Stocks & Equities
Stockscores.com Perspectives for the week ending March 21, 2014
In this week’s issue:
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Trade Process
You have a strategy that you believe in, having tested it well and finding that it has a strong expected value. Are you ready to make market beating profits? Unfortunately, without a good process, even the best strategies can fall apart.
What steps will you take to find the trades, manage risk, monitor the trade for an exit and keep your emotions in check? Any one of these steps can suffer a breakdown that causes a winning trade to turn in to a loser. Without a good process for finding the trades, you can miss them or find them too late, hurting your overall performance. Discipline is essential to carrying out your trading plan so that its effectiveness can be similar to what you found when you were developing and testing your strategy.
Your process does not need to be complex; instead, it should be simple. What is important, however, is that you leave no room for error when defining your process. Creating your trading plan should include the step by step process so specific that you could program it in to a computer.
If you are at all vague then you leave room for your emotions to creep in to the process. You increase the potential that you will see what you want to see or ignore the market’s message. In a one page, written plan, you should establish your rules and also the processes you will go through to activate those rules.
Include a schedule. If you are a long term position trader, establish the time of the week when you will do your research process to find trades. Block off time to monitor the trades you are in. Come up with a simple process to define your position size. Most importantly, define the steps you will take to maintain discipline and emotional control through the process.
If you are an active trader, take the time to define what you will do through the trading day. When will you be at your desk looking for trades? What are the processes you will use to find those trades and when will you do them? You should define each step in your trading day so that you have the best chance of being focused and disciplined.
Most of us are busy and have many distractions that can take us away from our trading plan. A good strategy is not enough to be successful; we must also have a clear and well defined process for carrying it out. The hour you spend creating this plan will have a big impact on your returns so get to work on it now!
This week, I ran the process I use to find good weekly charts for longer term position trades. I set up the Market Scan to look for stocks that have gained 5% or more over the past 10 days, Sentiment Stockscore of 50 or higher, and at least 150 trades for the Canadian market and 1000 for US markets. To limit the number of stocks that I have to look at, I also focused my scans on stocks under $15.
Before running the Market Scan, I set my chart up to be a 3 year weekly. To do this, I called up any chart, clicked on the charting tab, set the time frame to weekly and the lookback to 3 years. Once I click on Create Chart, the default is set so that all charts that I view will be weekly.
Here are the three charts that I think are standouts:
1. T.AAV
T.AAV breaks to two year highs this week from an optimistic rising bottom. Lots of ground to recover from the losses the stock incurred in 2011. Support at $4.40.
2. FTR
FTR is breaking out from a rounding bottom pattern, this week moving through $5 resistance to highs not seen since early in 2011. No major resistance until $9, support at $4.95.
3. AKS
AKS had a good run higher late in 2013 but has been in a profit taking slide for 2014. This week, the stock broke its pull back, making a move out of a flag pattern on the weekly chart. Good chance it can move to $10 with support at $5.95.
References
- Get the Stockscore on any of over 20,000 North American stocks.
- Background on the theories used by Stockscores.
- Strategies that can help you find new opportunities.
- Scan the market using extensive filter criteria.
- Build a portfolio of stocks and view a slide show of their charts.
- See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.
Over the past several years, we have been hearing a somewhat common theme from the financial media and pundits alike – BUY & HOLD is dead. After two significant market crashes in less than a decade, many investors were all too eager to buy into to this new mantra. It became a common theme from those in the business of selling news, complex trading programs, or even just straight hysteria, that the decade from 2000 to 2010, which they dubbed ‘The Lost Decade,’ had not yielded regular investors a return and that if everyday people wanted to actually earn a return on their capital then they had to adopt new and complex trading strategies (in our experience these types of strategies have only served to lose investor money).
KeyStone has always advised investors to ignore the daily noise perpetually emanating from the markets. Market noise can take the form of price volatility, media headlines and buzz terms, or so-called experts shouting strong but unsubstantiated opinions. But whatever form it takes, it typically only serves to distract people from the long-term objective of investing in solid businesses that can be purchased at good prices. If buy and hold means buying a stock and forgetting about it for a few decades then not only is it dead to us, but it was never alive. In this context however, the strategy of buy and hold was sold by many members of the media and financial community as anything that didn’t involve continuous trading (whether daily or monthly) and a need to sit in front of your computer terminal for any minute the market was open.
We first started hearing about ‘The Lost Decade’ at the outset of 2010. The recovery from the 2008 crash was still at a relatively early stage and feeling in the investment community was still one of uncertainty and pessimism. Figure 1 illustrates S&P TSX price performance from January 2000 to December 2009. Over this 10 year period, the TSX had produced a meager 3.5% return per year which was well below the 6% to 8% return investors generally anticipated as a long-term average. It was at this point that people started to ask, “Is buy and hold dead.” What many people did not think to ask at the time was whether or not measuring average return from the near peak of the ‘tech bubble’ in 2000 to the early recovery of the 2008 crash was an appropriate period from which to ascertain a trend.
