Bad Breadth

July 23, 2015 at 4:51 am  ·  Category: Technical Analysis, Top Gun Financial Planning

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

I noticed something strange with the market internals on Friday and Monday.  Even though the S&P squeezed out new highs, breadth was quite poor.  Declining stocks outnumbered advancing stocks 2040 to 1011 on Friday and 2122 to 1030 on Monday on the NYSE.

This divergence between the overall averages and the market internals caught my attention.  It gelled with something I had been noticing.  Many stocks that I follow have been performing poorly even though the overall averages are keeping up.  For example, United Rentals (URI) and Viacom (VIAB) are two underperformers I sold recently after they peaked out a few months ago and have been mostly straight down since then.

A look at the cumulative NYSE Advance-Decline line shows this trend started 3 months ago.  Breadth is very important so let me take a minute to explain what this chart shows.  Every day a certain number of stocks advance, a certain number decline and a certain number are unchanged.  For example, today (Wed 7/22), 1329 securities on the NYSE advanced, 1839 declined and 86 were unchanged, according to the WSJ’s Market Data Center.  Decliners outnumbered advancers by 510.  Therefore, breadth for today was -510.  The cumulative NYSE Advance-Decline line starts at 0 at a certain point in time, in this case one year ago, and then sums each days breadth onto the cumulative total moving forward.

What this charts shows then, importantly, is that more stocks are declining than advancing over the last 3 months.  This can be so even though the market averages are hanging in there due to differences in market capitalization.  The S&P 500 is a market cap weighted index so a few big stocks can carry the index and mask underlying weakness – which seems to be exactly what is happening.

Breadth is a very important market internal because it shows how broad participation in a move is.  In this case, participation is not as strong as a bull would like it to be.  This is just another reason I am increasingly cautious on this aging bull market and starting to take profits.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
(916) 224-0113

Follow me on Twitter, like me on Facebook and invest like me with Covestor!

More on this topic (What's this?)
Market Outlook
CenturyLink Takes the NFV Plunge with Cyan
Read more on Cheung Kong (HLDGS) at Wikinvest
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

Some Things To Worry About

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

I find myself quite nervous about the stock market lately for a few reasons.

First, the S&P can’t seem to make any progress.  We are essentially flat for the last 5 months.

While some stocks such as DIS, SBUX and NKE continue to make new highs, other important leading stocks seem stuck in the mud such as GOOG, PCLN and FB.

Second, earnings growth is anemic.  The Wall Street Journal reported this morning that with 417 companies reporting, 1st quarter earnings growth for the S&P is 0.2%.  PCLN this morning reported anemic net income growth of 3%.  GOOG wasn’t much better at 5%.  FB’s EPS were up only 20% after 7 straight quarters of monster growth.

Third, we are late in this economic cycle.  While I expect the Fed to be gentle, it is likely they will raise interest rates at least once sometime this year.  It may not be until September but the monetary tailwind that has powered stocks will be diminishing somewhat.

For all these reasons I find myself tempted to cut our exposure to the market somewhat in the days and weeks ahead without doing anything drastically bearish.  Technically, this market is still strong and should be given the benefit of the doubt.  But more and more I find myself feeling anxious moving forward.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter, LIKE ME ON Facebook AND INVEST LIKE ME WITH CoVestor!

Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

Keeping It Simple In 2015

January 6, 2015 at 3:07 am  ·  Category: Currencies, Economics, Energy, Federal Reserve, Top Gun Financial Planning

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

As we start off 2015 on a down note a number of concerns are weighing on markets.

First is the collapse in oil prices.  This is obviously bad for oil companies.  It is also bad for employment in oil related sectors which have created many solid middle class jobs in recent years.  For example, Hercules Offshore (HERO), a Houston based oil services company, is laying off 324 employees, 15% of its workforce, because companies aren’t renewing its contracts in the Gulf of Mexico (“Oil Jobs Squeezed As Prices Plummet”, December 27, 2014, WSJ A1).  It is also bad for oil heavy economies such as North Dakota and Texas.  In the 1980s, an oil bust in Texas led to a collapse in the real estate market which resulted in a banking crisis (“Plunging Oil Prices Test Texas’ Economic Boom”, January 5, 2015, WSJ A1).

On the flip side, the drop in oil prices is a boon to the rest of the economy.  It puts more money in the pockets of consumers who spend less money on gas.  It similarly increases the margins and profits of companies who are energy consumers.  As is frequently the case in economics, there is a concentrated impact on a specific group but a more diffuse, but just as significant, impact on the larger society.

