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Rounded Bottom Could Mean a Rally for These Stocks

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Rounded Bottom Could Mean a Rally for These Stocks

By Cory Mitchell | July 19, 2017 — 1:00 PM EDT

The rounded bottom is a powerful pattern, but because it is a relatively calm (although not always) and long-lasting pattern, it often goes unnoticed. A rounded bottom begins with a sell-off, when the price is making lower swing lows and lower swing highs. The price then slowly transitions to making higher lows and higher highs.

The pattern shows that people are really interested are buying the stock. Once the price starts rising more dramatically, more market players notice, causing a surge in buying interest as the stock moves higher out of the rounded bottom. The observant trader gets into the trade while the price is forming the rounded bottom and therefore benefits once more traders take notice and push the price higher. (For more, see: Analyzing Chart Patterns: Round Bottoms.)

Autohome Inc. (ATHM) stock had a recent rounded bottom. The price was moving lower into mid-2016, making big swings that resulted in lower swing highs and lower swing lows. In the second half of 2016, the price started making higher swing highs and higher swing lows. Upon noticing this pattern, a trader looks to buy on the next pullback. It is important to remember that the next swing low will likely be higher than the last, so traders should not be overly conservative with the entry point. In November, the price consolidated after a small decline and started moving back to the upside – that was the signal to enter. This pattern was quite volatile, but the overall rounded bottom structure was still there. (See also: Autohome: An Off-the-Radar Potential Winner.)

Technical chart showing Autohome Inc. (ATHM) stock with a rounded bottom followed by a move up

It is important to note that the rounded bottom took several months to form, which is typical of this pattern. These patterns can be quite explosive. Therefore, traders should consider the use of a trailing stop-loss for an exit. A simple type of trailing exit is to move the stop-loss up to below a recent swing low after the price has moved above the last swing high. This assures that the stop-loss is only moved up once the stock price has moved up. Traders can continue to do this until the price hits the stop loss.

Clean Energy Fuels Corp. (CLNE) stock has been in a long-term downtrend, but the selling has stabilized and the price is starting to move higher, forming a rounded bottom. This rounded bottom occurs slightly above the 2016 low and has been forming since the start of 2017. The price bottomed on May 31 at $2.18 and then started to make higher highs and higher lows, accelerating to the upside in July. Traders could look to buy a pullback but should remember that the price is likely to stay above the former swing low. Therefore, an entry is likely to develop near $2.50. A stop-loss can be placed below $2.30 or below the major low at $2.18 to give the trade a bit more room. (It is smart to pick a stop-loss before the trade and stick with it.) (For more, see: Clean Energy Fuels Gets Los Angeles Transit Bus Contract.)

Technical chart showing Clean Energy Fuels Corp. (CLNE) stock in a rounded bottom pattern and starting to move up

Canadian Solar Inc. (CSIQ) shares started transitioning to the upside after the November low ($10.25). The pattern is quite choppy overall, but the May low was significantly higher than the March low and was followed by a sharp rally in June. The next step is to wait for a pullback. The anticipated entry area is near $13.50 (rising short-term trendline and also above the May low). A slop-loss could be placed below $12. Unfortunately, a decent sized pullback may not always occur before the price runs higher. That applies to the pattern in general and not just to this stock. If the price does keep running higher instead of pulling back, then traders will need to look for a trend trading entry, as the rounded bottom will be over. (See also: Sunny Times Ahead for the Solar Sector.)

Technical chart showing Canadian Solar Inc. (CSIQ) stock with a rounded bottom and starting to move higher

The Bottom Line

The rounded bottom can be a powerful pattern, but it can be tricky to spot and trade. Traders can wait for the transition to the upside to start, and once it has begun, they can look to buy on one of the pullbacks. These patterns occur over a period of several months, but once the stock starts running to the upside, the opportunity has likely been missed. Trading these patterns is a balancing act between being patient (making sure there is a transition to the upside occurring) but not too passive. No matter the pattern, traders should risk a only small portion of account capital on any single trade. (For related reading, check out: How Do I Build a Profitable Strategy When Spotting a Rounding Bottom Pattern?)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the stocks mentioned.

Published at Wed, 19 Jul 2017 17:00:00 +0000

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Rite Aid Corporation (RAD) Stock Is a No-Brainer Buy. Seriously.

Rite Aid Corporation (RAD) Stock Is a No-Brainer Buy. Seriously.

Richard Saintvilus
InvestorPlace

Despite the punishment Rite Aid Corporation (NYSE:RAD) stock has taken due to the blocked $17.2 billion merger with larger rival Walgreens Boots Alliance, Inc. (NASDAQ:WBA), owning RAD stock today not can pay off in the long run.

Rite Aid Corporation (RAD) Stock Is a No-Brainer Buy. Seriously.
Rite Aid Corporation (RAD) Stock Is a No-Brainer Buy. Seriously.

Source: Mike Mozart via Flickr

In fact, to steal a phrase from billionaire investor Carl Icahn, it looks like a “no-brainer.”

Where Rite Aid is Today

Shares of the U.S. drugstore chain, which closed Monday at $2.31, have fallen 72% year-to-date and 68% over the past year. Consider that in January, Rite Aid was valued at more than $8.5 billion, versus a valuation of around $2.4 billion today.

Investors should ask themselves this: Other than market expectations and Walgreens’ decision to end its merger attempt, what has drastically changed for the worse in six months?

Plus, with Walgreens instead deciding to buy roughly half of Rite Aid’s stores, from which the latter can use proceeds to pay down debt, Rite Aid’s fundamental metrics can drastically improve. In fact, Rite Aid is actually up 7% on Tuesday morning after it released some pro forma information about the pending $4.9 billion sale of stores and other assets to Walgreens. The information showed that EBITDA after the sale was $743 million despite selling roughly half its stores. It was $1.137 billion before the sale.

Yet RAD stock has been trading on the assumption that the company will cease to exist without the full buyout from Walgreens. That’s just not the case.

Based on Monday’s closing price, versus the consensus price target of $4, RAD stock presents potential premiums of more than 73%. That’s on the low end.

As such, I see an opportunity here for investors to make some strong gains, especially since there is now evidence that RAD stock has bottomed. The important short-term price target to watch today is the $2.50 level — an important psychological threshold.

And for the longer-term?

Where Rite Aid Will Be a Year From Now

All told, there are now more buyers than there are sellers as the market begins to assess what the “new Rite Aid” will look like a year from now, given that the new proposed Walgreens deal would acquire 2,186 Rite Aid stores. And here’s the thing: The new deal comes with Walgreens offering to pay some $5.2 billion in cash to Rite Aid, which to me is the biggest factor that is being overlooked.

Why is that important?

Rite Aid’s $7.24 billion in debt as of the most-recent quarter has been the biggest overhang to RAD stock. Assuming the company uses the $5.2 billion in cash it receives from Walgreens to pay down debt, the debt burden not only would fall to around $2.5 billion, but it would drastically reduce the interest expense Rite Aid pays on the balance. The savings could then fuel cash flow, thereby stabilizing operations.

What’s more, terms of the new deal with Walgreens gives Rite Aid a 10-year window to buy prescription drugs through Walgreens, paying the same price that Walgreens pays. Assuming Rite Aid management is able leverage these advantages, RAD stock could be a potential turnaround candidate for the next 12 to 18 months.

Not to mention, during that period, there’s still the possibly of another suitor can step in and take out Rite Aid.

Will Amazon Buy Rite Aid?

Lead by billionaire founder and CEO Jeff Bezos, Amazon.com, Inc. (NASDAQ:AMZN) continues to push the envelop on what is possible at the intersection of retail and tech. With Amazon wanting to be a part of all facets of people’s lives, analysts now believe Bezos’ next target could be the remaining Rite Aid stores that Walgreens won’t buy.

