Understanding the Rally… – Voice of the People
Stock markets continue to rejoice on hopes and dreams of a path through the European mess. Italian yields dropped sharply today after major austerity measures were pushed through. The SPDR S&P 500 ETF (SPY) is trading at $126.80, +1.94 (+1.55%). In addition to optimism about Europe, economic data in the United States continues to be strong. Most amateur traders are looking to buy the market into the end of the year, expecting a Santa Claus rally to continue, but extreme caution must be used.
First, traders and investors alike must recognize that the Dow Jones Industrial Average is up approximately one-thousand points in the last week. Buying now is paying a premium on the market that is not needed. Second, remember this market is bipolar. One week the savior is born and the markets will never go down, while the next the world is doomed due to Europe and the crisis. Paying up for anything is a fool’s game as the pro traders take money from the weak minded.
Projections for 2012 are grim. While we may float and limp into the end of 2011, next year will be another rough one with a fair amount of downside and wild swings.
Looking at positives and negatives are always important. The positive for the rally today is easy to spot. The financial sector is rocking. Stocks like JPMorgan Chase & Co. (JPM) are having a monster day. The banks are leaders in the market and their strength confirms that the rally will hold today. JPMorgan is trading at $33.83, +1.50 (+4.64%).
Commodities are weak today. Everything from oil to gold, silver and natural gas seem to be left out of the rally. This may be a signal dumb money is chasing the rally and jumping out of commodities. The SPDR Gold Trust (ETF) (GLD) is trading at $168.44, -1.48 (-0.87%).
Again, the key as a trader is to avoid the emotional decision. Investors chasing the rally now are falling into emotion and that is why they always lose money. Stay patient and follow the charts. They will tell you the truth.
Gareth Soloway
Agriculture Stocks Still Stuck in the Mud – Voice of the People
This morning, all of the major stock market indexes are trading sharply higher. For the most part, the rally is broad based as most important stock sectors are climbing. The one sector that is struggling and continuing to show weak relative strength is the agriculture sector. Many of the leading stocks in this sector are actually trading lower as the major stock indexes climb.
Potash Corp (POT) is considered the leading agriculture stock in the market. POT stock is trading lower by 0.74 cents to $40.18 a share. The stock has some short term intra-day support around the $39.65 area which is a double bottom support area on the daily chart. Should this level fail to hold up the stock is vulnerable to further declines. The daily chart should have very good support around the $36.00 level on the daily chart.
Other leading agriculture stocks that are not participating in today’s early morning stock rally are Mosaic Co (MOS), Agrium Inc (AGU) and CF Industries Holdings Inc (CF). All of these agricultural leading stocks still remain weak on the daily charts. These stocks are all trading below the important daily chart 50, and 200 moving averages which put these stocks in a weak technical position. Traders should wait for a better daily chart pattern before committing to these names.
Nicholas Santiago
Is Halliburton Overhyped for 2012?
As this MarketWatch column points out, now is the time of year when Wall Street analysts offer their two cents on the best stocks to buy for the year ahead. However, after running the numbers, columnist Brett Arends cautioned that if history is any indicator, investors may be better off coming to their own conclusions for 2012.
Specifically, if you’d invested $10,000 in each of the 10 most beloved stocks (as measured by their number of “buy” or better ratings) on the S&P 500 Index (SPX) last year, “you’d be down 3.5%, even before trading costs and taxes,” says Arends. Furthermore, “Six of the ‘top 10 stocks’ actually lost you double digits,” while five of the 10 least-loved stocks (as measured by “sell” or worse ratings) actually rose year-over-year, outperforming a flat SPX.
That said, the author — with help from Thomson Reuters — listed Wall Street’s “top picks” of 2012, which included commodity titan Halliburton (HAL).
Contrarian Takeaway:
According to Zacks, HAL is, in fact, adored among the brokerage bunch, garnering a whopping 22 “strong buys” and three “buy” endorsements. For comparison, just two analysts offer up a lukewarm “hold” rating, and not one rates the stock a “sell” or worse. In the same vein, Thomson Reuters pegs the consensus 12-month price target on the equity at $53.83 — representing a steep premium of 53% to HAL’s closing price of $35.12 on Jan. 4.
Elsewhere, the options crowd is also optimistically aligned toward HAL. The security’s Schaeffer’s put/call open interest ratio (SOIR) of 0.66 indicates that calls comfortably outnumber puts among options slated to expire within three months. Plus, this ratio registers in just the second percentile of its annual range, suggesting that short-term options traders have rarely been more call-heavy on HAL during the past year.
From a fundamental and technical standpoint, though, the abundance of bullish bets seems somewhat out of place. For instance, HAL could be on the hook to cover the cost of cleaning up the 2010 Gulf of Mexico oil spill, if BP plc (BP) has anything to say about it. Technically, meanwhile, HAL has surrendered roughly 40% since peaking at $57.77 in July, ushered lower beneath its 10-week and 20-week moving averages.
From a contrarian perspective, the optimism surrounding HAL could leave the equity vulnerable in 2012. Should the stock continue to struggle on and/or off the charts, a mass exodus of bulls — in the form of downgrades, price-target cuts, or a reversal in sentiment in the options pits — could exacerbate the shares’ recent slide.
Andrea Kramer (akramer@sir-inc.com)
Apple Inc.: A Case Study On the Importance of Expectations
As most of you have probably heard by now, tech mogul Apple Inc. (AAPL) reported third-quarter earnings that fell short of analysts’ estimates, sending the shares lower as a result. But, as SmartMoney columnist Jack Hough notes, “Normally, a 54% profit jump would be impressive even for a promising start-up in a booming economy.” Furthermore, the author points out that although AAPL’s iPhone sales missed Wall Street’s mark, they rose a year-over-year 21% — pointing to healthy demand, and underscoring the Schaeffer’s philosophy that sentiment should never be overlooked.
