Archive for January, 2010

 

The INDU is headed for 9700, which is a 10% pullback from the top at 10700.  This is a healthy correction and has been needed for awhile.  The volume accompanying the current bearish movement confirms the investment community is definitely participating.  This retracement has not surprised us as we have adjusted our positions to take advantage of the move.  We are longer term bullish, so in our opinion, this move is no need to panic. The analysts who are predicting a double dip recession are still alive and well however, we are not in that camp.

The SPX is the same story as the INDU.  Look for 1030 and then 975 on the pullback and then hop back on board the “Bull Train”.  There will be some buying opportunities as the index begins to bottom.  As mentioned in last week’s post, do not underestimate the power of momentum.  There were some that felt that the consolidation on Monday through Wednesday was a bottoming sign which was misguided.  You have to expect periods of consolidation on the way down so don’t be fooled.

The COMPQ fell hard out of the Bear Flag on Thursday and Friday on increasing volume.  We are targeting 2114 and then 2024.  The COMPQ has posted impressive gains since the March 2009 bottom and it is not a surprise to see the index leading the major averages lower.

 The broad market finished lower in January, which does not bode well for those that believe that ’how January goes so does the year’.  We happen to believe that this move is a short-term bump in the road and will provide us with some outstanding buying opportunities going forward.  The key to success in trading is to follow the market.  Don’t fight it with your preconceived beliefs.  Although, we have definite ideas about where we feel the market is going, we will submit to the market and follow it because in the end, the market is always right.  We would rather make money than stubbornly trying to be right.  We wish you a fantastic week ahead!

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•  The inverse to the Bull Flag, the Bear Flag is a bearish continuation pattern that appears in a downtrend after a significant bearish move with volume.

•  The Bear Pennant is very similar to the Bear Flag.  The difference is that the consolidation is in the form of a small symmetrical triangle.  The bearish entry is just below the lower trend line of the triangle.

•  The stock will cease its fall as shorts cover their position.  The stock should consolidate in a sideways to slightly bullish fashion with decreasing volume.

•  The short entry is the break of the low of the flag.  The target should be the initial move down added to the bearish breakdown point.  Look for increased volume on the breakdown from the flag.

•  The stock falls quickly on increasing volume and smart traders begin to take profits as the stock moves sideways to up on decreasing volume.

•  The bearish entry at the low of the flag provides an excellent entry as the stock continues its’ move down on increasing volume.

•  The projected target is the length of the initial move down to the flag added to the breakdown point out of the flag.  Increased volume on the move will confirm the quality of the continued bearish sentiment.

 

 

ECONOMIC REPORTS

MONDAY 2/1

Personal Income, Personal Spending, Construction Spending, ISM Index

TUESDAY 2/2

Pending Home Sales, Auto Sales, Truck Sales

WEDNESDAY 2/3

Challenger Job Cuts, ADP Employment Change, ISM Services, Crude Inventories 

THURSDAY 2/4

Initial Claims, Continuing Claims, Productivity-Prel, Unit Labor Costs-Preliminary, Factory orders 

FRIDAY 2/5

 Nonfarm Payrolls, Unemployment Rate, Average Workweek, Hourly Earnings, Consumer Credit

 

 EARNINGS OF NOTE

MONDAY 2/1

ACV, APC, GCI, HUM, MNKD, PCL, SOHU, TUP

TUESDAY 2/2

 AFL, ADM, CTRP, CMI, DHI, FISV, JDSU, MTW, MAN, MRO, MEE, MET, MYGN, NETL, PBG, SU, DOW, HSY, UPS, UNM, GRA, WHR

WEDNESDAY 2/3

 AKAM, AMP, BDK, BRCM, CBG, CSCO, CMCSA, EFX, HMC, INSP, IP, MWW, NOV, NVLS, PFE, RL, BCO, TWX, V, WLT, YUM

THURSDAY 2/4

 BEBE, BKC, CME, CI, DB, DO, GSK, HIT, K, MA, MCO, NOC, PENN, PBI, SLE, SNE, HOT, SUN, TM, UIS

FRIDAY 2/5

 AET, AON, BZH, PC, TSN, WY

 

 

Cash is king!  Liquidity in the form of cash tells us that the company can meet its’ obligations.  The Cash Flow Statement is the third and last statement that we will touch upon.  The statement is filed quarterly and year over year in concert with the Profit and Loss and Balance Sheet.  The Cash Flow Statement is a measure of incoming and outgoing cash from its’ business operations for a specific point in time.  The statement further defines the cash flow of the company that is indicated on the Balance Sheet.  There are two methods of accounting that are used 1) accrual and 2) cash.  Most companies use the accrual method which accounts for goods delivered as sales regardless of whether they have been paid for or not.  The outstanding balance is shown on the Profit and Loss Statement under accounts receivable.

The Cash Flow statement typically divides the accounting for cash into three areas 1) Operating Activities 2) Investing Activities and 3) Financing Activities.  It is most favorable if the company is creating their cash flow from Operating Activities as opposed to the other two.  The reason is that if the company can sustain its’ operations from daily operations as opposed to investment returns and financing, it shows company strength.  Be careful to take note of how large of an impact that depreciation has on the Operating Activities bottom line.  Depreciation does not actually contribute cash to the company; it is more of an accounting item.

So, what are we looking for as investors in the Cash Flow Statement?  A company with a smaller percentage of capital expenditures, (which is found under Investing Activities) is spending less of the company’s net earnings to remain competitive.  It is also prudent to look for a company that uses its’ cash to buy back stock.  Stock buyback activity tells the investor that the company believes its’ stock is a bargain and if they feel that way, that is a good sign.  The other outcome to stock buyback is that it reduces the outstanding shares and will therefore increases the earnings per share which should at some point increase the value of the stock assuming that the multiple remains constant.  You can find this information under the Financing Activity section of the Cash Flow Statement.

Well, it appears we are getting our pullback as we had expected would happen.  We are certainly grateful that we were generously hedged as indicated in last week’s blog.  This may have taken others as a surprise but we were ready for it.  Our positions are now bearishly delta.  The task is now to determine likely targets for the move.  It is difficult to accurately determine the magnitude and duration of a move such as this.  The place to start is to find levels of confluence of indicators.  These are areas where several data points line up to tell us a similar story.  That does not mean that the market is going to co-operate.  However, many times it does. 

It is healthy that we have a pullback.  We are longer term bullish, but this retracement is needed.  We will simply follow it and make money.  I am reminded of the analogy that the market goes up like an escalator and down like an elevator.  The last three trading days certainly support that truism. 

As the market approaches target levels, we will begin to take close note of how it reacts at those key levels.  Typically, you will see the indexes put in narrower range trading days with less volume at support.  Don’t be fooled.  The market can do this several times on the way down.  Look for the market to begin to stall and trade sideways.  It is at times like this when you may be tempted to remove your hedge only to be whipsawed.  The safest approach is to wait for upside confirmation before determining that the market has found a bottom.  You may miss the exact turn, but who cares.  Do not underestimate the market’s ability to follow through.  Momentum can be a freight train and you don’t want to step in front of it.  Just hop on board and ride it to the end of the line.

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