Back in May CNBC reported that Amazon had hired a business lead to help the company enter the lucrative pharmacy market, where an estimated 4 billion prescriptions are filled annually, while Americans spent some $300 billion on prescription drugs in 2015.

Analyst David Larsen of Leerink Partners believes the pharmacy market is primed for Amazon to want to disrupt. “Following the [Whole Foods Market, Inc. (NASDAQ:WFM)] acquisition, we estimate [Amazon] will still have a net cash balance of [about $100 million to $200 million] and a negative leverage ratio,” Larsen noted. “This leaves room for an additional debt-funded deal which could be either a pharmacy chain such as [Rite Aid] or a pharmacy benefit manager if the company chose not to expand its internal offering.”

Bottom Line for RAD Stock

There’s no guarantee that Amazon — or any other suitor, for that matter — will buy the remnants of Rite Aid. But that doesn’t change the narrative that RAD, as a new company, looks better than it did a year ago. The company now has many levers it can pull to create value for shareholders.

And from a risk-versus-reward perspective, RAD stock is a no-brainer. Expect shares to trade between $4 and $6 per share a year from now.

As of this writing, Richard Saintvilus was long RAD.

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Health Carrier Stocks Need to Hold These Levels

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Health Carrier Stocks Need to Hold These Levels

By Alan Farley | July 19, 2017 — 11:39 AM EDT

Dow component UnitedHealth Group Incorporated (UNH) shook off selling pressure following strong second quarter earnings results, undermined by the collapse of the Senate’s healthcare reform bill. Sector players do not seem to mind the growing uncertainty, expecting that any solution will benefit their bottom lines given the business-friendly Trump administration. However, UnitedHealth Group is better positioned than its rivals, pulling out of Affordable Care Act (ACA) coverage well before the current crisis.

Those rivals sold off on Tuesday, posting limited losses, and have bounced into mid-week. It is a perfect time to review the technicals on these market-leading instruments in light of recent threats to let the ACA system collapse in the coming months. It’s tough to visualize how top industry players can sustain high profit levels if those threats become reality, raising the odds for long-term topping patterns that will demand timely exits from trading and investment accounts. (See also: 5 Things You Need to Know About Obamacare.)

UnitedHealth Group stock rallied above the 2005 high at $64.61 in 2013 and began a powerful trend advance that is now entering its fifth year. A 19-month rising wedge pattern generated a late 2016 breakout, intensifying the rally’s trajectory into the third quarter of 2017. The stock has added more than 30 points since that time, solidifying its position as the fourth strongest component in the Dow Jones Industrial Average.

The uptrend has exceeded logical and harmonic price targets, tripling since the 2013 breakout. This is a two-edged sword for sidelined market players because price action has not carved a major pullback since the fourth quarter of 2016, generating extremely overbought technical readings could trap late-to-the-party shareholders. Even so, a reversal should generate red flags before selling momentum escalates, with the first bearish signal going off when a decline reaches the mid-$170s. (For more, see: UnitedHealth Beats on Q2 Earnings, Guides Up for 2017.)

Aetna Inc. (AET) shares topped out at $60 in December 2007 and sold off to the mid-teens during the 2008 economic collapse. The stock completed a round trip into the prior decade’s high in 2013 and broke out, entering a healthy uptrend that stalled at $134.40 in June 2015. A broad correction followed, dropping the stock into multiple support tests in the lower $90s, ahead of a strong recovery wave that completed a cup and handle breakout in May 2017.

That buying impulse generates a measured move target near $170, while Aetna stock is currently trading just above $150, offering plenty of upside if bullish technical patterns hold up. However, the stock is overbought and in need of a multi-week pullback, while on-balance volume (OBV) is flashing a bearish divergence because it is situated well below the 2015 and 2016 highs. Even so, the technical tone will remain bullish as long as the stock holds the 50-day exponential moving average (EMA), which is now rising toward $150. (See also: Aetna Settles on New York for New Headquarters in 2018.)

Anthem, Inc (ANTM) stock broke out with its rivals in 2013, entering a strong uptrend that topped out at $173.59 in 2015. It posted a series of lower lows into the fourth quarter of 2016, bottoming out at a two-year low near $115. The subsequent bounce reached 2015 resistance in March 2017, ahead of an April breakout that has added about 17 points. The stock sold off within two points of the 50-day EMA in Tuesday’s downturn.

This health carrier is performing poorly compared with its rivals, trading much closer to support at the 50-day EMA, which marks the dividing line between the uptrend and an intermediate correction. In addition, OBV for Anthem looks even worse than that of Aetna, slumping near lows from 2016, when the stock was trading nearly 70 points lower. This red flag could signal an impending reversal, but shareholders can hang tough until support in the $180s breaks down. (For more, see: Watching for Buying Signals Near Trendline Support.)

The Bottom Line

Health carriers are holding close to multi-year highs despite the threat of a collapsing ACA system. Even so, technical cracks are starting to appear, telling informed shareholders to pay close attention to price action at intermediate support levels in the coming weeks. (For additional reading, check out: Top 3 Healthcare Stocks for 2017.)

(Why?)

Published at Wed, 19 Jul 2017 15:39:00 +0000

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Banks overtake tech stocks as top overweight sector: BAML poll

Banks overtake tech stocks as top overweight sector: BAML poll

Claire Milhench

LONDON (Reuters) – Banks overtook tech stocks as the most overweight global sector in July, according to a copy of Bank of America Merrill Lynch’s fund manager poll seen by Reuters, with ‘long Nasdaq’ deemed the most crowded trade for the third straight month.

The survey, which polled 207 asset managers with $586 billion under management, was carried out between July 7 and 13, and showed investors rotating out of technology stocks, which 68 percent of poll participants said were “expensive”.

Since the 2009 market lows, tech stocks have been the most overweight sector in portfolios 80 percent of the time, but investors have grown uneasy about the valuations.

The tech-heavy Nasdaq Composite was again picked as the “most crowded” trade, with 38 percent of poll respondents nominating this, the same as last month.

The Nasdaq sold off sharply in June, losing almost 2 percent in the final week, but has rebounded since and is trading back near its previous highs.

Cash levels fell to 4.9 percent from last month’s 5 percent, but remain above the 4.5 percent 10-year average.

Some 25 percent of investors who are holding higher cash levels are doing so because of their bearish views on markets, the poll indicated. Expectations that global growth would accelerate fell to 38 percent in July, down from 62 percent in January.

Investors were also concerned about a crash in global bond markets, with 28 percent choosing this as their top tail risk, just ahead of a policy mistake by the U.S. Federal Reserve or European Central Bank, chosen by 27 percent.

Last week, Fed chair Janet Yellen indicated that U.S. rate hikes could be gradual, and weak inflation data on Friday appeared to sharply reduce the chances of a third rate rise this year.

Meanwhile, the European Central Bank (ECB) is keen to keep its asset purchases open-ended rather than setting a potentially distant date on which bond-buying will stop, to retain flexibility in case the outlook sours.

BAML said the ECB was the most likely central bank to spark a global “risk off” trade, with euro zone exposure high relative to BAML’s global fund manager survey history.

Reporting by Claire Milhench; Editing by Kevin Liffey

(Why?)

Published at Tue, 18 Jul 2017 14:05:18 +0000

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Fidelity shows how unicorns hurt performance at popular funds

Fidelity shows how unicorns hurt performance at popular funds

BOSTON (Reuters) – Fidelity’s bets on unicorn companies, the rare private firm or startup that grows in value to at least $1 billion, put a dent in the stellar performance of some of the company’s most popular mutual funds during the first half of 2017.