And, now more than ever, AAPL investors are also learning why too-high expectations can come back to haunt a stock, despite arguably solid fundamentals and a longer-term uptrend. In fact, speaking like a true contrarian, Hough warns prospective AAPL buyers not to rush in anytime soon. “Analysts are sure to revisit their remaining forecasts in coming weeks and a few might even issue downgrades,” he cautions, which could send the security even lower.
Contrarian Takeaway:
If there ever were a poster child for a Wall Street darling, AAPL just might be it. According to Zacks, a whopping 35 analysts consider the stock a “strong buy,” with another three doling out “buy” ratings. For comparison, just three brokerage firms rate the equity a “hold,” and not one considers it a “sell” or worse. Should the analyst crowd downwardly revise their opinions in the wake of AAPL’s earnings miss, a bullish exodus could exacerbate the stock’s slide.
Elsewhere on the Street, options traders have also upped the bullish ante on AAPL. The stock sports a 10-day call/put volume ratio of 2.23 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), indicating that traders have bought to open more than two AAPL calls for every put during the past couple of weeks. What’s more, this ratio registers in the 95th annual percentile, implying that speculators have rarely initiated bullish bets over bearish at a faster clip during the past year.
Echoing that trend, the security’s Schaeffer’s put/call open interest ratio (SOIR) rests at 0.74, indicating that calls comfortably outnumber puts among options slated to expire within three months. Plus, this ratio stands just nine percentage points shy of a 52-week low, suggesting near-term options players are much more call-heavy than usual on AAPL. An unwinding of optimism in the options pits could also amplify the selling pressure on the equity.
Andrea Kramer (akramer@sir-inc.com)
View the original article hereContrarians Should Proceed with Caution on Netflix
Netflix (NFLX) took a notable nosedive earlier this week after a poorly received earnings report, and this gloomy article warns that the stock’s single-day slide of 35% could be just the beginning. The author cites daily volume data indicating that “there are lots of individual investors who bought high who still own shares” — which means that any future rallies in NFLX could quickly be met with selling pressure, as these investors attempt to minimize their paper losses. As evidence, the author describes similar scenarios that played out with former momentum leaders First Solar (FSLR) and Oracle (ORCL), which have yet to revisit the highs of their own respective glory days. In addition to the threat of pent-up selling pressure on the sidelines, the article also cites “plenty of legitimate fundamental questions” about NFLX’s business, particularly after the PR nightmare that was Qwikster.
Contrarian Takeaway:
Following its earnings-related plunge, NFLX is certainly staring up at some serious technical roadblocks — including its 40-month moving average, which contained the equity’s steep slide during the month of September.
Meanwhile, from a sentiment perspective, traders have shown a strong preference for bullishly oriented options on the beaten-down stock. During the past 10 days, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.36 calls for every put on NFLX. This ratio rests in the 100th annual percentile, implying that traders have been scooping up calls over puts at an annual-high pace in recent weeks.
One silver lining, from a contrarian standpoint, is NFLX’s healthy short-to-float ratio of 17.5%. However, at the equity’s average daily volume, it would take less than one day for all of these bearish bets to be covered. During the near term, as the author suggests, NFLX shares could continue to struggle on the charts.
Oil Soars: These Energy Areas Are Next – Voice of the People
Oil Soars: These Energy Areas Are Next
As spot crude oil has pushed through the $100 level, the upside is somewhat limited. Oil is up over 30% in the last six weeks and with the global economy still weak, it is hard to imagine it will push much higher. Investors are searching frantically for the next big energy area. There are some obvious places that money should start to flow.
Natural gas continues to be the obvious answer to some easy money upside. With oil back above $100, a natural switch towards the cheap natural gas should begin. Natural gas is a cleaner and cheaper energy source. With the commodity trading at or near 52 week lows, it makes sense in this range. Some natural gas stocks to watch are Chesapeake Energy Corporation (CHK – Analyst Report) and Devon Energy Corporation (DVN – Analyst Report).
Another possible area for investment is in solar stocks. This sector has been crushed but as it trades at multi year lows and oil moves over $100, it begins to make sense as a speculative investment. Best of breed stocks like First Solar, Inc. (FSLR – Analyst Report) and cheap China solar producers like Suntech Power Holdings Co., Ltd. (ADR) (STP – Analyst Report) are likely to appreciate over the next year from current levels.
Can Coinstar Capitalize on Netflix’s PR Problems?
Rival Netflix (NFLX) has made a few high-profile PR blunders in recent weeks, but this article cautions that “investors still need to watch where they are going” with Redbox kiosk operator Coinstar (CSTR). Speculation on Wall Street suggests that CSTR could snag a healthy share of NFLX’s defecting DVD customers, but it’s worth noting that the DVD-rental industry isn’t necessarily a growth industry. Netflix’s own strategic shift reveals that the company thinks streaming content is the wave of the future, and that field is crowded with competition from cable providers, websites such as Hulu — and, of course, Netflix itself. Redbox has yet to create a streaming service of its own, suggesting the company is already behind the competitive curve. As a result, warns the author, “investors should pause before putting pennies into Coinstar.”
Contrarian Takeaway:
In addition to the concerns about Redbox’s relatively narrow business model, CSTR’s technical performance has been less than impressive. The stock is down 22.5% year-to-date, and CSTR has been pressured by unflagging resistance at its 10-week and 20-week moving averages since late July. Going forward, these trendlines could continue to create technical trouble for the shares.
Despite the weak price action, though, analysts remain generally upbeat toward CSTR. Zacks indicates that nine analysts maintain a “strong buy” recommendation on the struggling stock, along with six “holds” and zero “sells.” As CSTR continues to trend lower on the charts, the equity’s woes could be exacerbated by downgrades. As it stands now, it seems that any investor enthusiasm related to Netflix’s controversial changes may be premature.
What is the most robust investment strategy? – Voice of the People
What is the most robust investment strategy?
That is the set of investment rules that has proven to be profitable with minimum risks (drawdowns) over prolonged periods of time.
Do those rules exist? Yes, they do.