These facts are associated with two narratives about the fall in oil prices.  The bearish narrative suggests that the collapse in oil prices stems from a decline in demand and is the first domino in what will be another global economic collapse in financial asset prices.  This is what has so many concerned about the meaning of the fall in oil prices.  The bullish narrative suggests that the collapse in oil prices stems from an increase in supply and, while painful for the oil related sectors and regions, is a boon to the world economy overall.

Another concern is the rising dollar.  The dollar index rose 12% in 2014.  This is bad for our exports which made up 15% of the economy in 2013.  A rising dollar makes our exports more expensive for countries whose currencies are losing value against it.  “Expect the worst for US trade” Allen Sinai Chief Global Economist of Decision Economics told The Wall Street Journal.  3M’s (MMM) CFO said last month that the rising dollar would trim 2-3% off sales in 2015 (“Dollar Surges to 11 Year High Against Biggest Rivals”, January 3, WSJ A1).

However, as with oil, the strong dollar also results in economic benefits.  While our exports become more expensive, imports become cheaper.  Just as it is cheaper for us to travel in foreign countries, it is cheaper for us to buy their goods.

The main reason the dollar is rising, starting in the second half of 2014, is expectations that the Federal Reserve will begin raising interest rates for the first time in a decade in 2015.  This is happening at a time when our main rivals, such as Japan and Europe, are actually loosening monetary policy with large doses of quantitative easing.

This has led many to believe the market, which has been propelled by Fed policy, is due for a fall this year as well.  In fact, it is not too much to say that the market is “obsessed” with Fed policy.  However, Janet Yellen is very aware of the market’s obsession and her dovish orientation is likely to cause her to move slowly and carefully.  The Fed has shown deference to the market in recent years and I see no reason to expect that to change.

That is why I am keeping things simple heading into 2015.  The bull market remains intact and I expect that to continue for the immediate future.  I will be watching the oil market and Fed policy very carefully to detect any inflection points but for the moment I am maintaining the status quo in our portfolios.  In fact, I used today’s selloff to add to our positions in Apple (AAPL) and Facebook (FB) as well as initiating a small position in natural gas producer Southwestern Energy (SWN).

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter, LIKE ME ON Facebook AND INVEST LIKE ME WITH CoVestor!

More on this topic (What's this?)
Obama Cartoons: Legacy Of Failure
Read more on Oil, Feng Hsin Iron STL at Wikinvest
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

Pressure Point

October 13, 2014 at 11:59 pm  ·  Category: Market Commentary, Stocks, Technical Analysis

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

Last Thursday and Friday were the worst two days for the markets since February.  The S&P is testing its 200 day moving average (DMA) for the first time in 2 years.

Real fear has entered the market for the first time in quite a while.  5 1/2 years into the bull market investors are worried: Is this just a standard correction or the beginning of something more ominous?

 

The next few weeks should provide some answers.  As we begin earnings season, companies will tell us not just about their results for the last three months but what they see going forward.  Everybody will be keying into forecasts as a way to gauge global growth.

The hardest hit sector last week was semiconductors.  Timely then that Intel (INTC) will be reporting 3rd quarter results Tuesday after the close.  In their 2nd quarter earnings report, they forecasted revenue of $14.4 billion +/- $500 million compared to $13.5 billion in the year ago period.  Investors will also be closely scrutinizing their 4th quarter forecast.  This will be an important earnings report that will set the tone for earnings season.

The conjunction of technical support at the 200 DMA with the beginning of earnings season creates a pressure point.  Earnings should be the catalyst to determine which way the market goes from here and the movement either way could be explosive.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter, LIKE ME ON Facebook AND INVEST LIKE ME WITH CoVestor!

More on this topic (What's this?)
Things To Do In North Wales
Three Key Clues To A Topping Tail Pattern
Genocide of Christians is apparently not front page news! (List)
Read more on Cheung Kong (HLDGS) at Wikinvest
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

Riding The Bull

September 3, 2014 at 2:47 pm  ·  Category: Federal Reserve, Market Commentary, Stocks, Top Gun Financial Planning

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

Those of you who have followed me over the years know that I was slow to warm to this bull market.  However, in the last year I have evolved and come to embrace it.  I stopped trying to short it (see “The Loser’s Strategy”, August 4, 2013) and decided to invest more in line with what is actually happening rather than with what I think should be happening.

As a result, my clients and I have had an excellent 8 months to start this year.  My personal account – which is tracked by CoVestor – is up more than 20% and my clients are doing quite well too.

