My Own Analyst

Market Update

After a strong run over the past few days, the market, not too surprisingly, is retracing a bit.  The catalyst is strength in the dollar against the euro amidst concerns over tomorrow's Italian 10-year auction.

I have been laying low on ST Trades but might step it up as the diminished liquidity should be ending.  We have CHS on - it popped last week on a rumor and has held in fairly well.  It hasn't been a great trade, but it's in the money.  Looking for 11.50 in the near-term hopefully.  Then there's the XLF Jan 13 call, which is about back to where we put it on, actually a little lower.  Still viewing it as having potential for now.

I wanted to pass along a series of Seeking Alpha articles where I was looking for potential bounce candidates among the down-trodden:

• Health
• Industrial/Energy/Material
• Tech
• Financial
• Consumer

In Health, NJVA (maybe too scary) and MASI are classic bounce candidates to me.  VOLC is one I like longer-term - not so sure about a bounce in the near-term.

In Industrial/Energy/Material, clearly DGI is my favorite here, and I am looking for 19.  A client of mine thinks that the tanker sector is way overdone and owns TNK.  CAS is interesting too.

In Technology, I want to mention that I still like ADBE ST and LT.  On the list, though, DRIV is clearly due for a big bounce.  RIMG is one I like LT and could draw some buy interest, but it's more likely to be when they report next.  I don't know too many of the other names that well.  VECO is at LT support and a good company from what I recall.

In Financial, ART has been such a pig that it captivates me.  I wish it were closer to TBV, but I note it has no significant leverage (it's an asset manager).  Of course, EZPW is the one on the list I like.  FSP looks interesting here too - fat yield, stable NAV.

Finally, on Consumer, SKX is definitely the one.  I also note that JAKK is on big support at 14.  VRA and RUE are growth stocks that hopefully aren't passe but rather just growing into their valuations.  These look quite interesting.

 

2012 Year-end Target: 1600

I just submitted an article to Seeking Alpha - http://seekingalpha.com/article/303454-market-outlook-jump-aboard-it-s-now-a-rocket-not-a-roller-coaster.   I spent today thinking about my outlook for the coming year, and I believe that while we will likely fall short of my 1500 target for 2011 I will employ similar methodology to forecast 2012.

I shared here last week that I expected to end 2011 near 1320, but I am more bullish near-term.  The way the market penetrated what I expected to be big resistance at 1270 leads me to believe we have a decent shot of 1400, which would be modest new highs post-2008.  I think that the key to being right or not is the outcome of the Super Committee at Thanksgiving.  While betting on the government to do the right thing has been a challenging one in recent years (two glaring p.r. failures), I think that they get it right this time.  Expectations are low, and I think that the actual outcome could be a much larger and more comprehensive program aimed at preventing another downgrade.  We'll see how it plays out, but it sets the tone for perhaps cautious trading in November with another surge at year-end if my speculation proves correct.

What Looks Good Right Now

We are back up - not sure what happened with typepad.com.  Hopefully, you received my email regarding BEN earlier - it was down following its monthly report of assets under management, which fell sharply reflecting lowerr asset values at the end of the month.  The stock has been clobbered well beyond what the lower assets would suggest, and it appears that there have been no outflows (just lower asset prices, particularly international equity). 

The market appears to be following the script I described this weekend, with a test of 1250-1270 likely ahead.  Go figure.  Had I predicted that a week ago, it would have been funny or perhaps crazy, yet we have now cleared some big resistance.  Small-Cap appears to have more near-term upside in my view, having lagged recently.

Before I go on, with NDN's acquisition announcement today, I have removed it from my watchlist, replacing it with a specialty chemical company, ALB.  My preliminary target on this company is 65, so I will be looking for a better entry than the current 46.

I am liking the charts of SMCI, SHFL and IIIN in particular.  LOW too.  SYNO has moved to post-July highs, showing incredible relative strength of late.  CSCO appears to be moving out of its base, rewarding patience finally.  STJ stands out on high quality oversold, CRK on not-so-high quality oversold...

Manic Monday

Well, we got my levels from Friday this morning - better late than never!  In case you haven't seen, please be aware of trades in all models.

Gold is getting slammed along with other metals again.  I may lift the trade before we hit 150 on GLD - it is currently 157 and has traded as low as 155 in the pre-market.

On EZPW, just a heads-up that Sterne Agee downgraded FCFS (a rival that is a lot more expensive and that is a "black 1").

A heads-up on AEO, a stock that is SO CHEAP.  The CEO bought over $10mm of stock.  I mentioned the name in an article I published on Seeking Alpha this weekend.  It, along with several others I mentioned, haven't caught on yet that falling gasoline prices are likely good for Consumer Discretionary stocks.  CATO and SCVL stand out in this regard too.

On the market, I am used to head-fakes, especially on Monday.  The Tuesday after Labor Day and the Monday the following week saw gap down that proved to be buying opportunities.  Last week too, to a smaller degree (and not for long!).  This is a tough call, as we look to be leaving a lot of room down to the high Friday of 114.16.  We also have left a gap from Wed/Thurs up to 116.44, so things could be wild.  I am going with higher before lower, but I am definitely keeping in mind that Friday was an "inside day", which, as I shared last week, can signal the end of a trend.  We had that funky island earlier this month, and now we have another one, at least for now.

I don't have my usual Monday meeting - it has been moved to Tuesday, so I will be back soon...

6 in a Row?