Just back test the total collection of 14,022 active and inactive stocks in Research Wizard and see that these 14,022 stocks combined compounded 7436%/year with a maximum drawdown of -26% over the past 12 years. That scan takes a full 10 minutes on my new laptop and immediately reveals the errors in the Dbase. But even without these errors, this is the most profitable and safest portfolio approach ever.
But it is not practical. The portfolios are equally weighted and the smallest stocks that only trade a few shares are pushed up by buys much more so than being pushed down by a sell. That asymmetry in those very small stocks is responsible for these tremendous gains, not any fundamental. When you take out these tiny stocks by imposing daily dollar volumes in excess of $500,000 and share prices larger than $1.5 and cap sizes larger than $100 million, you are left with 3446 stocks that suddenly only compound 6.4%/year with the high risk of a maximum drawdown of -60%. When you take the 200 smallest stocks of that collection, you start compounding 22%/year with a somewhat higher risk of -71%. There are only 200 ZR#1’s fulfilling those minimum size requirements. These 200 ZR#1’s compounded 18%/year over the past 12 years with a -54% risk. Hence, not using fundamentals gives you a +4%/year edge over the 200 ZR#1 stocks of the same liquidity.
If you would know the share price a week from today, you could make tremendous amounts of money. Just program in RW the selection rule i5[Recent+nW]/i5[Recent]>0, so that you only select stocks that increase in share value during the next n weeks (n=1, 2, 3, ….). When you apply such forward testing on earnings or margins, you don’t compound steady gains. However, you do compound steady gains when you apply such foreknowledge to estimate revisions. For instance, try i44[Recent+3wks]>0. When parties are holding back that information, they could make enormous amounts of money.
Back testing is only a reliable tool as long as your watch list of back-tested stocks doesn’t change over time. Hence, when a stock of your list becomes inactive, your back-tested results change, as this stock is not available any more. Zacks retroactively started to put back the inactive stocks in its dbcmhist in November 2009. It showed that the back-tested results of mid and large caps were hardly affected by the inclusion of inactive stocks. This so-called survivor bias is more important for the smaller caps.
So are there relatively stable watch lists from which you consistently, over 20 to 32 years, can pick sub selections of up to 50% of those stocks and then steadily compound up to 40-50%/yr with maximum risks between -15% and -30% and hardly suffer from survivorship?
The answer is yes, you can, without using any fundamental or TA analysis. Our 32-year deep back-test programs and quantitative watch-list design just proves that to be true. Does that mean that 32 years of proven past performance holds any promise for future performance? Except for using foreknowledge or flash trading, it is the best you can do. But stocks are like neutrinos. Neutrinos don’t carry any charge and are thus invisible for light waves. Pure mass is only inertial without any wave character. That lack of wave character is also with stocks and prevents you to make any future prediction with any certainty. Heisenberg’s uncertainty principle doesn’t hold for particles without a wave character. It doesn’t hold for neutrinos and stocks. You can only manipulate them when you have the instruments.
For Contrarians, Sanderson Farms Could Be a Golden Egg
Posted on 8/22/2011 1:49 PM
Publication: “Barron’s”
Publication title: “This Stock Could Really Lay an Egg”
Publication Date: 8/20/2011
KeyWords: SAFM
Brief Summary:
This Barron’s article starts like a Debbie Downer monologue, with the author quipping, “the sky is falling in the chicken industry.” She then lists a series of factors working against the industry, including ramped-up prices on corn and soybean, chicken prices at all-time lows, and “a glut of chicken on the market” as the industry heads into the slower fall and winter seasons. All things considered, the author concludes, “it’s a perfect storm roiling the industry” — Sanderson Farms, Inc. (SAFM) included.
As the nation’s fourth-largest chicken producer, SAFM “is most exposed to the turmoil by virtue of being the biggest pure-play company,” the author argues. In fact, Mike Cockrell, SAFM’s CFO, agrees that times are tough for the company, comparing the situation now to that in 2008, when the global financial crisis hit. The CFO is doubtful that SAFM will be able to return to profitability in the fourth quarter, as a result of the aforementioned factors, and lowered consumer confidence.
Considering these factors, the author concludes by telling investors to “look elsewhere.”
Contrarian Takeaway:
Such strong, blatantly bearish language got my contrarian radar up, as it’s always worth investigating a stock which analysts consider undesirable. And indeed, it seems that most analysts do consider SAFM undesirable, with Zacks revealing that 80% of the brokerage firms following the stock calls it a “hold” or worse.
The rest of the Street seems to share this pessimistic outlook on SAFM. The stock’s 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 1.2, indicating that puts bought to open have easily outnumbered calls purchased during the past two weeks. Moreover, as a result of a recent rise in short interest, these bearish bets now account for over 33% of SAFM’s total available float — over 25 sessions’ worth of pent-up buying pressure, at the stock’s average daily trading volume.
With so much negativity levied toward SAFM, you’d think the stock’s technical picture would be dire — but it’s actually not. Despite the recent market turmoil, the shares are still sitting on a year-to-date advance of over 3%, compared to a loss of nearly 6% for the Dow Jones Industrial Average. Meanwhile, SAFM remains docked above support at $38, a level which emerged as a floor for the shares during a similar pullback in late 2010.
So, while SAFM is by no means a technical outperformer, the stock is not performing nearly as poorly as this author suggests. Going forward, I’d keep my eye on SAFM, as the overwhelming pessimism surrounding the shares creates an appealing contrarian set-up, should the stock in any way defy the Street’s low expectations.
Sarah Wasserman (swasserman@sir-inc.com)
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Occupy DC and the Fed
Marc Faber Says Americans Need To Tighten Their Belts, Save More and Work More for Lower Salaries
Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke Tuesday about the Occupy Wall Street protests, blaming lobbyist and Washington for the current economic stagnation and characterizing Wall Street as a “minority” that is only “using the system.”
He suggested protesters should instead go after the real culprits in Washington and “also occupy the Federal Reserve on the way.”
Speaking in an interview with CNBC from Montreal, Faber blamed “Keynesians and US Democrats for their interventionist policies.
