Full decade forecast

This is the chart subscribers saw a few weeks ago and Barron's Online readers saw, albeit with some of the markings removed, in today's column.

I do believe that there is an 18 or so year cycle of secular bull and secular bear markets. The current secular bear started at the 2000 peak. This chart shows where most of the cyclical bull and bears fall within.

Yes, this chart shows a lower low in 2016 than we may see in 2012. But it is not as low as the one in 2009 and it sure does follow the road map of the 1970s (the previous secular bear).

The Year That Really Wasn't

Oh there was plenty of action but if you look at where the stock market was at the end of last year even your saving account interest might have beaten it.

Oh, it looks like a rally this month but the current price is pretty much where it was at the end of November.

And November, which came in like toxic waste and left on a Justin Bieber high - guess what? Just about the same price as when October ended.

Remember that monster October rally? Well it left things where they were in when we last serenaded jolly old St Nick.

So, for the August "crash" and the Japanese tsunami dip and the pre-Halloween "the financial system did not collapse" melt-up 2011 looks to be leaving us where it found us.

A Happy and Merry to all! I am not sure if I'll have anything to post here on the blog during the final week of the year so keep tabs on the Facebook page. And if you want to give me a little end of year gift, how about "liking" it?  It's just a little click over there on the right side of this very page.

Dividends

Today's column was about how two telecoms stocks - AT&T and Verizon - could provide a place to hide at the same time getting paid a healthy dividend to to so. I tried to make the point that just because you find a big name stock with a big dividend yield does not mean you can buy just anything.

Being the technician I am, any stock with a low P/E and high dividend yield still has to pass muster (or does it have to cut the muster, or mustard?). The chart cannot be in a big ol' bear trend. It cannot be at a new high with a bearish momentum divergence. And it cannot be breaking down below support.  Getting the picture? The chart has to be at least stable.

Telecoms from around the world now sport some mouth watering dividend yields. Surely, a 10% yield not only cushions the downside but also gives off at least a little - and rare - current yield.   But what happens when the stock falls 10%. Bye, bye yield.

Check this chart of Philippine Long Distance.

It is now near the top of a giant range and looking a bit overbought in this weekly time frame. Although it sports a hefty 4.6% dividend it can still fall 15% and remain in the range.  Dividend no mas, three times over. But at the bottom of the range it would look tasty indeed.

Then there is Frontier Communications, mentioned in the column. The stock lost more than half its value this year and is well below its 2007-2009 bear market low.  yet, it sports a 15.2% dividend!  Wow, what a deal!

 

Not so fast. While fundamentally oriented investors might say there is enough cash flow to keep paying it, the charts suggest something entirely different. After all, bad news often shows up in the technicals before it shows up in the quarterly earnings report. Somebody always knows something and acts. Then the ripples in the pond spread out, causing more people to act until the bad news emerges. Its not the charts that drive the fundamentals. Rather, it is the market sensing what is coming.

So, if you are looking for a nice cash cow to keep your wallet stuffed, make sure the cow is not dead and just bloated with the escaping gasses of decay. Find these stocks using fundamental screens but buy them only when the chart says Bossie is mooing contentedly in the fields.

Protect Profits by Having a Plan

Yet another piece I wrote for Scottrade - this one in November 2009.  Given what just happened in gold, it might be a nice read today.

After the last two bear markets, most investors understand that they have to have a plan to protect their portfolios. Traders live and die by this. They are taught that knowing when they should sell is more important than when to buy. 

In other words, they recognize when it is time to cut their losses. Investors should understand this, too.

How many of us are guilty of thinking that a lower stock price is always a better value? This was the case in November 2007 just after the last bull market peaked as analyst forecasts were still rather rosy. And during the 2008 bear market it was also the case, as we often heard news reports that "the financial crisis is near its end" or that "housing is about to bottom." 

Were all the profits you booked over the 2003-2007 bull market protected? Did you have a plan to take at least some money off the table when it became clear that the market was no longer healthy?

The market usually gives off many signals when the good times are about to end. One example is deterioration in market breadth, when the average stock starts to stumble well before the major indexes peak. Stocks with marginal fundamentals are left behind, unlike in bull markets when investors buy anything and everything.

Another example comes from the rising trend itself. In a healthy bull market, the general direction of the market is clear, even with the normal sequence of rally and pullback. However, when the rallies start to shrink and the pullbacks start to grow, we can get a good idea that the trend is changing. 

For most investors, knowing what to watch and having the time to watch it can be a problem. Therefore, they need a more mechanical plan. 

