Archive for the ‘Stock Market Analysis’ Category
A month ago, I expressed my concerns with the S&P chart and thought stocks were set for additional weakness. My investment advice was to be careful and not to chase stocks. Even after the one-day surge last Tuesday, I thought it was largely due to an extreme oversold condition resulting from stocks closing lower in seven of eight sessions. In my view, the bias continues to be negative and, until there is a base formation, I sense that stocks may edge lower.
More reality is creeping back into the stock market and the bear market rally looks vulnerable. With so much money sitting on the sidelines, a lot of institutional investors took the opportunity early this earnings season to nibble away at some long-term positions, as well as actually trade the market. There’s no doubt that the stock market’s been strong since achieving its new low in early March, but I think investors need to be very cautious right now. The news isn’t good enough for any sustainable stock market rally.
With the current bias to the downside, you need to have some risk management in place to avoid watching your trading capital disappear. This could be via mental or physical stop-loss orders. Or, if you want to avoid selling into a negative market, you could write call options on some of your stocks to generate some premium income and help reduce the average cost of a position.
However, the uncertainties make more downside moves in stocks likely in the near term and heading into 2009, which is turning out to be filled with uncertainty. We are clearly nervous, as a market bottom has yet to be established and this is where the risk is.
Another strategy you can employ is the use of put options as a downside hedge. I have discussed this in the past, but will reintroduce the strategy again. An option is a binding contract established between the two participants on the opposite side of a trade (i.e. the buyer and seller). A purchaser of a put option buys the right, but not the obligation, to sell the underlying instrument.
Establishing put options makes sense to me and should to you. The fact is that investment assets are valuables, probably having the first or second largest value after your home. By the time you retire, the value of your investment assets would be probably far in excess of your home value. So, this makes protecting your investment assets that much more critical, so you can enjoy that retirement.
You can establish put hedges for a single stock or a basket of stocks, where buying put options to … Read More
Price stability has always been an important goal of Western central banks around the world. Only until very recently have most central banks been quite hawkish on inflation and rightly so. Now, however, the threat of inflation remains, but there is the added risk of asset deflation, which is very real. This means that central banks have room to cut interest rates without the worry of stoking inflation too much.
Coordinated interest-rate cuts are just what the current market environment needs, not only to make credit more affordable, but also to send another signal to the marketplace that policy makers are doing something for individuals and not just a select few on Wall Street.
Bill Gross, the West coast manager of the world’s largest bond fund, is calling for such a move and he does have a track record of advocating for what’s best for the economy, not just his fund.
I’d like to see an interest-rate cut with the flexibility for more. I do think, however, that there is a limit to how far the Federal Reserve should move. The central bank needs some breathing room on interest rates to handle both asset deflation and raw material inflation going forward.
It’s going to be shaky over the very near term, but I do think we’re going to get a period of consolidation very soon. The stock market is oversold and every piece of bad news you can think of is already factored into the market.
I really think we can avoid what some are saying might be a depression over the next several years. No sector of the economy … Read More
Black Monday appeared again, as the DOW fell as much as 800 points but recovered, and closed down 370 points or 3.58% on the day, breaking below key psychological support at 10,000. Across the board, selling was panicked, as investors flocked to the exits, dumping stocks. The focus of the selling was technology and small-cap growth stocks, as worries about a global meltdown and recession drove the selling. The fact that the trading volume of 3.4 billion shares on the NASDAQ was well above the 200-day moving average indicated the seriousness of the sellers.
The degree and scope of the selling yesterday were a surprise given that stocks had been moving down for three straight days and were extremely oversold. Yet it is clear that investors are very worried about the condition of the U.S. and global financial systems, despite the passage of the $700-billion financial bailout legislation and concerted efforts worldwide to halt the credit crisis.