Fidelity disclosed this week, for example, how content-sharing company Pinterest Inc had an outsize impact on the portfolio performance of Contrafund, its most popular stock fund. It was one of the first times a company that had not yet done an initial public offering (IPO) made a Fidelity fund’s quarterly list of largest contributors and detractors to benchmark performance, Fidelity spokeswoman Nicole Goodnow said.

Pre-IPO investments can amplify a fund’s relative performance because they are not included in a comparison benchmark index. And the valuations attached to them by Fidelity and other mutual fund companies have far outpaced the stock market.

Fidelity’s $114 billion Contrafund disclosed that its small stake in Pinterest shaved 9 basis points off the fund’s relative return versus the S&P 500 Index.

Contrafund’s Series E stake in Pinterest was valued at $473.3 million in the first quarter. But at the end of May, that value was marked down by 17 percent, Fidelity disclosures showed.

But Pinterest was tied with TJX Companies Inc as Contrafund’s largest detractor in the second quarter, even though the pre-IPO company accounted for only 0.34 percent of the fund’s net assets.

Contrafund, which is run by star Fidelity portfolio manager Will Danoff, posted a total second-quarter return of 6.09 percent in the second quarter, easily beating the 3.09 percent total return on the S&P 500 Index.

The fund’s year-to-date return of 19.84 percent is better than 75 percent of U.S. large-cap growth mutual funds, according to Morningstar Inc data.

Fidelity’s valuation of Contrafund’s Series E stake in Pinterest has more than doubled since an initial investment of $159.4 million in October 2013, compared to Nasdaq’s 62 percent rise.

While Pinterest is a relative pipsqueak in the massive Contrafund portfolio, other Fidelity managers have made tech unicorns some of their largest holdings.

At the end of May, ride-hailing company Uber was a top 20 stock in Fidelity’s $22 billion Blue Chip Growth Fund. The fund’s Series D stake in Uber was valued at $251.5 million, or 1.14 percent of net assets.

Portfolio manager Sonu Kalra’s Uber stake is bigger than his bet on Starbucks Corp ($202 million) and Bank of America Corp ($157 million).

In the first quarter, Uber was among the fund’s largest detractors, shaving 12 basis points off the fund’s relative return. Only Qualcomm Inc and Lululemon Athletica Inc detracted more.

Reporting By Tim McLaughlin; Editing by Tom Brown

Published at Tue, 18 Jul 2017 23:17:38 +0000

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What D.C. drama? Dow hits 25th record of 2017

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Is this the new normal for Wall Street?
Is this the new normal for Wall Street?

What D.C. drama? Dow hits 25th record of 2017

  @mattmegan5

If Wall Street is concerned about all the drama in D.C., it’s definitely not showing it.

The stock market keeps rewriting the record book despite the political scandals and legislative gridlock in Washington.

The Dow did it again on Friday, climbing 85 points to notch its third straight record close, the 25th thisthe year.

The index has now celebrated 42 all-time highs since President Trump’s election last November, according to LPL Financial. It’s up about 3,300 points over that span.

Not to be outdone, the S&P 500 also zoomed to a record on Friday, its first since June 19. The broad index has now closed in record territory 25 times this year and 33 times since Trump’s victory.

The Nasdaq took a beating earlier this summer, but it’s bounced back nicely since then. The tech index is now less than 0.5% away from its first record since early June. The Nasdaq has surged 17% so far this year, nearly doubling the Dow.

In some ways, the party on Wall Street is a bit confusing. The Trump rally was essentially a massive bet on the Trump agenda. But GOP infighting and political controversies have prevented Trump from delivering on his promises of massive tax reform, infrastructure spending and deregulation.

The Trump agenda wasn’t helped by the revelations this week about Donald Trump Jr.’s meeting with a Russian lawyer.

“The D.C. drama is definitely stealing the headlines, but the reality is inflation is low, earnings around the globe are improving, and the Fed is still very accommodative,” said Ryan Detrick, senior market strategist at LPL Financial.

Wall Street received a boost from the Federal Reserve this week after Janet Yellen reiterated that she’s in no rush to raise interest rates. Low rates have helped make stocks look cheap by comparison. CNNMoney’s Fear & Greed Index of market sentiment has flipped back to “greed” mode after briefly flashing “fear” earlier this week.

Corporate profits, the real driver of stock prices, also continue to look pretty good. S&P 500 earnings grew during the first quarter at the fastest pace since 2011. Analysts anticipate slower, but still healthy, growth from the earnings season that came into focus this week.

So what could derail the stock market? It’s entirely possible Wall Street will eventually have a negative reaction to the trouble in Washington. Look to see if investors get antsy later this year about the lack of progress on tax reform.

Wall Street is also watching closely for signs of a slowdown in the U.S. economy. Estimates for second-quarter growth have started to get pared down. That happened again on Friday after new numbers showed U.S. retail sales declined in June for the second month in a row.

Published at Fri, 14 Jul 2017 20:23:39 +0000

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New Features Can’t Save Snap Falling Below IPO Price

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New Features Can’t Save Snap Falling Below IPO Price

By Shoshanna Delventhal | July 10, 2017 — 7:50 PM EDT

Social messaging giant Snap Inc.’s (SNAP) shares were steadily edging toward their initial public offering (IPO) price before falling below the mark on Monday, closing down 1.1% at $16.99 per share. (See also: Snap May Soon Fall Below its IPO Price: Analysts.)

The social media app, popular among Millennials​ around the world, saw one of the most-anticipated IPOs of the past few years, hitting the public market in March at $17 per share and reflecting a market cap of mor than about $20 billion. The 6-year-old company’s IPO marked the largest on a U.S. exchange since that of Chinese internet giant Alibaba Group (BABA) in 2014.

Dip Not Unusual for Young Stocks

While on average, companies that have gone public between 2014 and 2016 have outperformed the S&P 500 in that calendar year, Snap’s investors are now looking at a loss. The dip shouldn’t be too much of a shock considering that 45% of U.S.-listed companies that have gone public in 2017 have slipped below their IPO prices at some point, reports The Wall Street Journal. Facebook Inc. (FB), which has secured a higher than 300% return since its public debut in 2012, fell below its $38 IPO price on its second day of trading and did not surpass that level until about one year later.

SNAP has also proved resistant to the media company’s recent announcements regarding a new feature for advertisers and a few new features for users. The Venice, Calif.-based firm has launched a maps feature that allows users to see where their friends are and drop into popular events that the company pinpoints on the map. The maps features will give Snapchat the opportunity to sell location-based advertising. Users can now also add links to their picture and video messages and select objects in a photo to remove or highlight against pre-programmed backgrounds. (See also: Is Snapchat Sabotaging Its New Revenue Model?)

Published at Mon, 10 Jul 2017 23:50:00 +0000

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PepsiCo Stock Could Trap Complacent Shareholders

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PepsiCo Stock Could Trap Complacent Shareholders

By Alan Farley | July 7, 2017 — 11:49 AM EDT

Big tech may attract the majority of headlines, but a small group of high-yielding but slow-moving equities have generated equally impressive gains in recent years. PepsiCo, Inc. (PEP) sits at the top of this winner’s list, posting a long series of new highs while paying annual dividends that now average around 2.75%. However, given months of outstanding performance, the July 11 earnings report should be watched closely for signs of weakness that undermine the bullish narrative.

It may be useful to compare PepsiCo’s long-term price action with that of arch rival and Dow component The Coca-Cola Company (KO), which remains stuck below the historic high posted nearly 20 years ago. Coca-Cola pays a slightly higher 2.90% dividend while trading similar total share volume after adjustment for PepsiCo’s higher stock price, telling informed market players that the best strategy is to stick with the obvious winner. (See also: The Top Beverage Stock Picks Right Now: Credit Suisse.)