“There has been too much intervention in the Western World where the share of the total economy that goes to the government and is government sponsored has grown,” he said.
“That essentially makes it very difficult for the Western World to grow substantially…I don’t see how the Western World, including the US, Japan, and Western Europe can actually grow. They’re going to stagnate,” Faber predicted.
Stagnation, in turn, leads “people to ask questions and to go after minorities,” he said.
“Wall Street is a minority, anyone else would have done the same, they use the system but they didn’t create the system. The system was created by the lobbyists and by Washington. So they [the protesters] should actually go to Washington and also occupy the Federal Reserve on the way,” Faber suggested.
The protesters say the Wall Street bank bailouts in 2008 left banks enjoying huge profits while average Americans suffered under high unemployment and job insecurity with little help from Washington. They contend that the richest 1% of Americans have amassed vast fortunes while being taxed at a lower rate than most people.
What America needs
Faber blamed an excessive regulatory environment in the US for curtailing initiatives by businesses, leading to a drop in net investments.
Businesses no longer employ and invest capital in the US, he said, preferring instead to invest in china or somewhere else in the world where the regulatory environment is more favorable.
“If you look at net investments in the US, it has gone down for the last 20 years, and it’s now negative. In other words, basically the capital stock of America is not being replenished…althought it’s being replenished somewhere else in the world. At the same time, the policies of the Keynesians have always encouraged spending,” the renowned investor noted.
“We’re not going to get out of a recession by saying spend, spend, spend. That is wrong!”
“The lack of saving is the problem of the United States.”
In one of his most memorable recent rants, Faber then went to explain what the US [really] needs to do: “I tell you what the US needs. The US needs Lee Kwan Yew [Singapore's first Prime Minister] who stands in front of the US and tells them: Listen you lazy buggers, you have to tighten your belts, you have to save more, work more for lower salaries and only through that will we get out of the current dilemma, that essentially prevents the economy from growing.”
Markets and the Dollar
Faber, who predicted the stock market crash in 1987, turned bearish shortly before the 2007-2009 bear market and called the March 2009 level a major low which is not going to be broken any time soon, expects market volatility to continue for a long period of time and sees global liquidity tightening.
He is quite positive about the Dollar because whenever global liquidity is tightening “it’s bad for asset prices but good for the US Dollar as was the case in 2008.”
Tyranny of the masses
In an interview with Tom Keene and Ken Prewitt on Bloomberg Surveillance on Thursday, Faber was asked about one of the themes in the current issue of the Gloom Boom & Doom Report regarding alleged widespread corruption in many US institutions, including the political and corporate systems.
JPMorgan Chase Is Still the Stock Market Barometer – Voice of the People
Zacks highlights commentary from People and Picks Member «inthemoneystocks».
For more Voice of the People, visit http://at.zacks.com/?id=7872
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JPMorgan Chase Is Still the Stock Market BarometerIf you want to know what the stock market is doing just follow J.P. Morgan Chase & Co (JPM – Analyst Report). This stock is the leading financial company in the United States and possibly the entire world, therefore, it will generally lead the major stock indexes. At this time, there is a banking crisis going on around the world. Sure, the European banks might be where all of the recent focus is, however, all of these banks have some exposure to European debt and that is why these bailouts are being talked about or tried by the central banks.
JPM stock has staged a sharp three day rally and so has the major stock market indexes. If JPM stock begins to slide this short term rally could end as quickly as it began.
Other financial stocks that are trading higher today include Goldman Sachs Group Inc (GS – Analyst Report), Deutsche Bank AG (DB – Snapshot Report) and Credit Suisse Group (CS – Snapshot Report). All of these stocks are very important and should be followed, however, JPM stock is certainly the most important and a stock market barometer.
Nicholas Santiago
InTheMoneyStocks.com 
In 2008, Zacks Investment Research launched PeopleAndPicks.com, a stock-picking website where members of the Zacks community can test their strategies and share ideas with other members. Each user is scored on the accuracy of his or her picks, and top users are rewarded with free products from Zacks. Registration is free. To learn more about People And Picks, visit http://at.zacks.com/?id=7870
Follow us on Twitter: http://www.twitter.com/PeopleAndPicks
About ZacksZacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it’s your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=7867.
Read the full analyst report on JPM. GS
Read the full analyst report on DB
Pre-Christmas Contrarians Should Consider GameStop
This SmartMoney column takes a contrarian approach to the retail sector, opining that America’s lack of love for retail stocks “might be an opportunity” as consumers start to collect Christmas lists. Most notably, GameStop (GME) is expected to approach fiscal-year sales of $10 billion, marking an increase of roughly 500% over the past eight years. Plus, the used games business “is more than twice as profitable as new game sales and at least six times as profitable as hardware sales,” giving GME an edge over most of its rivals.
What’s more, the author notes, “a parade of promising game releases looks likely to give the entire industry a boost” heading into the holidays, with the newest installments of Gears of War, Batman, and Call of Duty slated to launch by the end of the year. In addition, GME’s new rewards program has been more popular than expected among customers, and the fact that GME shares “sell for less than nine times this year’s earnings forecast” makes the stock that much more appealing.
Contrarian Takeaway:
Technically speaking, GME has fared better than the broader equities market, outperforming the S&P 500 Index (SPX) by 13.9% during the past 40 sessions. Furthermore, the stock is on pace to end its third straight week atop its 10-week moving average — a feat not accomplished since the latter half of May, when GME was exploring annual-high territory.
However, the equity could gain even more ground as the bearish bandwagon begins to implode. Specifically, short interest soared 10.7% during the past month, and now accounts for a healthy 27.7% of GME’s total available float. In fact, at the security’s average daily trading volume, it would take around seven sessions to repurchase these pessimistic positions — pointing to an ample supply of sideline cash to fuel a short-covering rally.
Risks, Probabilities, Uncertainties… – Voice of the People
Zacks highlights commentary from People and Picks Member «JohntheWizard».