How do investors create such a plan? A tool called a "stop" or "stop loss" order is one way to help mitigate losses. Basically, you determine how much money you are willing to lose on any investment - how much you are willing to risk - and if the stock reaches or surpasses the price you specified, an order will trigger to sell. Stop orders allow you to ride an upswing and limit your losses on a downswing even if you're not watching the market every minute.

If you just bought the stock, you take your loss and move on.

If you owned it for a while and you have a profit, you set your stop based on today's price, not the price you paid. You may still walk away with that profit, but keep in mind that once the order triggers, it becomes a market order and could execute well below your stop price if the stock takes a sharp drop. Using stop orders can be an excellent strategy to prevent loss, but it can also be very unpredictable if the market or the stock is particularly volatile. 

Remember, big losses can begin with small losses.

While it is always possible that the stock will rebound, causing you to sell a good investment, you can help mitigate losses during a bear market with carefully placed stop orders. You are managing your risk. And you will live to invest another day.

No matter which way you think the market is heading, if you own stocks you must know what has to happen to cause you to sell. Sometimes it is a change in the fundamentals, and other times the market reacts in advance to tell you something is wrong. That will be the time to consider managing risk rather than seeking that last nickel of profit.

Value from CNBC

It is a national pastime of traders to make fun of CNBC and I won't argue on most of it. But I have always thought that there are some smart people there and perhaps it is the mandate to provide a constant stream of advertising selling content that marginalizes them.

Anyway, this morning, they put up an Intrade chart of Obama Reelection futures. It showed a steady decline this year with an Osama bump and even a little strength this month.  Here is that chart - followed by a chart of the S&P 500.

Do you see any similarities?  Forget the news. What we see here is the same shape in Obama's prospects as we see in the stock market - only lagged by perhaps two weeks.

Forget unemployment. If the stock market tanks before the election you can welcome President Newt or President Mitt or President The Donald.  Well, maybe not that last one.

Just Another Manic Market

Did you ever see the market go this way and that?
Go this way and that way,
And that way and this way
- a  children's song (sort of), possibly Scottish

or, if you are a 1970s psuedo-punk like me:

Well we can't take it this week
And her friends don't want another speech
Hoping for a better day to hear what she's got to say
All about that Personality Crisis you got it while it was hot
But now frustration and heartache is what you got
- Personality Crisis, New York Dolls (1973)


Honestly, I really have nothing new to say. Financial markets are being wagged by the dogs of Europe and nothing else matters. Perhaps options expirations this week will give money managers the reason to try to push the market higher but one sneeze from MerKozy and bye bye profits.

What do you do? Unless you are a day trader or a gambler (there is a difference), protect capital unless you see a really compelling setup.

And as for the title of this post - Manic Monday, The Bangles 1986 (written by Prince the symbol)

Buy the rumor, sell the news

Buy cheap, sell dear.  Or, buy on the rumor that good stuff is going to happen and sell when it does, or does not come true. That seems to be what happened Thursday in the stock market.

Here is your headline:
U.S. stocks lost sizeable ground Thursday as public sparring among European Union members jolted the market late in the session.

What? More than a dozen countries with different languages, customs, history and cultures did not fall into line behind Queen Germany?  I am shocked! and by shocked I mean not surprised at all.

The only surprise is that it happened Thursday and not after the Friday summit.

Do you get the feeling that the term summit is overly generous?  Sort of when failing K-Mart joined forces with failing Sears. Maybe Xerox can hook up with Kodak.  Or RIM can marry Palm. Oh wait, Palm did the nasty with flailing Hewlett Packard. Didn't HP buy Compaq, too? It's the Oakland Raider strategy of scooping up the league's cast offs and somehow making a team out of the drek.  But I digress.

Now we are in an analytical pickle. There still is time for some bold action, such as printing trillions of euros and getting it together on selling bonds. Or letting Greece fade off into the deep like Leo did in Titanic.  That would really screw things up because as it stands today, the S&P 500 has failed again- for the fourth time - at the 200-day average.

The third time may be charm but the fourth time is a just bad odor following you around.

Song Lyric for the Week

I was writing about how the market is in a stall right now as it awaits Europe's decision or lack thereof. This lyric popped into my head.   Perhaps this is the market singing to MerKozy and friends.

I'm leavin' it all up to you-ooh-ooh
You decide what you're gonna do
Now do you want my lo-o-ove?
Or are we through?


- Dale and Grace (1963)

The Waiting is the Hardest Part by Tom Petty was too easy.