However, all financial instruments are two-sided animals in which long-term rallies inevitably give way to equally persistent pullbacks, corrections and shakeouts. With that in mind, the dramatic rally since PepsiCo stock bottomed out at $98.50 in December 2016 has reached multi-year resistance that could signal a decline lasting through the balance of 2017 while causing the stock to relinquish 15% to 20% of its total value.

PEP Long-Term Chart (1993 – 2017)

Sleepy price action in the first half of the 1980s gave way to a powerful uptrend that continued into the 1993 peak at $21.82. The stock paused at that resistance level for more than two years, ahead of a breakout that eased into a shallow rising channel in 1996. Price action held within those narrow boundaries into the new millennium, lifting to $53.50 in the first half of 2002.

PepsiCo stock sold off to channel support a few months later and returned to resistance in 2004, breaking out and continuing to gain ground in a low-volatility pattern that rarely challenged new support levels. That uptick finally ended at $79.79 in January 2008, giving way to a mild decline that accelerated during the economic collapse. Selling pressure finally eased in March 2009 at a five-year low in the mid-$40s, ahead of a modest recovery wave that stalled in 2011 in the low $70s. (For more, see: How Does PepsiCo Make Money?)

It took another two years for the stock to complete a round trip into the 2008 high, ahead of a 2013 breakout that tracked a rising channel in place since 2011 (red lines). That pattern continues to control price action more than five years later, with a single quickly repealed violation in August 2015. Ominously for long-term bulls, the rally wave that started at channel support in December 2016 has now reversed at channel resistance.

PEP Short-Term Chart (2014 – 2017)

A 2014 rally wave peaked at $100 in December, generating a decline that posted a fat finger reversal during the August 2015 mini flash crash. Three lows since that time have carved fresh support within a rising channel that has now triggered four reversals at resistance. As we know from the stock’s long-term history, this particular pattern can persist for many years, telling informed market players to take defensive action now that resistance has been reached once again. (See also: Pepsi, Coke Have Limited Upside; Dr. Pepper and Cott Undervalued: BMO.)

The stock built a four-week rectangle at channel resistance into July and broke down, but support at the 50-day exponential moving average (EMA) near $115 has stalled the decline. A breakdown at this level will add reliability to a bearish prediction that sets a target at channel support, now located near $105. Prior reversals have averaged five to seven months, setting the stage for weak relative performance into the end of 2017.

The Bottom Line

PepsiCo has emerged as a high-yield market leader, posting a long series of new highs while maintaining a healthy annual dividend. However, the rally that started in December 2016 may have run its course, with high odds for a pullback that eventually finds its way down to support near $105. (For additional reading, check out: Pepsi Has ‘Fallen Victim to Media Hype’ as Soda Sales Dwindle: Analyst.)

Published at Fri, 07 Jul 2017 15:49:00 +0000

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IBM Buyers’ Strike Predicts a Rough Quarter

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IBM Buyers’ Strike Predicts a Rough Quarter

By Alan Farley | July 6, 2017 — 1:11 PM EDT

Dow component International Business Machines Corporation (IBM) ended a 14-month recovery wave in April 2017, dropping more than eight points in a single session after reporting the 20th consecutive quarterly decline in year-over-year revenues. It took a second hit a few weeks later following news that legendary investor Warren Buffett had sold one-third of his $11 million stake, his second 2017 sale.

The stock bottomed out near $150 on May 10 but has failed to gain ground in the past two months, despite a historic tech rally that has lifted many components to all-time highs. IBM stock has also failed to trade back into the broken 200-day exponential moving average (EMA), a major line-in-the-sand between bull and bear markets. This limp action tells observant market players to expect a weak quarter and lower prices when the company reports second quarter results on July 18. (See also: Who Is Driving IBM’s Management Team?)

IBM Long-Term Chart (1993 – 2017)

This old-school tech behemoth ground sideways for more than 25 years into the 1990s, selling off repeatedly into long-term support near $10.00. IBM stock entered a historic rally at that level in 1993, powered by the embryonic World Wide Web and silicon chip processing breakthroughs. The stock rose nearly 1,400% during this fruitful period, while splitting twice during an ascent into the 1999 high at $138.35.

The stock tested that resistance level repeatedly into the start of 2002 and plunged, breaking four-year support in the mid-$80s before finding support at $54.01 in October 2002. Weak action persisted through the mid-decade bull market, with the stock failing to mount the 2004 high in the mid-$90s until a 2007 rally burst failed at 1999 resistance. IBM relinquished those gains during the 2008 economic collapse, posting a six-year low at support in the $70s in November. (For more, see: Behind IBM’s 87.6% Rise in 10 Years.)

A bounce into 2009 gained traction, reaching the prior high at the start of 2010, ahead of a breakout that generated the most prolific returns since the 1990s. That uptick stalled above $200 in 2012, yielding a topping pattern that broke down in 2014, generating a steep decline to a six-year low near $115. The stock bounced through 2016, posted a lower high above $180 in February 2017 and fell more than 30 points into the May 2017 low near $150.

The monthly stochastics oscillator entered a sell cycle three months ago and has now reached the deepest oversold level since 2002. This lopsided reading could inhibit third quarter selling pressure while energizing remaining bulls if the company surprises to the upside. Even so, the monthly pattern continues to advertise even lower prices due to the April rejection at 50-month EMA resistance. (See also: Why IBM Will Go On Forever.)

IBM Short-Term Chart (2013 – 2017)

The final wave of the three-year downtrend started at $198 in April 2014, generating an 81-point decline. The bounce into February 2017 stalled at the .786 Fibonacci sell-off retracement, which has a nasty reputation for generating lower highs within topping patterns. An impulsive selling wave ended at $150, followed by a bear flag that filled the May 11 gap. This progressive structure predicts that sellers will return soon and generate even lower lows.

On-balance volume (OBV) peaked in 2012 and stair-stepped lower into 2016, signaling steady institutional abandonment. A bounce into 2017 failed to end the five-year string of lower indicator highs, while the downturn into the third quarter needs little selling pressure to reach the downtrend low. A breakdown at that level would set off a wave of sell signals, possibly signaling revenue contraction into the next decade as well as a secular decline in stock value. (For more, see: Technology Stocks: Do They All Deserve to Fall?)

The Bottom Line

IBM has failed to find new ways to grow in the current bull market cycle and is underperforming other high-technology components. Long-term technical deterioration has now entered its sixth year and could accelerate when benchmarks finally signal the top of this bull market cycle. (For related reading, check out: IBM’s Turnaround Story Hits a Dead End.

Published at Thu, 06 Jul 2017 17:11:00 +0000

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Mid Year Momo Update

 

Mid Year Momo Update

We’re half way through the year and the upcoming 4th of July weekend officially marks the beginning of the long awaited vacation season. Since most of you will be either mentally or physically absent tomorrow let’s devote whatever remains of our collective attention span to a comprehensive perspective on where we are on the momo front.

By the way there’s another reason why I think it’s important to remind ourselves where we are in the ongoing market cycle. Wherever I poke my nose these days I see nothing but bearish sentiment, for a whole host of reasons. Since I’ve been in this racket for quite a while now I have accumulated all sorts of newsletters I somehow found myself subscribed to – or unsubscribed from over the years without much success. Bottom line: quite a few of them are expecting *the big one* once again and that soon.

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Stocks recover as eyes shift to Fed minutes

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Stocks recover as eyes shift to Fed minutes

By Patrick Graham| LONDON

 

Stock markets rode out the latest rise in tensions around North Korea on Wednesday, main markets in both Europe and Asia inching higher as attention moved to minutes from the U.S. Federal Reserve’s last meeting.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, regaining half the losses it saw on Tuesday when North Korea fired a missile into Japanese waters.

