‘Summer’s over, kids are back to school, and the market tacked on another 11% while we were on vacation.’ ‘Is it too late to buy?’ ‘Should I sell?’ ‘Nothing good ever happens in the month of September, right?’ These are the types of questions that I have been fielding over the course of the past couple of weeks.
Let’s look at what is; During the past week the market averages pulled back and this has made people nervous. Of course we'd all like to see the market go straight up but, just like humans, the market inhales and exhales. During the exhales, it is important to determine if it is an exhale or more like a gasp for breath - like 2008's market.
Using geek speak and info I gleaned from stats 101 - The average S&P 500 component has contracted from 46% overbought on its distribution curve to roughly 20% overbought. What this tells me is that the market pullback was just an exhale. Should we start to see more exhaling we may want to take a more defensive approach but as it stands right now all of our risk indicators for the equity market remain positive, albeit at higher risk levels.
Therefore, while these questions make for good fodder with the media you may rest assured that I have tools to manage your account no matter what the market may throw our way.
Friday, September 4, 2009
Friday, August 28, 2009
Demand is Winning the Battle
There are many old sayings on Wall Street. One of my favorite is “let the trend be your friend”. What’s amazing is that these sayings have been around for many years because they have an uncanny knack for being true. Another favorite is “bulls make money, bears make money, while pigs get slaughtered”.
The rally in the market over the past five months has been much welcomed by many. To some though, it has been inexplicable, and to others it has been downright baffling. Judging by the talking heads, the fundamental analysis or economic outlook, for that matter, has simply offered no ‘logical’ explanation or ‘warning’ that investors would be in a buying mood. This is why I find tremendous value in following soulless indicators, like the NYSE Bullish Percent and relative strength, to guide my investment allocations.
I find these indicators to be useful. For example, the primary market indicator (NYSE Bullish Percent - BPNYSE) reversed into a column of X’s on March 12th of this year indicating that demand was taking charge, and despite a brief period in a column of O’s (supply) in June and July, the BPNYSE has been in a column of X’s (demand), suggesting an offensive posture for about 80% of the time since March. I don’t begin to profess to know why demand was winning the battle back in March, and we typically don’t find out for some time after the fact, but what I do know is that the irrefutable laws of supply and demand are in force on Wall Street the same way they affect produce in the supermarket. Further, we know that when there are more people willing to buy a stock than there are willing to sell, the price of the stock must go up. That being the case, it appears that there are many investors out there looking to get more invested, and even though our indicators are at high levels the offensive team remains on the field.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
The rally in the market over the past five months has been much welcomed by many. To some though, it has been inexplicable, and to others it has been downright baffling. Judging by the talking heads, the fundamental analysis or economic outlook, for that matter, has simply offered no ‘logical’ explanation or ‘warning’ that investors would be in a buying mood. This is why I find tremendous value in following soulless indicators, like the NYSE Bullish Percent and relative strength, to guide my investment allocations.
I find these indicators to be useful. For example, the primary market indicator (NYSE Bullish Percent - BPNYSE) reversed into a column of X’s on March 12th of this year indicating that demand was taking charge, and despite a brief period in a column of O’s (supply) in June and July, the BPNYSE has been in a column of X’s (demand), suggesting an offensive posture for about 80% of the time since March. I don’t begin to profess to know why demand was winning the battle back in March, and we typically don’t find out for some time after the fact, but what I do know is that the irrefutable laws of supply and demand are in force on Wall Street the same way they affect produce in the supermarket. Further, we know that when there are more people willing to buy a stock than there are willing to sell, the price of the stock must go up. That being the case, it appears that there are many investors out there looking to get more invested, and even though our indicators are at high levels the offensive team remains on the field.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Tuesday, August 18, 2009
Similarities between the 80's recession and today-
Interestingly, history has shown that economic recessions are not necessarily bad for the market because the stock markets are always looking ahead, the recession of the early-1980s serves as a great reminder of this. In 1980 the US economy was dealing with rampant inflation and a burgeoning recession. Largely because of this, gold prices rose from a low of $104/ounce in 1976, reaching $850/ounce by January of 1980. To further confuse the issue, the Fed had the discount rate set at 12% and the country was entering an election year.