Figure 1: S&P TSX Price Index (2000 – 2010)
But when the ‘The Lost Decade’ commentary really started to take off was about half way through 2010. At that point we were into the lackluster summer period and the market had declined moderately from the start of the year. The 10 year price return on the TSX was only 0.4% per year which opened doors to those who thrive (financially or otherwise) from agitation to contend that buy and hold strategies absolutely were dead and that our concept of investing had to change. Those who had struggled in the markets over recent years were all too willing to eat that commentary up with many of them believing that they had to become quick and nimble traders and leave long-term, intelligent investment strategies in the rear view.
Figure 2: S&P TSX Price Index (June, 2000 – June, 2010)
Statistically, the argument in favor of ‘The Lost Decade’ was accurate. There was nearly a zero percent return generated on average over the previous ten years (at that one point in time). However, the data used to support this premise was misleading at best. First of all, dividends were never included by lost decade advocates and looking at the charts in Figures 1 and 2 it is easy understand how dividends have accounted for 40% to 60% of total market returns over time. But where we really take issue is with the time period used to back the lost decade claims. As we said, when this mantra really started to gain was about midway through 2010 which means that the measure was taken from the peak of the tech bubble to what was still a market recovery from the 2008 crash.
In the Figure 3 below, we can see that by simply shifting our measurement period forward 6 months we dramatically alter the picture of long-term investment returns. From 2001 to 2011, the average price performance on the TSX improves to 4.4% per year and when we add dividends we get back up to the 6.5% to 7.0% range.
Figure 3: S&P TSX Price Index (2001 – 2011)
When we look at the 10 year return measured from today, the TSX has produced average annual gains of about 5.3% per year and about 8.0% when including dividends.
Figure 4: S&P TSX Price Index (March 2004 – March 2014)
Although we don’t hear much about ‘The Lost Decade’ today (as it was now four years ago), we still see many people (including media and so-called financial experts) cling to the notion that buy and hold is dead and that investors need to be able to trade nimbly. This is in spite of the fact that the lost decade concept was only true for a very brief period of time and based on numbers and facts that were ignorantly and purposefully presently in a misleading fashion. It is unfortunate that many investors were, and continue to be, sold into this fallacy at what is likely a huge cost to their portfolios and financial positions. Investment success is and will always be based on buying solid, profitable companies at reasonable prices and being willing to hold those positions while being inundated with market noise.
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The Federal Reserve used their policy announcement and the press conference following the announcement to alter their method of forward guidance. Previously, it had been the hard line 6.5 per cent unemployment target that would lead to a culmination of the third round of quantitative easing. Unfortunately, as the employment rate has fallen, and the overall labour market hasn’t improved accordingly, there has been a realization that the employment rate is not a sufficient stand-alone measure for the labour market. Thus, the Fed has had to abandon this with a more qualitative approach. This creates a problem for those invested in these markets, for it has been Fed policy providing direction. With a more qualitative approach to guidance, the result will be more ambiguous policy statements from the Federal Reserve’s Federal Open Market Committee (FOMC), and it will potentially lead to greater market volatility from the Fed as their guidance is open to misinterpretation.
One of the touted accomplishments of Janet Yellen’s predecessor, Ben Bernanke, was that he played a role in making the Federal Reserve a more transparent institution. One action in particular was lengthening the FOMC statement that was released after each meeting giving investors and analysts a more detailed approach to how policy is conducted. This was a stark difference to much briefer statements from the Greenspan era that left much to speculation. The importance of this measure though was to eliminate potential shocks to the market. This is why the US Federal Reserve finds themselves between a rock and hard place, and potentially risk reverting back to their old ways with a less definitive approach.
A qualitative guidance approach allows the US Central Bank to act in a more discretionary manner as they do not run the risk of failing to meet predetermined objectives. The consequence will be less clarity from the Fed, which implies the possibility of bigger shocks or surprises for the markets. Former PIMCO CEO Mohammed El-Erian suggests equities sold off following the Fed statement due to an uncertainty premium, which can be thought of as the market pricing a discount for a much vaguer policy outlook. But the uncertainty looks beyond the termination of QE as there are questions surrounding the overall efficacy associated with the Fed’s past course, and this is given QE could be terminated before the labour market is fully repaired.
It is difficult to refute that quantitative easing provided some form of benefit to the US economy; one in particular was supressing the longer end of the yield curve, which was of particular benefit to a troubled mortgage market. But with the Fed’s dual mandate of stable inflation of 2 per cent as well as maintaining full employment, the abandonment of QE before achieving success in that regard is an admission of the Fed’s shortcomings. And part of the problems is inherent in the American labour market. Long-term unemployed are structural issues, and unfortunately record low policy rates will not provide a solution to this problem. That’s part of the reason the FOMC is forced to take this path of paring back QE.