The organization’s global shares index gained 0.1 percent, helped by early gains for most of Europe’s major markets.

A shift towards more hawkish language by several major central banks has dominated the past week and left markets unsure of how much longer emergency stimulus in Europe will continue to support global asset prices.

For now investors seem to be giving policymakers the benefit of the doubt that the global economy can take any tightening of monetary policy, although the latest data on Wednesday was mixed – strong in Europe and weaker in China.

The Fed minutes will be searched by investors for signs of more concern among policymakers about a downturn in inflation and activity in the United States.

“North Korea has rattled markets but central bankers are more important,” said Kathleen Brooks, research director at City Index in London.

“While North Korea’s military ambitions are a background threat for markets, we don’t think that this particular geopolitical event is at the stage yet where it will cause a spike in volatility.”

South Korea’s main index rebounded by 0.36 percent and Japan’s Nikkei ended up 0.25 percent.

Shanghai stocks rose more than 1 percent, despite a drop in the Caixin/Markit services purchasing managers’ index (PMI) to 51.6 in June, from 52.8 in May.

IHS Markit’s final composite Purchasing Managers’ Index for the euro zone was 56.3 in June, down from May but comfortably beating a flash estimate, chalking up the best performance last quarter in over six years.

Currency markets were in limbo, the euro trading just over half a cent below last week’s 14-month highs against the dollar.

The dollar and yen were the main victims of the shift in language last week, but many analysts wonder whether the European Central Bank will be able to rein in money-printing later this year if the euro keeps gaining.

“I meet a lot of people while I talk to clients who think the ECB simply won’t be able to escape its current policy setting because a stronger currency is too damaging,” said Societe Generale strategist Kit Juckes.

“The thought the ECB will resist pressure…is still leading many … to look for cheaper levels to buy euro.”

The dollar was less than 0.1 percent higher against the basket of currencies used to measure its broader strength and 0.1 percent lower at $1.1353 per euro.

(Editing by Richard Balmforth)

Published at Wed, 05 Jul 2017 08:47:26 +0000

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July’s Tough, but These Stocks Tend to Do Well

 

July’s Tough, but These Stocks Tend to Do Well

By Cory Mitchell | June 28, 2017 — 1:00 PM EDT

July isn’t a great month for the stock market. Over the past 19 years, the S&P 500 index has rallied in July (closed the month higher than it opened) 47% of the time, and it has just barely been able to eke out a profit over all those years. While the period of May through September typically isn’t a great time for the stock market as a whole, certain stocks have shown a strong historical tendency to do very well in July.

If traders had purchased shares of Amgen Inc. (AMGN) at the beginning of July and sold them at the end of the month over the past 27 years, the average profit per trade would have been 9.62%. The 23 winning years (85% win rate) produced an average profit of 12.2%, while the four losing years resulted in an average loss of 5.21%. The maximum gain in July over this time period is 32.79%, while the biggest loss is 7.56%. These figures are based on monthly closing prices; therefore, gains and losses would have been larger during the month. (For more, see: Amgen’s Woes: It Could Always Be Worse!)

Chart showing the performance of Amgen Inc. (AMGN) stock over the past five years

HCP, Inc. (HCP) has moved higher in the month of July during 22 of the past 27 years (81% win rate). The average profit on all trades, if the stock had been bought at the start of July and sold at the end of July, is 3.76%. This is despite an overall long-term downtrend. The 22 winning trades produced an average profit of 5.74%, while the five losing years resulted in an average loss of 4.96%. The biggest rally is much larger than the biggest July decline: 21.55% versus -7.24%. (See also: HCP, Inc. Q1 FFO Beats Estimates, Deleveraging on Track.)

Chart showing the performance of HCP, Inc. (HCP) stock over the past five years

Welltower Inc. (HCN) has moved higher in July during 20 out of the past 25 years (80% win rate). The average profit on all trades, if the stock had been purchased at the start of July and sold at the end of the month, is 4.01%. The 20 winning trades produced an average profit of 5.88%, while the five losing years resulted in an average loss of 3.5%. The maximum gain in July over this time period is 17.47%, while the biggest loss is 9.03%. Welltower also has the largest dividend yield in this group of stocks at 4.55%, but the ex-dividend date is not until early August. (For more, see: Welltower’s Q1 FFO Meets Estimates, Revenues Beat.)

Chart showing the performance of Welltower Inc. (HCN) stock over the past five years

Harley-Davidson, Inc. (HOG) has a slightly lower win rate but impressive overall profitability in July. In 20 out of the past 27 years, the stock has moved higher in July (74% win rate). The average profit on each trade during this time frame, buying at the start of July and selling at the end, was 6.53%. This average is created based on 20 winning trades averaging 10.54%, while the seven down years averaged drops of 4.91%. The biggest gain in July was 39.41%, while the biggest decline was 11.5%. (See also: Is Harley-Davidson Joining the Ducati Takeover Race?)

Chart showing the historical tendency of Harley-Davidson, Inc. (HOG) stock to rise in July

The Bottom Line

Studying how assets move at various times of the year is called seasonality. Seasonality may provide trade ideas and places to look for trades, but it shouldn’t be used in isolation. Ideally, other fundamental and technical factors indicate whether a stock is worth owning over the next month or more. While the statistics look good in hindsight, they only show the difference between the opening and closing price in July. The volatility and risk that occurred in between those prices could be much greater than what is captured by these statistics. It is advisable to risk only a small percentage of account capital on any single trade. (For related reading, check out: Company Analysis: How to Think About Seasonality Trends.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the equities mentioned.

Published at Wed, 28 Jun 2017 17:00:00 +0000

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Altaba Stock Breaks Out After Verizon Sale

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Altaba Stock Breaks Out After Verizon Sale

By Alan Farley | June 27, 2017 — 12:34 PM EDT

Nasdaq-100​ component Altaba Inc. (AABA) holds the balance of the remaining Yahoo assets, including 15.4% of Alibaba Group Holding Limited (BABA), following Verizon Communications Inc.’s (VZ) partial acquisition. The newly minted $52 billion market cap seems pricey, but no one really knows the value of this corporate hodgepodge or how it’s going to grow in the coming years.

Technically speaking, the stock is well positioned for gains through the rest of 2017 because the new entity has adopted Yahoo’s long-term chart, yielding a timely breakout above the 2014 high at $52.62. While it’s easy to second guess this glued-together reporting, consider that other big caps including United States Steel Corporation (X) and AT&T Inc. (T) have also sewn together bits and pieces of newly acquired operations or divestitures into multi-decade price charts. (See also: What Is Altaba Anyway?)

AABA Long-Term Chart (1996 – 2017)

The former company came public at $1.49 (after adjustment for five stock splits) in April 1996 and fell into a downtrend that found support near 65 cents. It then entered a powerful trend advance driven by the awakening of the net bubble, rising to an all-time high at $125.03 in March 2000. The subsequent downtrend relinquished the majority of the prior decade’s dramatic gains, dropping the stock more than 97% to $4.01 at the end of 2002.

The subsequent uptrend topped out at $43.66 in January 2006, highlighting severe technical damage because the rally failed to reach the .386 Fibonacci bear market retracement level. A pullback into 2008 accelerated during the economic collapse, dropping the stock back into the single digits for the second time in six years. It underperformed badly after hitting a bottom in November 2008, stuck in a narrow trading range bounded by resistance in the upper teens.

The stock took off in the strongest buying impulse so far this decade in the second half of 2012, breaking out above the 2006 high in October 2014 before topping out in the low $50s a few weeks later. It then entered a steep correction that found support in the upper $20s in early 2016, ahead of an equally strong bounce that reached within a few points of the prior high in May 2017, just a few weeks before this month’s post-acquisition breakout. (For more, see: Verizon Officially Now Owns Yahoo, Mayer Resigns.)