At the close of 1980 the US economy continued to struggle as the Fed discount rate reached 13% and the prime rate peaked at 21%! Ronald Reagan entered office in 1981 seeking aggressive reductions in domestic spending & tax cuts. Reagan succeeded in the latter largely due to his economic advisor, Arthur Laffer; know for the ‘Laffer curve’ which illustrated that government revenues would increase as tax rates fell. Naturally, these policies were greatly debated, not only for the principal of Laffer’s theory but also for the budget deficits they would produce in the near-term if inflation remained high. Complicating matters further, Reagan inherited a US Economy that was a mere few months from entering its longest economic contraction since the Depression (16 months). Fortunately, following that recession we experienced one of the longest sustained growth periods in this country's history - but at the time, comparisons to the 30’s were being made, just like our current recession.
Of particularly interest to me are the similarities between the 80’s and today:
By August of 1982 ‘talking heads’ were debating whether the market was reacting to the end of a deep recession, or simply experiencing a ‘bear market rally’. Similar to the most recent ten year period, investors had experienced a ‘lost decade’, as the Dow was down 17% for the 10 years leading into August 1982. Today, investors can look back 10 years and see that the DJIA has lost about 12%. Despite the current economic backdrop of budget deficits and a deep recession, we see the market indexes behaving in a way that is at least comparable to that of the 1982 bottom.
Despite the news in ‘82, the market had bottomed and the supply-demand relationship pointed to offense, but those who myopically stared at the economy for insight saw nothing but inflation, unemployment and deficits. The recession would ‘officially’ end in November of 1982, by that time the S&P 500 had rallied 33% from its lows. The recession of the 80’s actually ended with the stock market higher than it was when the recession began! The best returns were yet to come however, as the S&P 500 would rally for the next 5 years without a correction of 20%, or more.
Sentiment can change quickly, in either direction, and no apologies will be given afterward. This is yet another reason why I use soulless and unemotional indicators to keep me heading in the ‘right ‘direction. I have thrown out my (office) TV so the ‘talking heads’ will not influence my decision making. The supply-demand relationship indicated that demand was taking control in mid March (2009). The market rallied into mid-June and then took a breather to digest the move. Mid-July saw a resumption of the market’s upward move. I don’t know what the future holds, but I will continue to rely on the tools that have served me well thus far.
As an aside; a client called several months ago because they were alarmed that a TV commentator had said that the rally was not ‘good’. I have been in this business since 1983 and have come to appreciate all market rally’s….When I inquired why the media figure did not like the rally – the answer was that there was not much cash going into the market. Again, insight gained over 26+ years has shown me that I want to be invested before all the cash comes pouring in – not the other way around.
If you know anyone who you feel would benefit from a logical and organized approach to investing – feel free to pass along this link.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
At the close of 1980 the US economy continued to struggle as the Fed discount rate reached 13% and the prime rate peaked at 21%! Ronald Reagan entered office in 1981 seeking aggressive reductions in domestic spending & tax cuts. Reagan succeeded in the latter largely due to his economic advisor, Arthur Laffer; know for the ‘Laffer curve’ which illustrated that government revenues would increase as tax rates fell. Naturally, these policies were greatly debated, not only for the principal of Laffer’s theory but also for the budget deficits they would produce in the near-term if inflation remained high. Complicating matters further, Reagan inherited a US Economy that was a mere few months from entering its longest economic contraction since the Depression (16 months). Fortunately, following that recession we experienced one of the longest sustained growth periods in this country's history - but at the time, comparisons to the 30’s were being made, just like our current recession.
