Archive for January, 2010

•The Bull Flag is a bullish continuation pattern that is characterized by a large and relatively quick upside move followed by profit taking as represented by a tight sideways to slightly bearish consolidation on decreasing volume.

•A Bull Pennant is very similar to a Bull Flag; the difference is that the consolidation is in the form of a small symmetrical triangle.  The upside breakout point is just above the upper trend line of the triangle.

•The resumption of the upside move occurs when the stock trades above the high of the flag on increasing volume.

•The consolidation is nothing more than profit taking and should be expected after a fairly large, rapid gain in the stock.

•The stock rises quickly with volume and smart traders begin to take some off the table which causes the pause.  This is normal and expected. 

•In my opinion, the Bull Flag is one of the most consistently bullish entries in trading.

•Once the stock breaks the high of the flag your target should be the length of the initial move in the trade (The Pole) added to the top of the breakout point.

ECONOMIC REPORTS

MONDAY 1/25

Existing Home Sales

TUESDAY 1/26

Case–Shiller 20 City Index, Consumer Confidence, FHFA Home Price Index

WEDNESDAY 1/27

New Home Sales, Crude Inventories, FOMC Rate Decision

 

THURSDAY 1/28

Initial Claims, Continuing Claims, Durable Orders

 

FRIDAY 1/29

 Chain Deflator–Adv., Employment Cost Index, GDP–Adv. Chicago PMI, Michigan Sentiment

 

 

EARNINGS OF NOTE

MONDAY 1/25

AKS, AMGN, AAPL, HAL, OLN, VMW

TUESDAY 1/26

 BHI, ELY, CNI, GLW, DAL, DV, DD, EMC, GILD, JNJ, NVS, NUE, SYK, TLAB, TRV, X, VZ, YHOO

WEDNESDAY 1/27

 ABT, ATI, CAT, CTXS, COP, ETFC, FLEX, GD, GMCR, HES, LRCX, MUR, NFLX, NSC, OSIS, PJC, QCOM, RYL, STJ, SYMC, BA, SWK, UAUA, UTX, USG, VLO, WLP

THURSDAY 1/28

 MMM, ALK, MO, AMZN, AZN, T, BLL, BMY, BC, CP, CAH, CELG, CHKP, CL, CY, EK, LLY, ETH, F, BEN, GNW, JNS, JBLU, JNPR, KSU, KLAC, LLL, LMT, MSFT, MNRO, MOT, NOK, OXY, OXPS, OSK, POT, PG, RMBS, RTN, RCL, SNDK, TROW, TSM, TDY, TWC, TYC, UA, LCC, WDR, XEL, ZMH

FRIDAY 1/29

 ACI, CVX, FO, HON, MAT, NWL, PFS

 

The Balance Sheet is a financial statement indicating the strength of the company at a specific point in time.  Most companies will report their Balance Sheet numbers quarterly with a year over year summary at the end of their fiscal year.  Put quite simply, the Balance Sheet seeks to “balance” two factors.  1)  That which is owned by the company and reflected by its’ assets and 2) that which is not owned comprising both borrowed money (debt and liabilities) and money generated through the equity of shareholders.  The Balance Sheet equation is:  Assets = Liabilities + Shareholders’ Equity.

Line items that appear under assets on the Balance Sheet can include the following:  Current Assets including cash and cash equivalents, Accounts Receivable, Short Term Investments and Inventory.  Current Assets fund the day to day operations of the company.  If the company is deficient in this area, it will force them to acquire more debt or initiate a capital raise with additional equity.  Long Term Assets include Fixed Assets such as buildings and equipment.  It also includes Intangible Assets such as intellectual property and blue sky value like good will.

Liabilities include Current Liabilities, Long Term Liabilities.  Current Liabilities include such items as Short Term Debt, Accounts Payable, Accrued Expenses and that portion of Long Term Debt that is currently due.  Long Term Liabilities comprise items such as mortgages and business loans.

The final part of the equation is Shareholder’s Equity and that is the part of the company that is attributed to claims that the stockholders have on the value of the company.  This value is typically arrived at by subtracting Total Liabilities from Total Assets resulting in the Shareholder’s Equity. 

So, as investors, what are we looking for on the Balance Sheet to tell us that the company is worth investing in?  An appealing investment would be a company with a large cash position that has been created from business operations, not from the sale of bonds or equity shares and little to no debt.  We look for a steady rise in inventory to satisfy the demand for the company’s products.  Net receivables should be low because that represents the company’s ability to bring cash in the door quickly and efficiently.  Next week we will talk about the Cash Flow Statement.