Simply nasty it was, but it could be much worse, as the key Russian MICEX exchange closed down 18.6% on Monday in an absolutely crazy day; in fact, the exchange was forced to shut down its trading three times during the trading day. Kind of reminds us of years passed in U.S. exchanges before the establishment of breakers to avoid what we saw during Black Monday in October 1987.
Selling in the technology sector has been intense, as the NASDAQ is close to 30% this year, and just fell below 1,900. The DOW down 25%, while the S&P is approaching support at 1,000, down 28%. Small-cap stocks, which had been holding and were … Read More
If there is one thing I have learned from years of investing and obsessing with stocks, it is that no investment goes up or down in a straight line. After days of going down, the stock market is entering a severely oversold condition, from which we can expect to see some bargain-hunting by the patient money sitting on the sidelines. As we all know, Warren Buffett has already started buying stock. So, in the immediate term, I see a rally naturally developing from today’s oversold market conditions.
But in the short term, it’s another story. The amount of technical damage to the stock market has been substantial. Just consider the following:
— Both the Dow Jones Industrial Average and the Dow Jones Transport Average have simultaneously hit new multi-year lows. This is a classic Dow Theory sell signal.
— The stock market performance yesterday was one of the worse single days we have seen in history. Of the approximately 3,200 stocks traded on the New York Stock Exchange, over 3,000 stocks were down.
— Outstandingly, over 50% of the stocks that traded on the NYSE yesterday hit fresh, new 52-week price lows.
Therefore, considering the amount of technical deterioration of the market, there is a very strong possibility that the Dow Jones Industrial Average will eventually test its 2002 low of 7,286. I only see two rays of hope:
The performance of the Dow Jones U.S. Home Construction Index has actually been positive. While the index is down 15% for the year, this important barometer of home-building stocks is actually up 3.3% over the past three months. This compares to … Read More
Markets continue to maintain a negative bias, as stocks trade at multi-year lows, with 2008 potentially the worst showing since the bear market in 2000. We are awaiting a second vote on a revised $700-billion bailout program that will give the markets some confidence. However, we feel it will do very little for small guys, as it appears more to be helping out failing companies. Yet, in spite of this, it is still needed, as there are grave concerns surrounding the condition of world economies.
If you need evidence, just take a look at some of the comments made over the last few weeks by some major financial pundits.
On Friday, French Prime Minister Francois Fillon said the world was standing on the “edge of the abyss” due to the potential negative impact of a global financial crisis. Economies in Europe are struggling and there are also concerted efforts there to halt a financial meltdown.
Billionaire investor Warren Buffett is also concerned about the condition of the country, and said the U.S. has been hit with an “economic Pearl Harbor.” In an interview on the “The Charlie Rose Show,” Buffett added that the government must react quickly.
Jack Welch, the former head of General Electric Company (NYSE/GE) believes that “one hell of a deep downturn” has been in the works, and that the first quarter of 2009 would probably be “brutal” This was all in a very recent speech to the World Business Forum in New York.
Fed Chairman Ben Bernanke suggested that a recession would be likely without a bailout.
Four views, but all suggesting that things could get … Read More
The people that I speak with who are really worried about the current state of things are those who are retired or are just about to retire. Even if you look at the most conservative of stocks that yield dividends, the vast majority of blue-chip stocks have been very hard-hit by the current bear market.
Also, if you are relying on income from your investments, your options are becoming very limited. Yields are falling on bonds and Treasuries. Dividend-yielding financial stocks are still on very shaky ground. And many are worried that even their cash reserves are a risk (or could get tied up for a while) in a banking failure.
There’s no doubt in my mind that the stock market and economy have a long way to go before any meaningful recovery. In the very near term, we could get some sort of rally in stocks, as the market looks to be a little oversold in my mind. Anything is possible in an environment where confidence is so fragile.
The one area of the capital markets that could derail the Main Street economy going forward is corporate credit. If the banks can’t get easy terms to borrow money, then people can’t get easy terms to borrow money. Just like our use of oil, the economy relies a lot on credit just to do its daily business.