For more Voice of the People, visit http://at.zacks.com/?id=7872
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Risks, Probabilities, Uncertainties and Prediction in the Stock MarketWhen you look up the word “probability” in the Oxford Dictionary, it tells you it is a “sense of certainty”, “probably” means “almost certain”. Mathematicians modeled the concept of probability but not the concept of certainty or uncertainty. We apparently can speak of a 70% probability that we are in a bull market.
Mathematically, you define probability as the ratio of selected events (occurrences) and the total number of events. Since the total number of events or total population may be too large to scan, you usually limit your population to a certain sample size. That limitation enables you to calculate the reliability of your calculated probability.
In mathematics, probabilities don’t say anything about future behavior, because they are calculated from historical data. Only mathematically calculated correlations over time may give you a hint on future prediction if you are able to show that the correlations you found are causal. Causal means that you are able to assign a certain cause to a certain effect and that this “always” holds. As an example, the same binding forces in a water molecule cause the same sunlight to spread into the same rainbow as long as water and sunlight exist.
A statement like “we are in a bull market with an assigned probability of 70%” implies that the present market will first go to new highs before dropping down to deep lows. Hence, that probability implies a certain future predictability. If that probability is just an expression of your gut feeling about the future, that is fine. But when this probability is based on the calculations of correlations in the stock market and when these correlations are proven to be causal, then you can predict future stock market performance. Except for price manipulation, mathematicians have proven that such correlations do not yet exist. That proof is the sole reason for that past performance doesn’t warrant any future performance. That is the sole reason that the mathematician Harry Markopolos was able to unmask Bernie Madoff already in 1999. It took the SEC nine years to react.
Averaging the gut feelings of all investors or analysts may mislead you into the illusion of common sense. As each sense is personal and not an objectively established data point, there exists not a common base for averaging. You are averaging apples and oranges.
On February 12, Tickerbandit wrote: “Anyway there is a distinct nature to the way corrections begin. They NEVER come without warning. But first signs ALWAYS occur before the indices top out, which are most effected by large capitalization issues.”
So here we ALWAYS have an observable and unique warning causing the future event of a correction. Apparently, past performance does warrant future performance.
Opposing views usually create new wisdom.
The most recent picks by «JohntheWizard» are:
A sell rating on China Green Agriculture (CGA – Snapshot Report),
a sell rating on eHealth (EHTH – Snapshot Report) and
a sell rating on NBT Bancorp (NBTB – Snapshot Report).
In 2008, Zacks Investment Research launched PeopleAndPicks.com, a stock-picking website where members of the Zacks community can test their strategies and share ideas with other members. Each user is scored on the accuracy of his or her picks, and top users are rewarded with free products from Zacks. Registration is free. To learn more about People And Picks, visit http://at.zacks.com/?id=7870
Follow us on Twitter: http://www.twitter.com/PeopleAndPicks
About ZacksZacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it’s your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=7867.
Read the full analyst report on CGA
Read the full analyst report on EHTH
Robbing the Markets Blind on McDonald’s – Voice of the People
Zacks highlights commentary from People and Picks Member «DiviMO».
For more Voice of the People, visit http://at.zacks.com/?id=7872
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Robbing the Markets Blind on McDonald’sToday let’s look at “Big Mac”: McDonald’s (MCD – Analyst Report):
First, I’m disclosing that I own MCD stock. However, our trade today involves writing (cash-secured or naked) PUTs on MCD. When you write a put, you receive the current premium immediately. The entity buying the PUT from you has the option of putting the underlying stock to you to purchase at the assigned strike price. Hence, one always writes a put on a stock one doesn’t mind owning if assigned.
Currently MCD is priced at 90.30 as this is being written.
By looking at the chart and the technicals I see that the $82.50 level has reasonable support as it rests. As well MCD Stock at $82.50 is below the 100 day moving average which McDonalds Stock has retested at least twice but perhaps three times in the last two months.
Also the 200 day moving average is just below the $82.50 strike. This means that should MCD Stock decisively break the 100 day moving average this could signal a change in trend, I will have the chance to buy back my $82.50 puts on McDonalds Stock and roll them lower. As long as I do not wait too long should the 100 day moving average break, then I will have time to roll down for a net credit on any roll.
Presently though, the strength in MCD Stock tells me that it is a good time to writing puts, albeit far out of the money and when possible, at the 200 day moving average. With the volatility high in the present market as investors fear debt issues, the US slowdown in the economy, high unemployment, housing sales, and a number of other worries, put premiums in MCD Stock are excellent and make writing puts highly profitable even when doing so far out of the money.
MCD stock has had excellent support at the 82.50 – 83 price level during the last few months of high volatility. With the current market strength this month, and the excellent results of MCD’s earnings and dividend increases, one has high odds (excellent risk/reward ratio) of MCD not falling below 82.50 and if it did, one, as explained, can do an option roll-down.
Important is the RSI Indicator (Relative Strength Index) for McDonalds Stock. It remained fully positive on the big sell-off days.
Of interest was the MACD Indicator (moving average convergence divergence) when looking at the big sell-off days. The sell-offs produced just a mile negative amount and in each case MCD Stock quickly recovered as did the MACD Indicator. Important is the RSI Indicator (Relative Strength Index) for McDonalds Stock. It remained fully positive on the big sell-off days . The most important of the indicators was that MCD Stock failed to break the 100 day moving average.
So here’s the trade.
WRITE MCD (cash-secured or naked) PUT on the DEC 82.50′s for a premium of $91 per contract.
Final note: ‘Robbing the Market Blind’ subscriiption information will be forthcoming soon.
As of another option, if one wanted to take a more aggressive play with higher risk is to:
WRITE MCD (cash-secured or naked) PUT on the DEC 85′s for a premium of $135.00 per contract.
Let me remind you when writing puts for income that stock selection is as critical as what strikes to select to sell. Writing puts for income is a strategy of small monthly gains
Final note: ‘Robbing the Markets Blind’ subscription info will be forthcoming. The information provided can come from our own analysis or those found on the internet that can provide a winning trade. We scan the internet for winners. Some of the information provided above came from our internet friends. Posts via DIVIMO on this site document the other trade pick selections. Currently our documented picks are 100% winners. Disclosure: I own MCD stock.