We continue to be cautiously bullish but generously hedged in our positions.  We are trend followers, yet the trend is not convincingly robust.  That is ok because there are strategies that we employ for every market condition.  We are currently selling premium which allows us to reduce the cost basis of our stock positions in addition to trading premium collection strategies that creates short term income.  It may appear that when the market is not decisively trending, then the markets are futile.  There is nothing further from the truth.  The fact of the matter is that markets will generally channel 70-75 percent of the time.  We love it when it trends because we can make money very quickly.  A trader that only recognizes and trades the trends will end up being dormant for large periods of time.

The INDU broke out of its sideways channel in mid to late December and smartly traded up from the 10,500 level to 10,700.  It appears that the index may want to go sideways again for awhile.  The slope of the bullish move has flattened.  If you investigate a one year chart of the INDU, you will see that the index has had a varied trajectory on this amazing move.  From the low on March 6th until the close on March 26^th there were only six bearish sessions and they were slight.  The move was parabolic.  The slope changed from that point until early May when we experienced the first of two small corrections.  The index then burst upward from July 13^th mimicking the move from March.  The INDU spent the month of July on a tear until early August when it began a series of stair step moves up until the recent consolidation in November and December.  The slope of the INDU since Mid November has been relatively flat.  Volume has been unremarkable and we are currently at an inflection point as pointed out in previous market analysis. 

We know that the market is going to do what it wants to do.  Prosperous traders realize and embrace that knowledge.  We apply strategies that optimize current market conditions, but we can develop a market bias in anticipation of what is likely to happen in the near term.  We pointed out in a recent post that institutional money appears to be pulling out of the market and into money market funds while retail investors are removing money from those funds and one could suspect that it is finding its way into the stock market.  Our feel is that the more sophisticated investor is anticipating a pullback in the markets.  It is anyone’s guess as to the magnitude and duration of such a move.  I can tell you that we are prepared to take advantage of that move when it occurs.  Best, Robin

-

-

-

• This is a falling and converging channel pattern.  It looks like the beginnings of a triangle as both trend lines are falling and converging.
• The lower trend line is putting in lower lows but not at the pace of the upper trend line.  The pattern has bullish implications as the stock will usually break to the upside out of the channel.
• The pattern can be found in both bullish and bearish markets.
• When in a bearish market, the pattern is defined as a reversal pattern.
• When in a bullish market, the pattern is a continuation pattern.
• The stock is putting in lower lows but at a slower rate than the highs. 
• Volume is diminishing indicating a lack of conviction in driving the stock lower.
• When the stock breaks the upper trend line it will usually be on increased volume as the stock breaks out of the channel to the upside.

ECONOMIC REPORTS

MONDAY 1/18

None

TUESDAY 1/19

Net Long-Term TIC Flows

WEDNESDAY 1/20

Building Permits, Core PPI, PPI, Housing Starts, Crude Inventories

 

THURSDAY 1/21

Initial Claims, Continuing Claims, Leading Indicators, Philadelphia Fed

 

FRIDAY 1/22

 None

 

 

EARNINGS OF NOTE

MONDAY 1/18

None

TUESDAY 1/19

 Citigroup (C), CSX (CSX), Fastenal (FAST), Forest Labs (FRX), IBM (IBM), New Oriental Education & Tech (EDU), Parker Hannafin (PH), TD Ameritrade (AMTD).

WEDNESDAY 1/20

 Bank of America (BAC), Bank of NY Mellon (BK), Brinker (EAT), Covidien (COV), eBay (EBAY), F5 Networks (FFIV), Hudson City Bancorp (HCBK), Logitech (LOGI), M&T Bank (MTB), Morgan Stanley (MS), Seagate Tech (STX), SLM Corp (SLM), Starbucks (SBUX), State Street (STT), U.S. Bancorp (USB), Wells Fargo (WFC), Xilinx (XLNX).

THURSDAY 1/21

 American Express (AXP), Burlington Northern Santa Fe (BNI), Capital One (COF), Comerica (CMA), Cosolidated Edison (ED), Continental Airlines (CAL), Fifth Third Bancorp (FITB), Freeport McMoRan (FCX), Goldman ‘Government’ Sachs (GS), Google (GOOG), ICICI Bank (IBN), International Gaming Tech (IGT), Intuitive Surgical (ISRG), ITT Educational (ESI), KeyCorp (KEY), PNC Financial (PNC), PPG Industries (PPG), Precision Castparts (PCP), Southwest Airlines (LUV), Synaptics (SYNA), Union Pacific (UNP), United Health Group (UNH), Western Digital (WDC), Xerox (XRX).

FRIDAY 1/22

 Air Products (APD), BB&T Corp (BBT), Exelon (EXC), General Electric (GE), Harley-Davidson (HOG), Huntingon Bancshares (HBAN), Johnson Controls (JCI), Kimberly Clark (KMB), McDonald’s (MCD), Schlumberger (SLB), SunTrust (STI).