AABA Short-Term Chart (2015 – 2017)

The sell-off into 2016 unfolded through an Elliott five-wave decline, perfectly aligned with bearish action throughout the tech universe during that period. The stock tested the September 2015 low at $27.20 in February 2016, broke down and then rallied strongly, setting off a 2B buy signal that denotes the failure of bears to hold new resistance. Rumors about a company sale or divestiture generated speculative buying interest into September, when it disclosed high-profile hacking incidents that raised questions about the company’s valuation. (For more, see: Yahoo Confirms Massive Data Breach.)

On-balance volume (OBV) topped out in 2014 and entered a persistent distribution wave that ended four months before the price bottomed out in the first quarter of 2016. This bullish divergence contributed to steady buying interest that reached a new high ahead of the Verizon sale. The transaction triggered high-volume price bars and a sharp indicator downturn to a nine-month low, signaling aggressive profit taking as well as new purchases.

The OBV downturn tells us that the stock needs to rebuild previously loyal sponsorship to continue the 16-month uptrend. However, the price remains in breakout mode, and it makes sense to ignore recent signals because they’re unfolding right at the interface between the two corporate identities. In other words, this seemingly bearish activity could reflect the natural rotation from one set of shareholder hands to another. (See also: On-Balance Volume: The Way to Smart Money.)

The Bottom Line

Altaba came to life after Yahoo sold key assets to Verizon, with the new entity using the parent’s long-term chart. The split has triggered a major breakout undermined by a bearish volume signal, but we’ll ignore that red flag for now, given broad tech strength and confusion about the new entity’s legitimate supply and demand. (For more, check out: Altaba Spends $3.5B on Its Shares in Dutch Auction.)

Published at Tue, 27 Jun 2017 16:34:00 +0000

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S&P 500 edges up; tech weighs on Nasdaq

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S&P 500 edges up; tech weighs on Nasdaq

By Sinead Carew

The S&P 500 and the Dow were slightly higher on Monday but gains were muted by a fall in technology stocks which nudged the Nasdaq lower as investors turned to more defensive sectors.

The slow-growing, high-dividend S&P utilities .SPLRCU and telecommunications .SPLRCL were the best performers among the 11 S&P sectors.

Technology stocks, which have been under pressure as investors worry about stretched valuations, hit a session low in late afternoon trading.

“The bond market is signaling an economic slowing,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “That’s why you’re seeing defensive names like utilities do well, because equity investors are buying more in line with what that bond market is saying.”

The Dow Jones Industrial Average .DJI was up 39.35 points, or 0.18 percent, to 21,434.11, the S&P 500 .SPX gained 3.12 points, or 0.13 percent, to 2,441.42 and the Nasdaq Composite .IXIC dropped 11.12 points, or 0.18 percent, to 6,254.13.

A fall in Microsoft (MSFT.O), Amazon (AMZN.O) and Alphabet (GOOGL.O) weighed most on the S&P as well as the Nasdaq.

“It’s simply profit-taking going into the end of the quarter. I wouldn’t be surprised at all to see that reversed in early July with the thought that we’re going to see some strong earnings,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in New York.

The utilities and the four-company telecommunications services sector index were the S&P’s best performers with gains of more than 0.8 percent.

The S&P energy .SPNY was lower as investors worried about a relentless rise in U.S. supply and a surge in demand for short sale contracts, or bets against higher crude prices.

The recent drop in oil prices has spurred concerns about low inflation, which remains below the Federal Reserve’s 2 percent target rate.

The Fed raised rates this month for the second time this year and has indicated it could raise them again but futures imply only a 50 percent chance of another rate hike by December.

The financial index .SPSY rose 0.6 percent after a string of Fed policymakers appeared to back another rate hike this year despite a patch of recent weak economic data.

San Francisco Fed President John Williams said the Fed needs to raise rates gradually or the economy runs the risk of overheating.

New York Fed chief William Dudley said recent narrowing of credit spreads, record stock prices and falling bond yields could encourage the Fed to continue tightening U.S. policy.

Data on Monday showed new orders for key U.S.-made capital goods unexpectedly fell in May, with non-defense orders excluding aircraft – a closely watched proxy for business spending plans – dropping 0.2 percent.

Economists polled by Reuters had expected a rise of 0.3 percent.

Advancing issues outnumbered declining ones on the NYSE by a 2.18-to-1 ratio; on Nasdaq, a 1.33-to-1 ratio favored advancers.

(Additional reporting by Caroline Valetkevitch in New York, Tanya Agrawal in Bengaluru,; Editing by Arun Koyyur and Nick Zieminski)

Published at Mon, 26 Jun 2017 19:06:53 +0000

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Tobacco Stocks Probing New Highs

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Tobacco Stocks Probing New Highs

By Alan Farley | June 15, 2017 — 1:39 PM EDT

Tobacco stocks have offered perfect investment vehicles for patient shareholders in the past decade, paying sizable dividends while posting a near endless series of new highs. Of course, taking exposure in this controversial industry isn’t for everyone, especially if loved ones have paid the price for nicotine addiction. However, buying shares of a company isn’t the same thing is supporting their business practices, and it’s our job to seek out superior returns wherever we can find them.

Strong Asian growth now drives industry profits, along with a resurgence in U.S. consumption triggered by modern vaporizer technology. In addition, the current administration has plans to strip away regulations across a broad swath of industries, making it unlikely that producers will get singled out for criticism in coming years. Given these tailwinds, tobacco stocks are likely to perform well into the next decade. (For more, check out: Back From the Dead: Why Tobacco Stocks Are Soaring.)

Philip Morris International Inc. (PM) carries the highest sector capitalization for tobacco producers trading on the U.S. exchanges at $184 billion. It spun off from parent Altria Group, Inc. (MO) at $50 in March 2008 and entered an immediate downtrend that posted an all-time low at $32.04 in March 2009. The subsequent recovery wave reached the upper $90s in 2013, giving way to a multi-year correction that found support in the mid-$70s.

The stock rallied above the prior high in 2016 and stalled out, building a base on new support and then spiraling lower in November. That marked the washout low, ahead of a strong buying impulse that reinstated the breakout in January 2017, followed by a powerful trend advance to an all-time high at $122.90 on June 6. Philip Morris stock has been pulling back in a bull flag pattern since that time, while daily stochastics have dropped into the oversold zone. (See also: Philip Morris, the Best Is Yet to Come: Wells Fargo.)

Both monthly and weekly indicators have held buy cycles through this period, signaling a bullish divergence and potential pullback buying opportunity ahead of continued upside. Even so, a more advantageous trade entry might come if aggressive sellers break short-term support and knock the stock down to the top of the first quarter range and 50-day EMA at $115.

Altria Group expanded into spirits and finance leasing services following the Philip Morris spin-off,​ but tobacco remains its biggest profit component. It fell just 7 points during the 2008 economic collapse, returning to the prior high in 2010, ahead of a 2011 breakout that reached $70.14 in July 2016. A pullback into the fourth quarter settled near $60, ahead of a January 2017 rally into March’s all-time high at $76.54. (See also: Altria Optimistic on FDA’s Filing of Heated Products.)

Altria Group shares sold off into May, testing new support near $70 and turning higher into June, settling into a narrow platform that traded within 60 cents of resistance this week. On-balance volume (OBV) has already risen to a new high, highlighting strong institutional sponsorship that should support a fresh rally leg into the low $80s, where a two-year rising-highs trendline could trigger another reversal.