However, I am starting to get nervous again.  The S&P recently tagged 2000 which marks a 200% advance from its March 2009 lows.  2000 is a number that I have targeted in recent Client Notes and hitting it has caused me to think about where we go from here.

One major concern is when the Fed starts raising interest rates.  While many don’t think this will happen until mid-2015, another strong employment report this Friday could pull that time table forward, according to Russ Koesterich, Chief Investment Strategist at Blackrock.  “If you get another strong employment number, that will focus investor attention on the impending monetary tightening.  It could cause volatility in the fall”, Mr. Koesterich told The Wall Street Journal.

Doug Ramsey, Chief Investment Officer at Leuthold Group, is calling for a correction.  “We are expecting and 8% to 10% correction for the S&P 500 over the next two months.  There is a good chance that it would wipe out all the gains for the year”, he told The Wall Street Journal.  (Both the Koesterich and Ramsey quotes are from “Strategists Brace For A Swoon”, Tuesday September 2, C1).

As a result, I have started trimming some positions.  I sold our large position in Lifelock (LOCK) for a significant profit.  I also cut our positions in JC Penney (JCP) and Apollo Group (APOL) in half.  Should any other stocks reach my targets, I wouldn’t hesitate to raise even more cash.

This doesn’t mean that I am turning bearish.  It just strikes me as a good time to raise a little cash when times are good and in case better opportunities present themselves down the road.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter, LIKE ME ON Facebook AND INVEST LIKE ME WITH CoVestor!

More on this topic (What's this?)
Genocide of Christians is apparently not front page news! (List)
Things To Do In North Wales
Please Help if you can. A call to all my fellow Traders
Read more on Cheung Kong (HLDGS) at Wikinvest
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

Interview With Mint.com

Check out this short interview I did with Mint.com.

 

Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

It’s A Bull Market

July 16, 2014 at 11:12 am  ·  Category: Federal Reserve, Market Commentary, Stocks, Top Gun Financial Planning

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

The S&P is up another 1% since I last checked in in early June (“That 2013 Feeling”, June 9) and what I said then still applies.  The path of least resistance continues to be higher.

The stock market sold off yesterday on the following comments by Fed Chair Janet Yellen:

Valuation metrics in some sectors do appear substantially stretched-particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.

That generated a lot of chatter on Twitter and CNBC but seems mostly forgotten already this morning.

Second quarter earnings are starting to come in and so far so good.  Portfolio holding Goldman Sachs (GS) reported an excellent quarter yesterday morning.  EPS of $4.10 blew away estimates of $3.05.  Both investment banking and investment management were solid.  The stock rallied about 1%.

*****

I have taken a small speculative position in for profit college operator Corinthian Colleges (COCO).  Corinthian operates 107 schools under the Heald, Wyotech and Everest brands.  A month ago the Department of Education (DOE) put a 21 day hold on federal student loans plunging Corinthian into a cash crisis.  Without the funds, Corinthian warned it may not be able to continue as a going concern.  The stuck plunged.

Negotiations with the DOE followed resulting in an operating agreement.  Under the agreement, Corinthian will put up for sale 85 US schools and “teach out” the remaining 12.  Separately, Corinthian will also sell its Canadian operations.  As part of the agreeement, the DOE restored normal funding of federal student loans.

At 22 cents/share, Corinthian’s market cap is only $19 million.  They had revenues of $1.456 billion in the previous 12 months ending March 31, 2014.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter, LIKE ME ON FaceBook AND ENGAGE WITH ME ON SeekingAlpha!

Posted by Greg Feirman  ·  Link  ·  1 Comment »

That 2013 Feeling

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

Only a few weeks ago the S&P seemed stuck below 1900 and market sentiment had turned bearish.  Star hedge fund manager David Tepper punctuated the bearishness when he told an audience full of investors at the SALT Conference in Las Vegas “Don’t be too frickin’ long”.

A few weeks later things feel decidedly different.  The S&P powered through 1900 on its way to Friday’s close just below 1950 and the market’s animal spirits have been awakened.  It seems likely that we are paving the road to S&P 2000 – which would mark a 200% advance since the March ’09 bear market lows.

While I am bullish and long, it is time to start making plans for becoming more cautious.  The most recent issue of Jim Stack’s excellent Investech Newsletter included an aptly titled section “Conservative Investing For The Final Stretch”.  Within that section, I was struck by the following sentence:  “Based on historical bull market longevity a final top is almost certain in the next 1-2 years.”