Of particularly interest to me are the similarities between the 80’s and today:
By August of 1982 ‘talking heads’ were debating whether the market was reacting to the end of a deep recession, or simply experiencing a ‘bear market rally’. Similar to the most recent ten year period, investors had experienced a ‘lost decade’, as the Dow was down 17% for the 10 years leading into August 1982. Today, investors can look back 10 years and see that the DJIA has lost about 12%. Despite the current economic backdrop of budget deficits and a deep recession, we see the market indexes behaving in a way that is at least comparable to that of the 1982 bottom.
Despite the news in ‘82, the market had bottomed and the supply-demand relationship pointed to offense, but those who myopically stared at the economy for insight saw nothing but inflation, unemployment and deficits. The recession would ‘officially’ end in November of 1982, by that time the S&P 500 had rallied 33% from its lows. The recession of the 80’s actually ended with the stock market higher than it was when the recession began! The best returns were yet to come however, as the S&P 500 would rally for the next 5 years without a correction of 20%, or more.
Sentiment can change quickly, in either direction, and no apologies will be given afterward. This is yet another reason why I use soulless and unemotional indicators to keep me heading in the ‘right ‘direction. I have thrown out my (office) TV so the ‘talking heads’ will not influence my decision making. The supply-demand relationship indicated that demand was taking control in mid March (2009). The market rallied into mid-June and then took a breather to digest the move. Mid-July saw a resumption of the market’s upward move. I don’t know what the future holds, but I will continue to rely on the tools that have served me well thus far.
As an aside; a client called several months ago because they were alarmed that a TV commentator had said that the rally was not ‘good’. I have been in this business since 1983 and have come to appreciate all market rally’s….When I inquired why the media figure did not like the rally – the answer was that there was not much cash going into the market. Again, insight gained over 26+ years has shown me that I want to be invested before all the cash comes pouring in – not the other way around.
If you know anyone who you feel would benefit from a logical and organized approach to investing – feel free to pass along this link.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Wednesday, July 29, 2009
View from the driver's seat
We moved back to wealth accumulation within the past two weeks. As a result of that I am taking this opportunity to communicate what I see in the markets at this time…
-Opportunities in international equities continue to look attractive versus other asset classes. Specifically, emerging markets are exhibiting positive relative strength versus the developed countries; therefore, we are going to focus our international exposure in the emerging market countries.
-For the most part, all of the major market indexes, like the Dow Jones Industrial Average and S&P 500 have returned to positive trends. Within the confines of domestic sectors there are clear leaders; Technology is one of the strongest sectors right now, and an area of focus.
-While the commodity markets in general have taken a breather over the past few weeks, there are some interesting looking opportunities here among the metals. For instance, Copper, Nickel, and Aluminum are among the metal-based commodities that look attractive here, all of which can be bought through an ETF. Feel free to give me a call if you want to take about specific ETFs to use in this area.
-The US Dollar continues to trade in a long term negative trend, and after a period of consolidation over the course of the past couple of weeks the US Dollar broke down again at $79. All in all, the picture for the US Dollar is not a positive one.
I will continue to diligently review your account(s) making the necessary adjustments to keep you positioned in the right direction. Additionally, as this offensive session progresses I will be monitoring the overall market, looking for any other potential areas of leadership. We will adhere to both the buy and sell side of our decision making process and let the discipline successfully navigate this market. If you have any questions regarding these strategies, or any other strategies for that matter, feel free to contact me and I would be happy to discuss them in further detail with you.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Thursday, May 7, 2009
risk vs reward when initiating an investment
Today I am revisiting a topic that is at the core of the analysis that I perform for clients before initiating an investment position; this being risk-reward analysis. Risk-reward analysis is especially apropos now given the rally in the market over the past few months.
Due to the rally that we have seen in the market, many stocks & ETFs have become extended and overbought, with many now a good distance from a viable stop or support level. Because of this, the risk to enter an extended stock can be much greater than the potential reward. Please realize, in keeping with my disciplined risk management, that it is essential to your portfolio's health that I conduct a risk-reward analysis on each stock & ETF we choose to buy. Below, I have laid out this process for you.