Janet Yellen’s key task will be to conventionalize the role of the US Fed. Her greatest risk is that as long as these markets continue to be driven by the guidance her institution provides as a more ambiguous approach will lead to much greater volatility. The only hope is that markets can move off the life support provided by central bank easing, and back towards being driven by fundamentals. In this case, central bankers can go back to operating in the shadows.
INSTITUTIONAL ADVISORS
FRIDAY, MARCH 21, 2014
BOB HOYE
PUBLISHED BY INSTITUTIONAL ADVISORS
The following is part of Pivotal Events that was
published for our subscribers March 13, 2014.
“High Times For High Yield Bonds”
“Default rates are below historic averages.”
– Investopedia, March 3
“A surge in interest rates and the worst currency rout since 2008 in developing nations from Russia to Brazil.”
– Bloomberg, March 7
“A Whole New Inflationary Threat Is On The Horizon”
– Business Insider, March 7
“Copper futures fell the daily limit”
“Commodities and equities slide amid broad risk aversion”
– Financial Times, March 11
* * * * *
Perspective
Tuesday clocked some outstanding reversals. Many to the downside, with long treasuries to the upside.
As we have noted, outside reversals may not end a trend but they show impetuous action and a sudden loss of liquidity.
The senior indexes accomplished a higher-high than the day before, a lower-low and a lower close. This included the S&P, DJIA, and the NDX. Banks (BKX), broker-dealers (XBD) and base metal miners (SPTMN) did the big reversal as well.
Last week’s Pivot led off with “Big forces are at play.”
It is too early to determine how significant the stock reversals are, but it included spectacular stuff in some parabolic flyers. Tuesday’s “Silly Season” Chartworks covered FCEL, BLDP and PLUG. These key reversals closed at down 16%, 20% and 33%, respectively. The big TSLA reversed as well.
Some credit spreads also recorded dramatic reversals. JNK/TLT, HYG/TLT, MUB/TLT, EMB/TLT and even the high-grade with LQD/TLT.
The price for junk (JNK) clocked the reversal, as the price for the bond future (TLT) reversed to the upside.
Base metals (GYX) suffered the surprise, as copper dropped in three days from 3.22 to 2.94, which takes out last summer’s low of 2.98.
Precious metals joined the reversal action, which will be reviewed below.
In recording the most ebullient conditions since 2007 financial markets had become precarious. Step one in the denouement is usually the discovery of volatility.
Volatility arrived today.
The hit to lower-grade bond prices is an alert to the end of the greatest bond bubble in history.
Junk soared to 41.36 last week and set a Weekly RSI at 77. This compares to 79 reached on last year’s seasonal thrust into early May.
It is uncertain if the RSI at 77 is the best on what could be a seasonal rally, or if the move has further to go. Strong rallies at this time of year in lower-grade bonds can become precarious at any moment.
The Euro bond market has become a one-way street. Confidence and the need for yield has overwhelmed caution. And then there is the old saying: “Credit is suspicion asleep”.
Using the Spanish Ten-Year Note, technical excesses have been accomplished and reviewed on the following chart.
Yields have jumped in Asia and it is unlikely that the sudden loss of liquidity will be isolated.
Emerging debt spreads (EMB/TLT) has been a good way of following the drama.
Representing narrowing spreads the ratio rose to 1.05 at the end of December and was the first to take out key technical support. The rebound out of the oversold made it to above the 200-Day ma last week. It has drifted below this marker and is vulnerable to an extended move. Today, it fell through the 200-day line. Now it’s at 1.00.
Other spreads followed on what was likely a cyclical reversal in credit spreads.
Ambrose Evans-Pritchard at The Telegraph has a clear view.
“It is extremely hard to calibrate a soft landing, and the sheer scale of China’s credit boom now makes it a global headache. China accounts for half of the $30 trillion raised in world debt over the past five years.”
Last week’s rush to risk dropped the bond future down to 130.7, it has recovered to the 133 level. We have had a target of around 136.
The main conditioner on commodities has been the exceptional lows set in November-December. And as noted, the sector was so dismal that a “Rotation” was possible.
The action has been outstanding and technical measures were reviewed last week.
Sentiment measures on the CRB soared to 56%, which is the highest since the 2011 peak. That high was 474, the recent is 308. Coffee, with sentiment at 78%, became the most popular on record.
Momentum seems to have peaked and within this coffee won the championship with a Daily RSI of 88. Agriculturals (GKX) accomplished 83 and the CRB recorded 86. These high momentum readings are only found at important highs.
Last week, the action seemed “straight up” and we concluded that on such a speculative spike it was difficult to call the top day.
