Tag Archives: Stocks

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Trend in equities points higher

Stocks are in a significant territory which can move the rally up another 200 or so points higher on the Dow.

dow

The 60-minute chart is suggesting that equities could move on to capture 12,588, the level from the October. The concerning thing is that the momentum trend line is diverging from the price movement on this chart, suggesting that eventually there will an end to this strong move higher and a sell-off-phase could begin.

With banks and housing names clocking strong gains the break-out towards 13,588 looks very probable by the end of the week. BAC, C and LEN look the best in this group.

EBAY and Visa (V) look most attractive on any pullback.

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Update on trades recently discussed

Over the course of several months, various stocks have been mentioned as potentially good or bad trades on this blog and several readers, noticing that the mentions have been scattered all over the place, have requested for all those to be put together… so here is a look at some.

Bank of America (BAC)
On October 23 (and before) BAC was highlighted as a strong buy and best return among the bunch of big-5 banks – should be held to price target of $11.35, the 200-week moving average. These long-term investors should expect consolidation at that level. This sideways price action could bring in the 50-week moving average over the 200WMA – the super bullish sign. Incidentally, the upturn in the 200-week average line in BAC looks like foreshadowing of the the upturn in interest rates on the longer bonds.

Citigroup (C)
Last week, it was noted that an upturn in the daily momentum should be expected and the catalyst for that was the decision to fire 11,000 workers. C has a $40-$43 price target with a slow, doubtful grind higher.

Walter Energy (WLT)
This name was highlighted as a stock with lots of bullish attributes and for those with the stomach for volatility could stay in the name with a stop just under $28. For those like me who got into this trade on technicals that did not materialize getting out at $33 is a good way to cut the opportunity cost of holding crapy equity. Walter tackled on more debt and some question whether they have cash to fund their operations. Others claim they are good take-over target but why would take-over pursue a falling knife?

Discover Financial (DFS)
DFS looked like a monster heading inexorably higher but, about a month ago, the name failed to make a new high and when, after the drop on the “cliff sell-off”, it failed to break higher, the momentum has confirmed that something not-good is happening to DFS and that next week’s earnings report may clarify what that may be. The bad technical signals going into earnings should be a huge red-flag. As a result, this name should not be held into the earnings because it could easily drop to $37 or worse. The weekly chart also confirms the negative price-momentum divergence.

Ebay
This is a great name and those in it should stay. Initiating a new buy in this name is kind of problematic right now because it is consolidating a break out. A good time to buy it was at $46 when it was clear that it refused to go lower. Weekly chart is suggestive this name seeks ways to go higher.

Lennar (LEN)
This housing-fav, with the nicest looking chart, has a long-term target at $52 but the time frame of getting there is questionable, so those of you who are considerate of the opportunity cost of holding equity may want to wait until the current consolidation finishes it. LEN has failed through break through $39 several times but it has also failed to decisively break below $34 on the downside. The $5 trading box in this name could, conceivable last as long as the 50-DMA needs to catch up to this price space or the price could catch up to the 50-DMA which is at $29.50. Fundamentals are also great especially the rising house price index which has a steep price slope and that means that LEN is operating in price appreciating environment (profit margin expansion), a great situation for any company.

International Paper (IP)
IP should be a hold & and more shares should be bought if it dips into $32 range. They are able to pass on the price of packaging and the nice dividend has a price floor under it.

Altria (MO)
This name should be loaded on as we speak for the next lazy, boring move higher.

AIG
Should be purchased on dips below $34 for a lazy, boring and choppy move higher as the government provides the floor.

AT&T (T)
Not so sure what to do with this holding at this point considering opportunity cost of holding a position that may move sideways. It is in the process of consolidating its parabolic move into $38 as people went chasing yield. We may be for a prolonged sideways price action so for folks happy to collect yield as price flickers flat, T is OK.

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Central banks increasing their stock buying

Central banks are using their reserves to load up on stocks, as in shares of companies.

Israel is investing 2% of irs foreign currency reserves in stocks and plans to raise it to 10% or to about $8 billion.

South Korea ballooned its reserve allocation for stocks from 3.1% in 2009 to 5.4%.

Czech Republic increased its holdings of stocks to 10% of its central bank reserves. It says that it has too much money in relation to what it needs to conduct its monetary policy.

As the chart notes, the dividend yields and the yields on long term paper are converging although there are some stocks whose dividend could be rated much higher than some government bonds while some governments like Germany are issuing debt at negative yield, meaning the governments get paid to issue debt.