The most recent picks by «DiviMO» are:
A buy rating on NiSource, Inc. (NI – Analyst Report),
a sell rating on Whirlpool Corp. (WHR – Analyst Report) and
a sell rating on Medco Health Solutions (MHS – Analyst Report).
In 2008, Zacks Investment Research launched PeopleAndPicks.com, a stock-picking website where members of the Zacks community can test their strategies and share ideas with other members. Each user is scored on the accuracy of his or her picks, and top users are rewarded with free products from Zacks. Registration is free. To learn more about People And Picks, visit http://at.zacks.com/?id=7870
Follow us on Twitter: http://www.twitter.com/PeopleAndPicks
About ZacksZacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it’s your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=7867.
Read the full analyst report on MCD
Read the full analyst report on NI
Read the full analyst report on WHR
European Banks Are Talking to Us – Voice of the People
Zacks highlights commentary from People and Picks Member «inthemoneystocks».
For more Voice of the People, visit http://at.zacks.com/?id=7872
Featured Post
European Banks Are Talking to UsThis morning, all of the leading European financial institutions are selling off sharply to start the day. The European banking crisis seems to be getting worse by the minute. Traders can easily see stocks such as National Bank of Greece (NBG – Snapshot Report), Deutsche Bank AG (DB – Snapshot Report), Credit Suisse Group (CS – Snapshot Report), UBS AG (UBS – Snapshot Report), and countless other financial institutions are trading lower by more than 3.00 percent or more. This is not a sign of a healthy financial system, it is a sign of a coming default in the European Union.
The stock market has already priced in a Greek default despite all of the news out of Europe last week saying that would not happen. Investors are just wondering who will be next country to default after Greece. Will it be Italy, Spain, Portugal, or perhaps even France. The French banks have sold off sharply over the past month, the French financial institutions do not seem any better then Greece at the moment.
There will certainly be more news out of Europe this week telling the world that everything will be fine in the European Union. Traders and investors should not listen to the noise from the talking heads, traders should listen to the price action on the charts. Right now, the charts are telling us there is a likely default in the European Union.
Nicholas Santiago
InTheMoneyStocks.com
About the Zacks CommunityIn 2008, Zacks Investment Research launched PeopleAndPicks.com, a stock-picking website where members of the Zacks community can test their strategies and share ideas with other members. Each user is scored on the accuracy of his or her picks, and top users are rewarded with free products from Zacks. Registration is free. To learn more about People And Picks, visit http://at.zacks.com/?id=7870
Follow us on Twitter: http://www.twitter.com/PeopleAndPicks
About ZacksZacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it’s your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=7867.
Read the full analyst report on NBG
Read the full analyst report on DB
Read the full analyst report on CS
Traders Wake to Reality – Voice of the People
Zacks highlights commentary from People and Picks Member «DiviMO».
For more Voice of the People, visit http://at.zacks.com/?id=7872
Featured Post
Traders Wake to RealityThe market action today is certainly telling. It appears that many investors really did believe that the Federal Reserve would commence a third round of quantitative easing. Why anyone would believe this is a possibility strikes me as quite odd. Interestingly the FED admitted the economy is expected to be in poor shape for a long time.
The first two rounds did not reduce unemployment and did not stop the housing tumble. I have said since January that the keys to the year would be Jobs and Housing and the Finance sector. These issues are forefront for the economy and so far nothing has worked. QE1 and QE2 were terrific for stocks but there was lots of warning that the Federal Reserve was going to change direction.
Yet investors still want to believe, just as many believe Greece won’t default and the European Crisis will be averted. How this is going to happen is definitely beyond me. So far the European leaders have made no real progress and certainly appear to not only not truly grasp the situation, but have no real strategies on how to solve the situation.
Today’s drop is just another sign that the bull market is over. It may go down in history as the shortest bull market in history, but definitely it is over. For those who are into stocks there will be lots of opportunity ahead for buy on weakness and selling into rallies.
However for those who like me prefer options, this volatility is playing right into our portfolios. Put premiums are higher and I have been selling puts on large down days, such as today, in order to take advantage of the volatility.
There is no need to rush. Investors should take their time and pick strikes carefully. I have not been able to update all my trades, but I will do my best to bring them up to date over the coming days. Here is my strategy going forward
On stocks you hold, write deep in the money Calls. On days like today, put premiums have been ‘jacked’ up high, writing naked or cash-secured puts is a winning strategy, buying 1x index etf’s in small increments is a strategy (in my case those are non-commissioned that have no trading restrictions). I am not one to short stocks. Buy good strong dividend stocks that have a history of ‘bouncing back’ when times are better.
Played properly, staying in a bear market can lead to terrific returns, but it is important to be careful and not get greedy. Close profitable positions early to lock in the profit and then look for new opportunities. Stay with large cap, quality stocks. Take your time as patience will definitely be rewarded in any bear market.
Keep some cash always available for big down days and watch using margin. I prefer to keep margin to a minimum or not use it at all.
PS: My attempt is to provide you with only with one person’s opinion of how to play this market. I hope you found this blog straightforward, not ambigious and hopefully helpful.
The most recent picks by «DiviMO» are:
A buy rating on NiSource, Inc. (NI – Analyst Report),
a sell rating on Whirlpool Corp. (WHR – Analyst Report) and
a sell rating on Medco Health Solutions (MHS – Analyst Report).
Forget Europe. This Is Worse – Voice of the People
Zacks highlights commentary from People and Picks Member «inthemoneystocks».
For more Voice of the People, visit http://at.zacks.com/?id=7872
Featured Post
Forget Europe. This Is WorseAs you all know, the banking crisis in the European Union is an absolute disaster. Most of the countries in the European Union are insolvent and they will have to likely default at some point. Whether or not there is a structured default remains to be seen.