Relating Charts to Market Analysis

Here is another article I wrote for Scottrade way back when (Jan 2010). Again, I figure the statute of limitations has run out for an article I wrote for free so here it is - for novices.
 

To many investors, technical analysis is either an unknown world or something rather suspicious. However, even for the skeptical there are many benefits to be had. The most important is simply figuring out if your stock or the market as a whole is in a bullish or bearish trend. 

Why is that important? Knowing the trend dictates the strategy. For example, in a bull market, traders buy dips while investors may simply buy and hold. Certainly, the latter was a great plan from 2003 to 2007. It did not work so well in 2008 when the bear market was in full force.

Charts Simplified

Let's talk briefly about what technical analysis, or just simple charting, is all about. First, analysts of all types use charts even if they shun technical analysis. What is always reported in the news? The trend in employment, earnings growth, projected sales and the Fed funds rate. All of these data are displayed in chart form to show how they have changed over time. 

Charting stock prices is no different. With one picture, we can see where a stock has been so we know right away if the current price is relatively cheap or expensive. Clearly, saying a stock has a price of $50 is meaningless if we do not know if it traded at $40 or $60 last month, or if we do not know if earnings have been growing at the same rate. 

Historical Analysis with Charts

When the stock market peaked in October 2007, analyst estimates for earnings were still strong and everything seemed to be status quo. Buy stocks, watch them go up, sell at a profit. Not bad.

Further, market psychology, or attitude, was very good. After all, the market survived the extreme sell-off of August 2007 when news of the sub-prime mortgage crisis broke. The Standard & Poor's 500 shook it off and rallied to new highs in short order. 

So, when prices pulled back again in November of that year, it appeared to be another buying opportunity. Good stocks were on sale again, but this time, price gains did not last. The market sold off again in December, and that time, there was no new high first. Something was different.

When prices slid below the panic lows of the previous August, chart watchers knew the trend had changed. The strategy had changed from buying dips to selling rallies; essentially a plan for getting out of the market.

What really had changed? The fundamentals were still good. Analysts still maintained buy ratings. Bear Stearns and Lehman Brothers were still alive and well.

Simply stated, the market was in a declining trend. Rallies were sold earlier and declines had to extend lower to entice demand, and that is what happens in bear markets. 

Conversely, at the March 2009 low, the fundamentals looked very bleak, but stock prices started to rise. It is hard to justify, even in hindsight, that the price chart said the trend had changed to a bull market (there were other technical reasons, however). But for investors missing the March to June run, they got their signal in July. After a rather sizable pullback, prices moved on to new highs. Stronger rallies and quick, shallow pullbacks became the norm - exactly the opposite of what happened in 2008.

Charts & Trends

Clearly, simple chart reading will not point out major tops and bottoms as they are happening. However, the market will often tell us sooner rather than later when the existing trend is over, and the best way to read any possible signals is to read and analyze basic price charts. 

The charts may signal the end of a rising trend when conditions become similar to those of previous bull markets. Rallies usually become weaker and pullbacks may have to go lower to entice buyers. There is no magic bullet for reading charts and using them to anticipate trends - if there were, we would all be rich. Different analysts interpret charts different ways, and it's up to you to do your own analysis and decide where you think the market is going.

As they say, the trend is your friend. Finding the trend, not predicting the future, is the goal. Once that is done, investors can use the trend to help them decide to hop on for the ride or simply step out of the way.

D-Day for Europe

Supposedly December 9 is decision day for Europe as they meet in a summit (ooh, it must be important - will they serve beer?) that could determine if they can rescue themselves. Woudn't it be cool if they met in Normandy?

Buy the rumor, sell the news. We had the "buy" part this week. Next week, unless they come up with something brilliant and totally expected we may see "selling the news."

I have more questions than answers:
Why did Treasuries rally a lot Friday?  I thought this was "risk on" week.
Why did the dollar reverse to the upside?
Why did gasoline rally so much Friday?
Why are pizza stocks flying? Don't say because people stopped going out fancier. These stocks were hot in October as the market was saying "I'm baaaack."
Did anyone notice the Chinese market is sucking wind and has given back most of the gains it made the day when they changed reserve requirements?
Who saw a one-day dip in LIBOR (it was back up Friday)?

A lot of these are not good signs for the stock market so if QE-Europe fails or stalls or looks like it will not happen, well, D-Day here we come.

I am pooped

No blog today as this week has fried my brain and thrown a lot of technicals out the window for a while.

As they say, " Sometimes the best trade is the one you do not make."