“Bond yields are very low in absolute terms and dividend yields are exceeding bond yields,” says Czech c.bank board member.

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EBay is a monster & coming pullback is a buy

Since its last earnings report, Ebay has had a monster move from under $40 to just shy of $50 and although on short-term chart EBay is ready for a pull back (see why in the chart), this name is by no means, over a long run, done going higher.

EBay story is not that it has ordinary folks reselling items via its web site but that its payment system, PayPal, is not only advancing in the world of finance but its very nature and features are by far more competitive than anything that Visa of MasterCard have to offer… and the only thing to worry is whether EBay can execute this advantage.

The thing that makes EBay a monster is that its PayPal system is so versatile that virtually anybody can use it for anything.

Like Visa and MasterCard, corporations can use PayPal to charge their customers but this is where these two EBay’s competitors stop because Visa and MasterCard are way behind the curve of giving accounts to consumers so they can transact amongst each other, be it they charge or are charged.

Now, Visa and MasterCard are monster stocks on their own for simply growing their corporate based transactions (and fees) but lets imagine what EBay can do with PayPal if it just broadens the base of transactions and collects a fee on it from each and every individual. Having a PayPal account can also be seen as indispensable for any consumer to move funds from one individual to another… and that will be a lot of transactions.

The good story does not end there. While Visa and MasterCard have banks beholden to them for issuance, PayPal is not restricted by such sharing. With PayPal banks are out of the transaction loop altogether and therefore banks have no share in PayPal’s earnings.

Sure that at some point in time bank participation may come in but that may be just another platform to grow transactions.

Meanwhile, with forward PE of 18.4 EBay is in line with its competitors. Visa’s is at 18.8 and MasterCard’s at 17.7. But, EBay’s relative value against these two is not just on these imaginary advantages described above but also with the price to book metric: EBay is at 3.3 on price to book, against 3.5 at Visa or 9 at MasterCard.

Price-to-book is a ratio and as the denominator, book, goes higher given growing transactions and prospects, EBay’s numerator, price, would have to go higher just to keep it pegged at 3.3. Suppose we are to give it a higher peg, somewhere between Visa’s and MasterCard’s, than the price of the EBay stock would have to go a lot more higher.

This puts EBay in a $100 category by next year.

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HSBC makes contrarian call on equities

Current low in the global risk appetite is a bullish sign for the equities, says HSBC Global Research, and notes that going long European telecoms and utilities is the way to profit from the underweight position of the international funds in this area.

“Last month we saw international funds tentatively return to emerging markets but this has not been sustained. Holdings are now relatively low for China, Brazil, India and Russia. In Europe, telecoms and utilities look interesting. International funds have been underweight for much of the past three years but are now beginning to close-out their underweight positions,” writes HSBC in its July 26 note.

Since then, Dow has moved from well over 550 points and the 10-year bond yield has gone from the historic lows of under 1.5% to the current 1.82%.

“One of the most reliable ways a European fund manager has been able to outperform since 2009 has been to be underweight telecoms and utilities. However, we detect signs that being underweight these two sectors has become a cosy consensus and it is beginning to unravel. We have seen buying of both sectors from a low base,” says HSBC.

HSBC says that these two sectors will outperform because a “cosy consensus” and “herd-like behaviour” has formed so that by “tracking holdings in high-beta or cyclical equities, we can also shed light on what these investors are expecting. Groups with low holdings tend to outperform.”

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Comerica: the good bank?

Banks are almost universally hated but one low-radar Taxas-based finance house that operates in Michigan is showing some technicals that could move the stock back to its old highs of $40 handle.

Based on its deposit base, Comerica (CMA) is ranked 2nd in Michigan and some talk suggests that it may seek to improve this position given that another Michigan operator, Citizens Republic Bancorp, has hired JPMorgan to find them a buyer.

Rumors aside… based on some key metrics CMA is much pricier then the big box bank like Bank of America (BAC): CMA forward PE of 11.5 vs. 8.4 for BAC and price to book of 0.85 vs 0.39 at BAC.

Then again, BAC does not have a 2% dividend yield the CMA does and in times when rates are zero, 2% makes CMA look like a fixed income security.

… nor is CMA saddled with so much of the sub-prime crap like BAC which spends lots of its capital just to rid itself of it.

Having said all this, the price chart on CMA is not something a momentum player would look at: it goes all over the place and it could keep doing that depending what happens (or does not) in Europe.