In my opinion, investing intelligently at the moment entails striking the proper balance between the potential gains from a final leg higher against the potential losses in the inevitable next bear market.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA

(916) 224-0113

FOLLOW ME ON Twitter AND ENGAGE WITH ME ON SeekingAlpha!
More on this topic (What's this?)
S&P Consolidates Prior To New Upswing
S&P Trapped In Broad Trading Range
Read more on China Steel Struct, S&P 500 (SPX) at Wikinvest
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

The Carnage Beneath The Surface

May 10, 2014 at 9:14 pm  ·  Category: Market Commentary, Stocks, Technical Analysis, Top Gun Financial Planning

NOTE: Every week or two I wrote a Client Note for my clients. I post most but not all of the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

Despite the relatively muted action in the major market indexes something big is happening beneath the surface.  While the Dow and S&P are within striking distance of their all time highs, many of the leading stocks from last year have suffered a beating in the last couple of months.  A chart from BeSpoke Investment Group shows many of these stocks down 20%, 30%, even 40% from recent highs made just a couple months ago.  In fact, it is not too much to say that we are witnessing a crash in these stocks.

 

After yesterday highflier Ubiquiti Networks (UBNT) can now be added to this list.  A seemingly solid earnings report was met with massive selling, sending shares down 24%.  Shares are now down more than 40% from recent highs in mid-March.

This divergence also shows up in the Advance/Decline Line of the NYSE compared to the NASDAQ over the last couple months.  The A/D Line cumulatively measures the number of advancing minus declining issues on each index on a daily basis.  A rising A/D line means that more stocks are rising than falling suggesting strong breadth.  A falling A/D line means more stocks are falling than rising suggesting weak breadth.  Because so many of these highflying stocks are listed on the NASDAQ, their breakdown is reflected in its declining A/D line.

This divergence is the key issue for the market and its resolution may well determine whether the bull market lives or dies.  If the momentum stocks catch a bid that may well be the catalyst for a new leg higher to all time highs for the major indexes.  However, should they continue to breakdown, that failure is likely to be contagious to the major indexes as well.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter AND ENGAGE WITH ME ON SeekingAlpha!
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »

Why Stocks Could Keep Going Higher In 2014

December 28, 2013 at 9:27 pm  ·  Category: Federal Reserve, History, Market Commentary, Stocks, Top Gun Financial Planning

NOTE: Every week or two I wrote a Client Note for my clients. I post the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

I have finally come around to the view that the path of least resistance for stocks is higher.

The first and most important reason is that the Fed and global central banks remain highly accommodative.  The much feared Fed taper finally occurred two weeks ago – and stocks rocketed higher!  One reason could be that despite the taper the Fed will continue to buy $75 bil securities a month or $900 bil/year.

Second, earnings are strong and corporations are in excellent financial condition.  Consider Allergan (AGN), a stock I recently looked at, for example.  Allergan is best known for Botox, Restasis and breast implants but the biggest part of their business is eye care products.  The company is growing the top line around 10% and the bottom line around 15%.  They have $3 bil in cash and short term investments on their balance sheet.  As long as the economy doesn’t experience any significant shocks, Allergan should continue to churn out solid results.

Third, the technicals are extremely strong and sentiment is becoming increasingly bullish.  Investors are becoming more and more comfortable and confident in stocks and that should add fuel to the fire in the early part of next year.

I do, however, have a number of concerns.  The first is the length and maturity of the current bull market.  As I wrote in early November (“Bull Markets Don’t Last Forever”), at 5 years old we are approaching the time when all but the most vigorous bull markets tend to exhaust themselves.  The good times won’t last forever and we should be prepared to turn more cautious when the time is right.

Second, valuations are expensive in my opinion.  Many people say the overall market is not expensive at 15 or 16 times earnings.  But that is based on optimistic forward earnings estimates.  Those multiples are based on forecasts, not real earnings.  Using trailing earnings, the multiple on the S&P is approaching 20.  For example, Allergan’s trailing P/E multiple is 24.

Weighing it all together, I do think we will continue to see gains in the first half of 2014.  S&P 2000 is a reasonable target. 

However, that doesn’t mean I think you should run out and buy stocks first thing Monday.  We have had an excellent run this month and stocks are overextended in the short term.  A January correction would be a nice opportunity to pick up positions for what could be a strong final leg higher in an epic bull market.

Greg Feirman
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA
(916) 224-0113

FOLLOW ME ON Twitter AND ENGAGE WITH ME ON SeekingAlpha!
Posted by Greg Feirman  ·  Link  ·  No Comments Yet »