My worry is that a company in the manufacturing industry might have difficulty selling its account receivables to meet its payroll or to finance a new piece of equipment. Never forget that bank lending institutions are not your friends. In times where credit … Read More
A key variable in the success of the economy will be the labor market going forward. As business slows, companies will cut production and send workers home. This will translate into lost wages and a decline in consumer spending that will ultimately impact the economy negatively.
In the U.S., the labor market has been soft, as indicated by the monthly non-farm payroll data and rise in unemployment claims. In September, planned layoffs at U.S. companies are estimated to increase 7.2% in September on a sequential basis and to up a whopping 33% year-over-year, according to a report by employment consulting firm Challenger, Gray & Christmas Inc. This news is not good for the labor market, and it could translate into lower consumer confidence and economic growth.
But the labor issues are not limited to the U.S.; there is also labor weakness in the European Union (EU). The unemployment rate jumped to 7.5% in August in the 15-country EU, according to the EU statistics agency. Again, the impact on EU economic growth will be felt.
In the U.S., all eyes will be on the September employment report this Friday, which is expected to show a loss of another 90,000 jobs and the unemployment rate at 6.1%. The financial services sector is issuing pink slips at a rapid clip, and this will only pick up as more financial companies struggle with the credit issues and need to cut back expenses to survive.
My feeling is that the labor strife has not been considered seriously in light of the recent oil and financial worries, but needs to be addressed because of its potential … Read More
How odd is it that the day the $700-billion Wall Street bailout package was voted down, only one stock trading on the entire NASDAQ hit a new high? With the financials getting hit the hardest, it was ironic that small regional bank Penns Woods Bancorp, Inc. (NASDAQ/PWOD) hit a new 52-week high on the first day of the meltdown.
I’m really leaning towards Jim Rogers’ view that the marketplace must be allowed to correct itself without intervention. A government bailout is just a double whammy that won’t correct a problem that the government is half responsible for in the first place.
If you were a government agency and you said to a for-profit financial institution that you would virtually guarantee all their lending, then what would that corporation go out and do? It would go out and lend money to almost anyone on the street who would fill out the required paperwork. Why worry? The government will be there to bail the whole thing out.
Fannie Mae and Freddie Mac got saved, but at an already enormous cost to taxpayers. And just think of what you would do if you were a financial institution on Wall Street with a bunch of unhealthy debt. You’d be saying to pass the $700-billion bailout at all costs. You wouldn’t be selling your unpaid mortgage debt at $0.20 on the dollar, because you would hold out for a government intervention. You’d also likely try to get the government to take on your other losses, and you certainly wouldn’t go for bankruptcy protection with the prospect of government help just around the corner.
The point … Read More
Given the recent turmoil in stocks, investors have been facing a climate of volatile trading, as key market indices retested recent lows on Tuesday. So, it is time again to review ways of minimizing major downside risk.
By using options, you can create a protective hedge against potential capital losses. It makes sense to me and should to you. The fact is that investment assets are valuables, probably having the first or second largest value after your home. By the time you retire, the value of your investment assets would be probably far in excess of your home value. So, this makes protecting your investment assets that much more critical, so you can enjoy that retirement.
You can establish put hedges for a single stock or a basket of stocks where buying put options to match each stock would be economically infeasible, as well as improbable due to the limited selection of put options. If you own a basket of stocks, look for a stock index option that has a high statistical correlation with your particular group of stocks.
Holders of technology stocks, for instance, could buy put options on the NASDAQ-100 Index, representing the 100 major technology stocks trading on the NASDAQ.
The mechanics of buying put options on a stock index are quite straightforward and no different from put options on an underlying stock. There are only a few things to keep in mind. Remember that index options are cash settled and you must find an index option that best matches the group of stocks you want to protect. Once you find the appropriate index option, the next … Read More
A company I really like just reported solid financial results thatbeat Wall Street expectations. The company I’m talking about is PetMed Express, Inc. (NASDAQ/PETS).