Risk-Reward is just what the name implies; it is the process of evaluating how much risk you will take on, compared to how much reward you can expect to have on any given investment. Or said another way, how many points could the stock fall if the trade doesn't work out, versus how many points could you expect to see should the investment in fact go in our favor. Typically when evaluating Risk-Reward, we like to see a 2 to 1 ratio, at a minimum. In other words, for every point at risk, we want to have 2 points potential reward. So as the above sentences suggest, I need to be able to figure out what is the expected reward, and what is the potential risk. How do I calculate whether we should buy a stock or ETF at the current level, or wait for a pullback in price?
Due to the rally that we have seen in the market, many stocks & ETFs have become extended and overbought, with many now a good distance from a viable stop or support level. Because of this, the risk to enter an extended stock can be much greater than the potential reward. Please realize, in keeping with my disciplined risk management, that it is essential to your portfolio's health that I conduct a risk-reward analysis on each stock & ETF we choose to buy. Below, I have laid out this process for you.
Risk-Reward is just what the name implies; it is the process of evaluating how much risk you will take on, compared to how much reward you can expect to have on any given investment. Or said another way, how many points could the stock fall if the trade doesn't work out, versus how many points could you expect to see should the investment in fact go in our favor. Typically when evaluating Risk-Reward, we like to see a 2 to 1 ratio, at a minimum. In other words, for every point at risk, we want to have 2 points potential reward. So as the above sentences suggest, I need to be able to figure out what is the expected reward, and what is the potential risk. How do I calculate whether we should buy a stock or ETF at the current level, or wait for a pullback in price?
- Determine where significant resistance lies (ahead), or where the stock would be overbought on its trading band.
- Determine where significant support resides (below).
Calculate the price objective for the stock. - Determine a stop loss point - where the stock will break a significant bottom or trendline - basically, a point at which we no longer want to own the stock.
I also want to mention that market and sector risk should not be ignored; of course, I want to narrow the list of potential buy candidates down by focusing on strong stocks in strong sectors.
Following, is an example of evaluating risk-reward using BJ Services (BJS), which is a member of the currently favored - Oil Service Sector.
Buying BJS at Current Level (15.50):
This stock has broken out of a base of consolidation and has run straight up from $11 to $15.50. This rally has taken the stock right up to the top of its weekly distribution where the stock is considered to be 100% overbought. This suggests a pullback could be in the offing. Such a pullback would be welcomed from a risk-reward standpoint.
Risk-Reward Calculation:
Current Price = $15.50
Price Objective = $20.50
Stop Loss Point = $10.50
Reward = 5.00 points (20.50 price objective – 15.50)
Risk = 5.00 (15.50 – 10.50 stop loss)
Risk-Reward = 1 to 1 (5.00 / 5.00)
So as the calculation above suggests, the current risk-reward ratio is 1 to 1, meaning for every 1 point of risk, there is 1 point reward. This is insufficient, as I typically like to have at least a 2 to 1 ratio. Now let’s look at how the risk-reward parameters change if we wait for a pullback.
Buying BJS on a Pullback:
Let’s assume the stock simply pulled back to $13, which is now an area of support on the chart. Also, the middle of the ten week trading band is at $11.
Risk-Reward Calculation:
Current Price = $13.00
Price Objective = $20.50
Stop Loss Point = $10.50
Reward = 7.50 points (20.50 price objective – 13.00)
Risk = 2.50 (13.00 – 10.50 stop loss)
Risk-Reward = 3 to 1 (7.50 / 2.50)
Note that if you wait to buy BJS on a pullback to 13 the risk-reward ratio jumps above the acceptable 2 to 1 as the risk-reward improves to a 3 to 1 ratio, assuming a stop-loss of 10.50. This means that for every 1 point of risk there is a potential for 3 points of reward. In summary, by waiting for a pullback, it greatly improves the “Reward," and reduces the “Risk” and suggest that you don't chase stocks here, but instead be patient and let them pullback so that we have a reasonable risk-reward working to our advantage.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
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