see the Energy sector hitting on all cylinders. The sense of the sector being over-bought is strong, however, and the DMI number shows a potential weakening in trend.

Consumer Staples are turning in a mediocre performance and Health Care can't seem to get going. The fact that these two sectors, often thought of as refuges in times of declining markets, may be a strong indicator that stocks are not yet in a bear market. The numbers in the table bear this out.

Tech and the NASDAQ have been outperforming recently and we can indeed see trend and moving average numbers that support this.

Interestingly, Telecom Services is second only to the Energy sector in terms of percentage of stocks in an up-trend and with bullish moving averages.

All in all, the sectors in the S&P 500 appear to be in decent shape with the exception of Financials and Consumer Discretionary. With the further exception of the Energy, Telecom and Utilities sectors, there seems to be plenty of room for further gains without hitting levels of being over-bought.




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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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