The markets are down "sharply" this morning, which, while it seems like a long time ago now, was how we began last week.  In my comments over the weekend, I noted that the market's five-day surge last week had left too many stocks above the 10dma, leaving it vulnerable to some back-fill.

With that said, we are down in pre-market (2 1/2 hours to go, though) by about 1.3% at 119.90 on SPY.  It's actually closer to the highs than the low of 119.33.  119.65 looks to be support to me, with more support down to 118.75.  The now rising 10dma is just below there too.  So, we are likely due for a little breather today, but you never know. 

I want to share a chart from a review of prior markets that are similar in nature to this one - where we were down just a little going into Labor Day.  While there are some other examples where the outcome was less favorable than the big rallies depicted below, history has shown that as long as the market isn't already DOA going into Labor Day, it has tended to advance.  Of course, everyone has 2008 on their minds still, when the market was down 11% at the end of August.

 
I published an article in Seeking Alpha discussing each of these other years if you are interested:



http://seekingalpha.com/article/294279-will-stocks-end-2011-with-another-hail-mary-being-caught

 

 

Could Stocks Surge into Year-End?

Here we are near the end of Q3, and we find the market not too far from where we began the year.  I took a look at other years where the market suffered in the first 8 months of the year a few weeks ago.  More recently, I followed up with a review of 1982, 1998 and 2010 to see how 2011 stacks up.

READ MORE

Interesting Review of History

Rules are made to be broken, as 2008 taught us.  One rule that could be on the way to be broken is the "3rd year in an election cycle always is positive" rule.  By this, we are talking about the year before a presidential election.  We have been on a hell of a streak, as I was unable to find a full-year loss in the S&P 500 since its inception (to the 50s).  In fact, as my article on Seeking Alpha indicates, in 41 years, we haven't even been down 8 months into the year in one of these pre-election years.  The real gist of the article, though, is that the very best year-end rallies over the past four decades have occurred when the market was down modestly going into Labor Day.  Will this year be the same? 

I also want to share some reading I did this weekend, as it helps me to better understand why stocks are so darn cheap.  I re-read an excerpt from the book "Your Money and Your Brain:  How the New Science of Neuroeconomics Can Help Make You Rich".  Jason Zweig contributed to this book (Chapter 7), where he wrote about "Fear" in 2007.  Long story short, I believe that the terrible market action of 2008 and early 2009 has left the brains of market participants somewhat damaged in how they weigh opportunity relative to risk.  Quite simply, the market will take flight now very quickly when negative information appears, as the vast majority of participants, who are naturally risk-averse, don't want to experience pain and are willing to give up reward.  In a nutshell, Fear has gained the upper hand over Greed.

If you owned a business and had the choice of continuing to do so or selling it, how would you go about it?  I imagine you would contemplate the proceeds you would receive and how you might redeploy them.  There are many other aspects to the decision, but a key one would be to weigh the relative economics of continuing to run the business or cashing in.  Let's assume that you could sell your business (that you own but don't operate), which is generating $100K per year in profits and growing about 7% per year for $1.2mm.  Let's also assume that you could buy tax-free municipals that would yield 7% for 20 years.  You would essentially be ahead in the next few years on an after-tax basis (assuming you didn't have to pay capital gains on the sale of your business), so you might do this.  What if you could invest at only 5%?  You would take an immediate cut to your income - the deal would have to take place for reasons other than economics.

Rather than owning a business, let's now assume you own a stock.  Guess what, then.  You do own a business (just not control of it).  The numbers I shared are pretty realistic.  Plenty of stocks with 7% growth trade at 12PE, and A-Rated long-term munis are offered at about 5%.  Stocks are a great deal, except that they can become even better deals.  One alternative could be that people suddenly have realized that the future is likely to be a lot worse than the present (like in 1987, when the stock market lost 20% of its value in a day).  If you thought your business was going to implode, you might consider taking that offer.  I am sticking with the idea that the crowd is wrong.  Unfortunately, the crowd is big, so fighting the crowd could require a lot of patience.  Time, though, is on the side of value ultimately being realized.  Selling your business at 12X income to buy tax-free munis yielding 5% is likely a bad trade.  Hang on, and you will likely get a higher valuation (and enjoy higher income along the way) or, perhaps, a chance to buy those bonds at much higher yields than 5%.

Blog Articles

I got a question about a Seeking Alpha article I wrote from a subscriber here.  Rather than get into the specifics, allow me to share a few things about my posts.

1. I get paid for those posts (by the number of viewers) - sometimes I write for that reason, at least partially
2. I get leads for Top 20 and other models - it's good to have stuff out there
3. Thinking out loud keeps me honest

Why do I share this?  If I have something to say, you can be assured I will say it to you guys.  If I don't comment on a Seeking Alpha article to you, it's because its not action-oriented.  The same really goes for the TradeKing blog posts, which are also paid contributions (3X per month).  I don't mean to diminish those other posts - they are meant to get people started in their own diligence processes. 

 

Quick Items on Watchlist and Top 20 and CG/B Names

SKX - rumors of an acquistion caused the surge earlier...  also, they have a watch relationship now.

MPR - another Duall order, with optimistic comments as well

ASEI - new contract win

 

More on Empire District

There is probably a 4th lesson that will play out on EDE.  After further thought, while the price may be right, the timing may not.  If this type of situation interests you (buying into panic selling or over-selling), you should be careful to make sure that the panic is near an end.  My guess is that this could take some time to clear up.  I shared my views on Seeking Alpha:

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