At this time, the European Union is likely pass this European Financial Stability Facility (EFSF) to help bailout all of the Euro-zone banks in the near term. This plan is simply paying off debt with more debt. While it may keep the European Union together for a little while longer there are still going to be major problems in the region for a long time to come.
Believe it or not, there is a bigger problem lingering in the global economy. It is not the European debt crisis, it is not the massive U.S. debt crisis that grows every day. It is a Chinese slowdown that could cause the stock markets to decline further. The Shanghai Index (China) made a new 52-week closing low last night.
China is the growth engine of the world; they produce most of the goods that people buy and use. The Shanghai Index has actually lead the global stock markets for years now. If you look at the March 2009 low on the S&P 500 Index and the rest of the major stock indexes in the United States you can easily see that the Shanghai Index actually bottomed in November 2008. This is clearly indicating to us that the Shanghai Index is the leading economy in the world.
China is facing many problems at this time. The country has a housing bubble in place. Real estate prices are much too expensive compared to the average wage. Next, the Chinese economy is facing high inflation. This is obvious in Chinese housing and the cost of food for the people who live in the nation.
The Chinese are also starting to face an uprising in the labor force. The Chinese workers are demanding raises and better work conditions. These are all problems that are happening right now in this massive country. People must understand that the nation has a population of 1.3 billion. Any economic slowdown will hurt that country.
This morning, the Chinese ADR’s are behaving terrible. Leading stocks such as Baidu Inc. (BIDU – Snapshot Report), Sina Corp (SINA – Analyst Report) and Sohu.com Inc. (SOHU – Analyst Report) and Netease.com Inc. (NTES – Snapshot Report) are declining sharply lower on a day when the stock markets in the United States are rallying higher.
This is not the type of action that is healthy. Remember, it has been Chinese investments around the world that everyone has been hanging their hopes on. If the Chinese stop investing in different places around the world the entire global market will slowdown. This is worse than the European crisis.
Nicholas Santiago
Can Apple’s New Chief Keep the Bears at Bay?
View Most Recent Contrarian Takeaways
Publication: “Fortune”
Publication title: “5 warning signs that Apple has lost its magic”
Publication Date: 8/31/2011
KeyWords: AAPL
Brief Summary:
Many analysts have rushed to weigh in on the prospects for Apple Inc. (AAPL) following the recently announced departure of co-founder Steve Jobs from the CEO role. This cautionary article notes that it may take time for Jobs’ absence to be felt in the company’s product pipeline, but warns that changes in Apple’s advertising strategy could be early indicators of a broader shift in the corporate culture. A few potential red flags are listed — including “social media pandering,” to name one example. In particular, though, the analyst seems concerned that Apple may muddy the marketing waters by trying to sell its own corporate brand, rather than its industry-leading line of products.
Contrarian Takeaway:
It’s easy to understand why news of Jobs’ departure may have sparked a bit of knee-jerk panic among investors. However, replacement CEO Tim Cook has plenty of experience leading the company in Jobs’ absence, suggesting a sea change in Apple’s corporate strategy is relatively unlikely during the short term.
While AAPL’s fundamental outlook may remain more or less unchanged for now, the heavy-handed optimism surrounding the company remains a valid point of concern, from a contrarian perspective. Zacks reports no fewer than 40 “buy” or better ratings from brokerage firms, compared to only three “holds” and zero “sells.” In fact, AAPL’s average 12-month price target stands at a lofty $493.22, more than 100 points north of the equity’s current perch — suggesting that brokerage firms expect the stock to blaze a path deep into all-time high territory over the next year.
Traders are similarly upbeat. Short interest accounts for just 1.4% of the shares’ float, and peak call open interest for September lies at the out-of-the-money 400 strike, with approximately 29,000 contracts in residence. This key century level has already proven its mettle as round-number resistance, having thwarted AAPL’s late-July rally.
With such high hopes surrounding the tech stock, contrarians should be very wary of Apple going forward. Any signs of weakness following the firm’s historic changing of the guard could spook the bulls, potentially prompting a fresh wave of selling pressure on the shares.
Apple Inc.: A Case Study On the Importance of Expectations
View Most Recent Contrarian Takeaways
Posted on 10/19/2011 1:18 PMPublication: “SmartMoney”
Publication title: “Apple ‘Disappoints’? Blame Wall Street”
Publication Date: 10/19/2011
KeyWords: AAPL
Brief Summary:
As most of you have probably heard by now, tech mogul Apple Inc. (AAPL) reported third-quarter earnings that fell short of analysts’ estimates, sending the shares lower as a result. But, as SmartMoney columnist Jack Hough notes, “Normally, a 54% profit jump would be impressive even for a promising start-up in a booming economy.” Furthermore, the author points out that although AAPL’s iPhone sales missed Wall Street’s mark, they rose a year-over-year 21% — pointing to healthy demand, and underscoring the Schaeffer’s philosophy that sentiment should never be overlooked.
And, now more than ever, AAPL investors are also learning why too-high expectations can come back to haunt a stock, despite arguably solid fundamentals and a longer-term uptrend. In fact, speaking like a true contrarian, Hough warns prospective AAPL buyers not to rush in anytime soon. “Analysts are sure to revisit their remaining forecasts in coming weeks and a few might even issue downgrades,” he cautions, which could send the security even lower.
Contrarian Takeaway:
If there ever were a poster child for a Wall Street darling, AAPL just might be it. According to Zacks, a whopping 35 analysts consider the stock a “strong buy,” with another three doling out “buy” ratings. For comparison, just three brokerage firms rate the equity a “hold,” and not one considers it a “sell” or worse. Should the analyst crowd downwardly revise their opinions in the wake of AAPL’s earnings miss, a bullish exodus could exacerbate the stock’s slide.
Elsewhere on the Street, options traders have also upped the bullish ante on AAPL. The stock sports a 10-day call/put volume ratio of 2.23 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), indicating that traders have bought to open more than two AAPL calls for every put during the past couple of weeks. What’s more, this ratio registers in the 95th annual percentile, implying that speculators have rarely initiated bullish bets over bearish at a faster clip during the past year.