Reynolds American Inc (RAI) rallied above the 2008 high in 2011 and entered a rising channel that accelerated into a steeper channel in 2014, highlighting impressive relative strength. The uptrend stalled near $50 at the end of 2015, giving way to a shallow correction that ended with a high-volume October gap to a new high in the mid-$50s. It took three months to clear the high posted in that session, yielding a long series of new highs into last week. (For more, see: Reynolds Announces Leadership Roles Post Acquisition by BAT.)

The stock sold off with the broad market, dropping into the first test at the 50-day EMA since January, and it is still testing that level. Weekly stochastics fell into an unconfirmed sell cycle in reaction to the decline, raising odds for an intermediate correction lasting a minimum of eight to 12 weeks. Given this scenario, a pullback into deep support at $50 could offer a buying opportunity.

The Bottom Line

Tobacco manufacturers and distributors are leading the broad market, resistant to broad headwinds facing other high-yielding instruments. This resilience could last into the new decade, given humankind’s addictive interest in the controversial crop. (For additional reading, see: Behind Tobacco Stocks’ Recent Strength.)

Published at Thu, 15 Jun 2017 17:39:00 +0000

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PayPal Holdings Inc.: Payment Tech’s Growth Opportunity

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PayPal Holdings Inc.: Payment Tech’s Growth Opportunity

Lucas Downey June 12, 2017

Published at Mon, 12 Jun 2017 19:40:00 +0000

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How to Trade a Summer Correction

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How to Trade a Summer Correction

By Alan Farley | June 12, 2017 — 10:10 AM EDT

The Nasdaq 100​ sold off more nearly 2.5% at the end of last week, while the Powershares QQQ Trust (QQQ) posted the highest volume day since the August 2015 mini flash crash. Those bearish metrics generated a major distribution day that’s likely to yield a summer correction, testing gains posted since the November breakout. Traders and market timers should take defensive actions as soon as possible to protect gains and prepare for opportunities triggered by sharply lower stock prices.

The tech-heavy index posted six straight months of higher prices into last week, setting off extremely overbought technical readings that may require months of profit taking to shake out complacency and set the stage for a strong 2017 close. However, it was not a typical downtrend day because a good chunk of capital exiting big winners like Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOGL) and NVIDIA Corporation (NVDA) rotated into market groups that have underperformed in recent months. (See also: The Top 4 ETFs to Track the Nasdaq.)

Let’s look at three ways to trade and survive a summer correction, with a narrow focus on aggressive risk management, shorter holding periods and well timed short sales. Countertrends​ can unfold quickly through a series of sharp down days or evolve through two-sided action that persists for weeks or months before reaching the deep lows needed to institute new long-term positions. These time-tested techniques should work with both scenarios.

Raise Cash

The over-loved and overbought technology sector now holds a large supply of weak-handed players that are likely to panic when the market heads lower because they’ve been conditioned by Wall Street to hold for the long term but don’t have the discipline to follow that advice. It is often better to be the first one out the door, raising cash that can be used for short-term trades or to buy back beloved issues at much lower prices. This follows the old trader’s wisdom to “buy ’em when they’re cryin’ and sell ’em when they yellin’.” (For more, see Tech Stocks May Be Both Cheap – and Risky.)

Don’t Try to Pick a Bottom

The Nasdaq 100 set off a weekly-scale Stochastics sell signal last week, raising the odds for bearish price action that lasts between eight and 12 weeks. It is best to avoid bottom fishing until the indicator reaches the oversold zone while concentrating firepower on relative lows that generate buy signals on the 60-minute chart. Once positioned, it’s important to sell aggressively when bounces reach short-term resistance levels that are likely to attract fresh selling pressure. Those levels also mark entry zones for carefully timed short sales that should be covered aggressively during breakdowns and wide-range sell-off days.

Play the Rotation

Banks, industrial metals, energy, retail and small caps closed Friday’s session higher or near their unchanged levels, putting a floor under the S&P 500, but it will take weeks or months for those laggards to provide steady leadership rather than hours or days. As a result, these sectors are more likely to offer well timed position trades than longer-term investments, at least through the summer months. (For more, check out Sector Rotation: The Essentials.)

Banks are best positioned to take advance of a positive rotation after a three-month decline that dropped SPDR S&P Bank ETF (KBE) into deep support at the 200-day EMA. Last week’s buying surge has already reached short-term resistance, setting up two possible trading scenarios. First, a consolidation near the April high at 44 will set off fresh buy signals if it can hold that level for one to two weeks. Alternatively, a pullback that tests the 50-day EMA at 42.50 should also be buyable, ahead of continued upside into the March high.

The Bottom Line

The Nasdaq-100 posted the highest selling volume since August 2015 on June 9, signaling the start of a summer correction that shakes out high levels of complacency. Market players that adapt quickly can take advantage of this downturn, avoiding the typical traps that can empty trading and investment accounts. (For related reading, check out Why a 10% Stock Correction May Be Good.)

Published at Mon, 12 Jun 2017 14:10:00 +0000

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Fooled By Randomness

 

Fooled By Randomness

by THE MOLEJUNE 8, 2017

It is Mario Draghi’s turn to torment market participants this morning, which means a market overview will have to wait until the wave of volatility has washed over us and hopefully left some of our open campaigns intact. In the interim I decided to channel my inner Nicholas Taleb and ruin your collective day by singlehandedly smashing what you hold most dear as traders, i.e. your perspective on how markets function and your ability to anticipate what may come next. And if you think I am joking then you are most likely doubly mistaken. Read on at your own peril:

2017-06-08_random_series

Still here? Very well then. Take a look at the chart above and then grab a piece of paper and write down your thoughts about what you are seeing. Would you trade this chart? What are your general impressions about it? Do you see any entry opportunities? Are we perhaps counting waves or looking at specific cycles? When you’re done please follow me to exhibit B:

2017-06-08_random_series2

I tell you what I think. Not a bad chart at first sight I’d say but it has its periods of sideways volatility. But when it gets going it really ramps so a trend trading system here may just work fine. Playing the swings may also work if you slap a Bollinger on it. Do you agree? Disagree? Make not of all that and then follow me to exhibit C:

2017-06-08_random_series3

Ouch, not a chart I would want to be trading – that looks pretty nasty. That’s usually the type of tape I try to avoid. Although it has trending periods it seems to turn on a dime at a moment’s notice. Agree – disagree? Take note.

It’s All Just Noise

I’m sure your curiosity has peaked by now and you wonder what the purpose of today’s exercise may be. And the sad truth of the matter is that it’s all nothing but noise. All three charts above were produced purely by the power of a simple python script using a vanilla random function:

import numpy as np
import pandas as pd

import statsmodels
import statsmodels.api as sm
from statsmodels.tsa.stattools import coint
# just set the seed for the random number generator
np.random.seed(107)

import matplotlib.pyplot as plt

X_returns = np.random.normal(0, 1, 10000) # Generate the daily returns
# sum them and shift all the prices up into a reasonable range
X = pd.Series(np.cumsum(X_returns), name=’X’) + 50 # so the chart starts at 50
X.plot();

Order And Chaos

Trust me, I know how you feel – it’s like the floor just gave way underneath you and took with it all the technical trading knowledge you’ve accumulated over the years. The good news is that it’s not as bad as you think, if that makes you feel any better. Let me explain. Over the past few years I spent quite a bit of time investigating fractal patterns in financial data series. A major aspect of my work was the use of machine learning tools in combination with time series classification parsers to find recurrent patterns, also called ‘motifs’. Some may call them fractals although technically speaking fractals are self-recurring on larger intervals, so I usually prefer the term motif as we normally look for the same recurring pattern within the same time window.

Turns out that I actually wrote a multiple-dimension parser and parsed for the same motif on a series of time windows, so in the end a fractal it is. What I learned in months of testing is that there are in fact recurring fractals in financial time series. However, the type and frequency significantly differ from one symbol to the next, plus the number of recurring patterns/fractals/motifs only account for about 5% of the series. Which means that 95% of it is noise, or more correctly what is known as a ‘random walk’.