Quite likely, the best is in for momentum, sentiment and for the “Rotation”. That’s on the hot commodities.
Crude oil was not as dynamic. Our overview included “Peak Oil” of February 19th. This concluded that the rally into March would set a cyclical peak and the subsequent decline would resume the secular bear. The high was 105 at the first of the month.
The Daily RSI reached 73 in February which was the level that ended the rally last July.
Base metals (GYX) jumped from 331 in early December to 362 in January and that was that. Although Chinese buying was called “investment” it was speculation, which we covered. The decline has been brutal. GYX is down to 324, which was the low last summer.
Copper rallied from 3.12 to 3.45 and plunged to 2.91 today. This takes out the low of last July at 2.98 – extending the bear that started at 4.65 in 2011.
However, under forced selling copper has become oversold enough to prompt a brief rebound. If it can’t get through 3.15 the bear will likely continue.
In US dollars gold has broken out. This is based upon the January 21st ChartWorks that noted that 1306 was key resistance. Another resistance level was at 1361 and it has been taken out as well. Today’s price has been up to 1375.
The equivalent levels for silver have been the 25 and 29 levels, and at a best of 22 silver is not working.
Why?
Will it catch up?
Earlier in the year we noted that for a bull market in precious metals silver had to outperform gold. From February 1st to the 18th it did as the silver/gold ratio increased from .153 to .167. Precious metals rallied with the strong commodities.
It is right back down to .153, which suggests changing credit markets. Which in turn suggests that gold could start to outperform silver. And that suggests a return of postbubble financial pressures. This seems round about reasoning but at the beginning of a financial storm gold starts to outperform silver.
So let’s look at the gold/silver ratio and it typically declines with a boom and rises with the bust.
In the great inflation in tangible assets to 1980 the ratio declined to 16. The Hunt Brothers “bet the ranch” that it would go lower. They must have been doing supply/demand research.
The consequent banking crisis did not fully clear until Citi and Chase had to be bailed out at the end of 1990. As with previous periods of credit distress the gold/silver ratio went up. It reached 104.
In the boom that peaked in 2000 the ratio declined to 46. In the bust it reached 83 in 2003.
On the party to 2007 the ratio declined to 45 and in the bust it soared to 93 in 2009.
The decline to 30 in 2011 showed the greatest speculation in precious metals since 1980. This excess seems independent of the credit cycle because the financial boom kept going.
Since then the gold/silver ratio has been correcting the unique excess and not connecting to the credit markets. It could be returning to its traditional role of signaling trouble. We will soon see.
Credit spreads took a turn to widening today and that slammed the general stock markets. With this the gold/silver ratio has turned up.
Considering the excesses in stocks and lower-grade bonds, we are assuming that the ratio is returning to its traditional role as a leading indicator.
At 64.5 now, rising through resistance at 66 would be an alert. Rising through 69 would suggest a rapidly spreading liquidity crisis.
Last week we advised that nimble traders could begin to take some money off the table. If the gold/silver ratio breaks above 65 take some more off.
Our bellwether stock is Silver Standard (SSRI) and it has rallied from 5.18 in October to 11.35 today. With this, the Daily RSI has enjoyed an impressive swing from 28 to 74.
The precious metals sector is getting overdone.
Link to March 14, 2014 Bob Hoye interview on TalkDigitalNetwork.com:
http://talkdigitalnetwork.com/2014/03/dont-blame-ukraine-for-market-bounces/
BOB HOYE, INSTITUTIONAL ADVISORS
E-MAIL bhoye.institutionaladvisors@telus.net
WEBSITE: www.institutionaladvisors.com
- Financial stress reached its worst in early 2009.
- By this measure there is less stress than in the halcyon days of 2007.
- Note the reversal at the beginning of the year.
- The ChartWorks proprietary model has registered a rare Downside Capitulation.
- This is an indicator of excess.
- Another technical model is registering a Sequential Buy.
- This one tracks the pending reversal and all that is needed now is an up-tick in yield.
- Credit distress has been increasing in China, and troubles that begin in outer regions have always visited the financial center.
- With the 2012 crisis, the yield soared to 7.50%.
- This week, a new low for the move was set at 3.30%.
Basically, “Try Not To”. As the author of this article proves well below.
Warren Buffett has commented that he would have more money today if he had never sold a position. Perhaps a more simple summary comes from Tom Gayner, the very successful chief investment officer at Markel (NYSE:MKL), who has said that investors make more money from their butts than their brains (as in, sit still and don’t overthink things).
Reading a well written article on the topic of “selling” from time to time is usually a valuable expediture of any investors time. For most of us, if not all of us find it difficult & even downright terrifying to sit through a correction in either a market, or an individual stock. The temptation to sell at the wrong time is powerful – Editor Money Talks
….read When Should You Sell?
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