This innovator, founded in 1996, is one of America’s largest direct-to-consumer pet pharmacies. Forget the overpriced pet medications at veterinary hospitals, this company delivers prescription and non-prescription pet medications as well as health and nutritional supplements for dogs and cats direct to the consumer through its 1- 800-PetMeds toll free number and on the Internet through its web site at www.1800PetMeds.com.
Recently, PetMed reported its financial results for the quarter ended June 30, 2008. According to the company, its revenues were more than sixty-eight million dollars, as compared to revenues of fifty-nine million dollars generated in the comparable quarter, representing an increase of 16%.
PetMed cited that its new order sales increased by 17% to just over twenty-two million dollars, up from nineteen million dollars in the comparable quarter.
Net income was $6.6 million, or $0.28 diluted per share, as compared to net income of $6.2 million, or $0.25 diluted per share, for the quarter ended June 30, 2007, representing a 10% increase in earnings per share.
During the company’s latest quarter, it acquired approximately 267,000 new customers, as compared to 236,000 new customers for the same quarter in the previous year. The company’s reorder revenues also improved some 16% to just over forty-six million dollars.
Going forward, PetMed Express plans to capture more market share, improve its reorder rate, and improve customer service levels in fiscal 2009.
I like this small-cap company and I think it has a bright future ahead. Anyone who is a … Read More
After declining below some key multi-year lows, markets saw some renewed buying that was driven by a combination of oversold buying and good earnings reports. The question is: does the current mini rally have any legs to sustain any of the gains? I continue to see a volatile market with a bias towards the downside, as evidenced by the extremely weak bearish sentiment.
Yet, in the near term, there could be some buying support based on volatility indices produced by the CBOE. On the technology side, the CBOE NASDAQ Volatility Index (VXN) — a barometer of near-term market volatility based on NASDAQ 100 index option prices — is generally viewed as a contrarian indicator. A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top.
The five-day VXN to July 16 jumped to 31.72 from 29.97 the previous week. The higher reading could indicate a near-term bottom on the NASDAQ.
In the broader market, the CBOE Volatility Index (VIX) is a barometer of near-term market volatility based on the S&P 500 index option prices.
The five-day VIX to July 16 rose to 27.07 from 24.97 the previous week. A rise in the VIX could indicate a near-term bottom in the S&P 500.
The reality is that the technical picture is mixed and indicates a market that may trade sideways with volatility until there is a sense of direction one way or the other.
In this market, you can trade on declines and sell on rallies, as this has been the recent tendency in stocks. The most important thing is … Read More
With the price of oil and natural gas so high these days, more and more homeowners are looking for alternative ways to heat and cool their homes. Residents in the Northeast have particularly felt the pain of high oil prices, because a lot of homes still heat with furnace oil, otherwise known as diesel fuel.
There are two areas of the HVAC industry that are really growing right now and these are geothermal heating and cooling, plus there is a return to wood burning. In both cases, geothermal and wood heating are particularly suited to rural environments.
Ask just about anyone burning home-heating oil and I bet you’ll find they are looking for alternatives. For rural residents, there is now a lot of interest in outdoor wood-burning boilers, pellet and biomass furnaces, and even traditional wood stoves. Wood-burning technology is now finally advancing and a lot of these appliances burn more cleanly and release a lot less particles into the air.
When it comes to ground source heating and cooling, geothermal heat pumps are the big news and business is booming. Despite high installation costs, geothermal heating and cooling use the relative constant warmth in the ground below the frost line. This heat is compressed and then distributed around your house. When it’s hot out, the reverse takes place and you’ve got air conditioning. These systems are highly efficient and all they take is electricity to operate.
One company that’s doing very well selling geothermal equipment is LSB Industries, Inc. (AMEX/LXU). This stock is under-followed and is very reasonably priced on the stock market right now.
With so much attention … Read More
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