All Models Are Wrong, But Some Are Useful

So is everything we have learned about the markets complete horse wash? Are there in fact no technical patterns and are we fooling ourselves? Well, yes but no. In the words of George Box (one of the great statistical minds of the 20th century): “all models are wrong, but some are useful.” In reality there is most definitely a significant amount of randomness to all financial markets. But I would call it ‘guided randomness’ because in between the noise are the actions of human traders who look at a chart and believe that buying or selling at a certain threshold makes a lot of sense. And as such it often becomes a self fulfilling prophecy, because just like water it seems that a random walk simply follows the path of least resistance and then finds its next level. Which of course may explain why ‘following the herd’ works so well until it doesn’t

Do Entries Matter?

But still two of those random charts I posted above look pretty tradeable, don’t they? Which makes one think of course whether or not the true key to profitability and success as a trader lies in picking entries. And of course we already know that it doesn’t because markets change all the time and so do the systems that operate successfully during any arbitrary trading period. Meaning you may be picking great entries like your nose one quarter and then lose it all back and then some doing the very same thing the next.

Van Tharp once stated that [successful trading is 40% risk control and 60% self-control. In turn, the risk control portion is one half money management and one half market analysis. Thus, market analysis is only about 20% of successful trading. Yet most traders emphasize market analysis while avoiding self-control and de-emphasizing risk control. To become successful, traders need to invert their priorities].

We’ve talked about self control many times here but let’s set that aside for now. Focusing on the remaining 40% only half (i.e. 20%) supposedly should be devoted to market analysis. I think that’s a vast over estimation and my own belief is that market analysis should account for not more than 5% of your trading. A lot more time should be devoted to campaign management, risk management, and capital commitment.  Which are activities that are by definition a lot more analytical than technical. Instead of reading charts to find entries we should be spending a lot more time analyzing how to extract maximum returns on entries we have been taking. Of course as a financial blogger that would most likely reduce my audience by a significant margin.
Published at Thu, 08 Jun 2017 13:16:01 +0000

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Macy’s Warning Sends Department Store Stocks Sinking

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American department store chain Macy’s Inc. (M) continues to see its shares fall Wednesday after dipping more than 8% on its reduced outlook for the current quarter.

Chief Financial Officer (CFO) Karen Hoguet told analysts Tuesday that the department store’s gross margins may come in below forecasts offered in February. (See also: Macy’s and the Day Retail Died.)

Investors Fear Pressure Will Continue into Q2

With gross margins now expected to be 60 to 80 basis points below last year, Cincinnati-based Macy’s says it plans to offset the burden with increased cost savings.

In general, investors are receiving the warning as a sign that the intense pressure on American retailers in the recent period hasn’t eased up in Q2. Macy’s industry peers such as J.C. Penney Co. Inc. (JCP) and Kohl’s Corp. (KSS) saw their stocks close down about 4% and 6% respectively following the announcement on Tuesday.

New CEO Lays Out ‘North Star Strategy’

Hoguet joined Macy’s newly instated Chief Executive Officer (CEO) Jeff Gennette in the department store chain’s first meeting with analysts in four years, just 10 weeks into Gennette’s tenure.

After working at Macy’s for 34 years, the new CEO says he has “tremendous faith” in the brand’s ability to strengthen its bond with customers, although admitting that it must “work hard” to “figure out all the answers.” Gennette further detailed a new “North Star Strategy” that outlines how the firm will evolve its marketing, merchandise, experience, interplay between stores and online, and innovation front deemed “what’s new, what’s next.” The North Star Strategy will reportedly involve a new loyalty program to roll out later in the year, a simplification of pricing and a reduction in duplicate items while the firm focuses on more trendy fashion over basic clothing.

As luxury retailers benefit from an increase in demand for premium products driven by Millennial trends and a solid stock market, Macy’s hopes to leverage its high-end brands such as Tommy Hilfiger and DKNY, along with private-label brands including I.N.C., Hotel Collection and Martha Stewart. In a move that will also boost margins, Gennette seeks to grow exclusive and private label brands to make up 40% of total revenue by 2020 compared to the current 29%. (See also: 2017: The Year of Retail Bankruptcies.)
Published at Wed, 07 Jun 2017 19:53:00 +0000

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Stocks Rise as Earnings Surpass Expectations

 

Stocks Rise as Earnings Surpass Expectations

By Justin Kuepper | May 26, 2017 — 4:58 PM EDT

The major U.S. indexes moved higher over the past week as first-quarter earnings estimates continue to surpass analyst expectations. According to FactSet, one-third of S&P 500 companies have beat mean earnings estimates, and 64% have beat mean sales estimates. New home sales swung 11.4% lower to an annualized rate of 569,000 and existing home sales fell 2.3% to a 5.57 million annualized rate, but long-term averages remain firmly in positive territory, and existing home prices remain strong with a 6% year over year gain to $244,800.

International markets were mixed over the past week. Japan’s Nikkei 225 rose 0.52%; Germany’s DAX 30 fell 0.29%; and, Britain’s FTSE 100 rose 0.7%. In Europe, the European Central Bank talked down the impact of the ‘Brexit’ on the Eurozone economy as economic activity hovered near a 6-year high. In Asia, Moody’s lowered China’s credit rating for the first time since 1989 citing concerns over rising debt. The rating was lowered by one notch to A1 from Aa3, putting in the same category as countries like Israel and Japan.

The S&P 500 SPDR (ARCA: SPY) rose 1.42% over the past week. After rebounding from its lower trend line support, the index rebounded past its R1 resistance at $240.90 to its upper trend line resistance. Traders should watch for a breakout to R2 resistance at $243.73 or a breakdown to the 50-day moving average at around $236.97. Looking at technical indicators, the RSI has moved closer to overbought levels at 63.56, while the MACD may have experienced a bullish crossover after a brief decline.

The Dow Jones Industrial Average SPDR (ARCA: DIA) rose 1.33% over the past week. After rebounding from lower trend line support, the index reached its upper trend line support and R1 resistance at $211.23. Traders should watch for a breakout to R2 resistance at $214.00 or a breakdown to the 50-day moving average and pivot point at $207.04. Looking at technical indicators, the RSI is approaching overbought levels at 62.90, but the MACD may have experienced a bullish crossover.

The PowerShares QQQ Trust (NASDAQ: QQQ) rose 2.45% over the past week, making it the best-performing major index. After rebounding from its lower trend line support, the index reached upper trend line resistance at around $142.00. Traders should watch for a breakout to new highs or a breakdown to R2 resistance at $140.20 on the downside. Looking at technical indicators, the RSI is overbought at 71.82 while the MACD may be experiencing a bullish crossover after a modest decline.

The iShares Russell 2000 Index ETF (ARCA: IWM) rose 1.12% over the past week, making it the worst-performing major index. After rebounding from lower trend line support, the index reached the pivot point at $138.18. Traders should watch for a breakout toward upper trend line resistance and R1 support at $142.70 or a move lower to lower trend line support and S1 support at $134.54. Looking at technical indicators, the RSI appears neutral at 50.35 while the MACD remains relatively flat over the past few sessions.

The Bottom Line

The major U.S. indexes moved higher over the past week, although several of them remain in overbought territory. Next week, traders will be closely watching several key economic events, including personal incomes on May 30, jobless claims on May 31, and employment data on June 2. Of course, investors will also be keeping a close eye on the evolving political situation in the United States and other countries.

Note: Charts courtesy of StockCharts.com. As of the time of writing, the author had no holdings in the securities mentioned.
Published at Fri, 26 May 2017 20:58:00 +0000

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