With bets on forward stability very low it may, as it often does, turn out that such low probability event is what actually happens in which case the price chart for CMA is set up to exploit that stability with a move higher.

There are 2 highly positive things in the price chart:

(1) Bullish divergence between price and momentum/strength metrics

(2) Multi-month price consolidation pattern whose triangular pattern of lower lows is signaling a possible breakout.

The bullish divergence, for reasons beyond this post, often get resolved with an upward move but the fact that such upward move has stalled just under last year’s pre-crash price line of circa $32 should not be discouraging.

What helps the belief that $32 will eventually get retested is the positive accumulation/distribution line (see weekly chart) suggestive that the buyers are holders meaning that at some point in the future there will be shortage of available shares to be traded – a circumstance that is always fixed by moving the price higher.

Now, one can pick and choose their particular entry point depending on the comfort level, time horizon and cash allocation, but with a stop at $28 the anxiety of owning some CMA is eased by the 2% dividend.

Of course, 2% is nowhere nearly as good as my favorites like MO, PM and T, but the price chart of CMA and some fundamental metrics do not look as extended as these three.

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How low could Walter go

Walter Industries has been the only coal stock not to sell off like its peers but as of yesterday its day has finally arrived.

WLT has had good speculative fortune because many have parked their cash into this name believing that it is a takeout candidate.

It has repetitively bounced off $53 area and today we see the name in a free-fall. It looks that those who want to buy WLT are more patient and have won the waiting game and may wait until the stock is done cliff-diving.

In yesterday tweet, it was noted that WLT is setting up for a monster short, at least into 30s but the cliff-dive would have few bumps against the cliff.

There may be some stops at $50 but support there looks flimsy particularly against the avalanche of the fundamentals: there is glut of steel in China and not enough demand for it everywhere else to drive WLTs coking coal price higher.

Ultimately, WLT looks to settle, rather quickly into $30s range possibly even dipping into $20s.

In the past week, several finance houses issued a bullish price call on WLT. Wells Fargo gave it “outperform”, Nomura went “neutral”, Merrill priced WLT at $75, Morgan gives WLT “overweight” and Brean Murray, itself probably holding lots of WLT, recently issued a buy rating on the stock.

Of course, all these calls could eventually be correct but only after the interim that is ahead of us.

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Two money men see stocks higher

Laszlo Birinyi, president of Birinyi Associates, and Jim Paulsen, the chief investment strategist at Wells Capital Management says that stocks are cheap and that they will go higher.

“Don’t get shaken out by the stories about possible corrections, the similarity to previous years. They are just nice background music. My attitude has been this market will continue to surprise you on the upside,” says Birinyi.

Birinyi sees S&P hitting 1500 this year.

Like Birinyi, Paulsen also projects 1500 on the S&P and says that stocks are cheaper then 2010 and are more attractive then bonds.

Although the path will certainly be uncertain and volatile, we continue to expect U.S. real GDP growth of about 3 percent this year, for the S&P 500 Index to surpass the 1500 level, and for the 10-year Treasury yield to rise to between 3 to 3.5 percent by year end,” Paulsen wrote in his note last week.

While the note provides more detail and reasons for his optimistic view the conclusion Paulsen draws is a recommendation to pull cash out of bonds and going “overweight towards the stock market”.

Paulsen is also optimistic on Europe saying that Eurozone will improve and not worsen.

So far, the newly treated patient is doing much better—the upward trajectory of bond yields in the region has seemingly been broken (Chart 7). Like any pesky infection, although it may intensify from time to time, the European crisis (while not over) seems to have been brought under much better containment,” says Paulsen.

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Is ARM Holdings ready for takeoff

For past 16 month, ARM Holdings (ARMH) has been going sideways zigzagging between $22 and $32, but this range is narrowing as of late warranting a closer monitoring of this stock.

In the past 5 months, ARMH price oscillation has narrowed between $25 and $29 and any positive turn in momentum on the MACD chart could trigger a monster rally in this name.

 

Based on the technicals, ARMH could potentially have a $15 on the upside with a potential target of $47.

ARMH is set to report earnings on April 29 with estimates ranging around 14 cents per share so some traders may hold until then.

Does this mean that ARMH will move on earnings or catapult higher for sure?

Nothing is for sure, but the probability favors an upside move. Narrowing trading range, higher lows and a turn in the longer term momentum metric places ARMH on a trading screen.