Echoing that trend, the security’s Schaeffer’s put/call open interest ratio (SOIR) rests at 0.74, indicating that calls comfortably outnumber puts among options slated to expire within three months. Plus, this ratio stands just nine percentage points shy of a 52-week low, suggesting near-term options players are much more call-heavy than usual on AAPL. An unwinding of optimism in the options pits could also amplify the selling pressure on the equity.
Andrea Kramer (akramer@sir-inc.com)
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“When everyone thinks alike, everyone is likely to be wrong.”
~ Humphrey Neill, The Art of Contrary Thinking
The above quote has been reiterated numerous times in our publications because of its ability to succinctly capture the essence of contrarian thinking. While simple in theory, the task of capturing the prevailing sentiment can be as elusive as defining the boundaries of a cloud. The closer you get to it, the harder it is to see.
Even Humphrey Neill admitted the difficulties inherent in gauging sentiment:
“I found in my own case that it took several years, as a matter of fact, before I was able to weigh ‘public opinion’ with sufficient accuracy to feel reasonably confident of the contrary conclusion. It takes time to form the habit of thinking contrarily?I grant you that you will have to peruse a pile of news and comments.”
Regular Schaeffer’s readers are well aware that we use “hard” data such as put/call ratios and short interest to gauge the sentiment of stocks, sectors, and the market as a whole. Graphs and numbers are easy to quantify and show. What is not so easy to convey is the sentiment that is gathered from poring over numerous publications and scanning various news outlets. This information is embedded in our approach and used to make trading decisions.
At Schaeffer’s, we have a team of analysts who track this “anecdotal sentiment” and pull it all together for our in-house research. The amount of information available is overwhelming and it would be impossible for one individual to stay on top of it all. Noting that Neill himself acknowledged the complexity of tracking numerous publications and the need for experience, we have launched a new column, “Schaeffer’s Weekly Contrarian.”
This weekly column will post summaries of current articles and provide a short take on how we view the article in a contrarian light. Some entries will give you insight into how we read media articles and how to merge small morsels into a tasty contrarian meal. Our goal is to constantly scan various media and news outlets every trading day and present some of what we feel provides a good contrarian read. We should note that not all articles will lend themselves to a contrarian interpretation. In fact, most will not.
What This is Not
First and foremost, “Schaeffer’s Weekly Contrarian” is not meant as a trade recommendation. These articles and our contrarian interpretation are but a small piece of a much larger analytical puzzle. Gathering anecdotal sentiment from a variety of sources and merging this with hard data is the hallmark of contrarian analysis. Here you get a first-hand account of how to go about this in real time.
It’s also important to understand that getting a contrarian read from an article is by no means a poor reflection on the publication or its writers. A negative article on a high-flying stock may site accurate facts and be extremely logical. And more importantly, it could ultimately prove to be correct. However, experience has taught us that uptrends do not end until the final capitulation where it seems that everyone has finally given up their concerns. The market has shown time and again that short-term moves are often driven purely on emotions. By monitoring the comments made by analysts in the media, we can add this to our contrarian arsenal to gauge whether the capitulation stage has finally been reached.
At Schaeffer’s, we have the years of experience and the ability to “peruse the piles of news.” More importantly, we are willing to share it with you every day. It’s almost like having your own personal team of contrarian analysts gathering and summarizing anecdotal information. We hope “Schaeffer’s Weekly Contrarian” becomes a resource you value as much as we do.
Optimism Still Lingers Toward Beaten-Down Big-Cap Banks
View Most Recent Contrarian Takeaways
Posted on 10/12/2011 2:00 PMPublication: “CNNMoney”
Publication title: “Earnings: Banks bracing for pain”
Publication Date: 10/12/2011
Brief Summary:
This article notes that Wall Street is on the cusp of a virtual onslaught of corporate earnings reports from big-cap banks, including all of the usual suspects: Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), and Wells Fargo (WFC). As the headline suggests, the prognosis is none too pleasant, with the author predicting that wild market volatility “has most likely taken a huge toll on profits.” The back-and-forth action on Wall Street has not only triggered trading-desk losses, it’s also slowed M&A activity to a trickle, and more than one planned IPO has been postponed — all of which adds up to a rather challenging environment for the aforementioned titans of finance. Plus, concerns are still lingering about the exposure of U.S. banks to bad European debt. Despite the multiple challenges facing the group, though, the article points out that valuations are “one bright spot,” as these banking stocks have apparently tumbled low enough on the charts to “potentially [make] them an attractive ‘buy’ option.”
Contrarian Takeaway:
It’s hard to argue with the facts of the article, as major U.S. banks are definitely operating in a remarkably challenging environment. The price action in these names is a testament to those challenges. Among sector heavyweights BAC, C, GS, JPM, MS, and WFC, the average year-to-date loss stands at about 37% — considerably worse than the broader S&P 500 Index (SPX), which is sitting on a 3% deficit for 2011.
However, the valuation argument is troubling. These six stocks have been hammered to double-digit percentage losses in 2011 amid ongoing concerns about bad debt exposure, ongoing legal and regulatory woes, and anemic loan demand. The outlook shows no signs of improving, so it’s difficult to accept “cheap share price” as a valid bullish argument. It’s also worth noting that BAC, C, GS, JPM, MS, and WFC currently boast 66% “buy” ratings from brokerage firms. Going forward, a round of downgrades for these underperforming equities could translate into even more “attractive” valuations for big-cap banks.
Elizabeth Harrow (eharrow@sir-inc.com)
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“When everyone thinks alike, everyone is likely to be wrong.”
~ Humphrey Neill, The Art of Contrary Thinking
The above quote has been reiterated numerous times in our publications because of its ability to succinctly capture the essence of contrarian thinking. While simple in theory, the task of capturing the prevailing sentiment can be as elusive as defining the boundaries of a cloud. The closer you get to it, the harder it is to see.
Even Humphrey Neill admitted the difficulties inherent in gauging sentiment:
“I found in my own case that it took several years, as a matter of fact, before I was able to weigh ‘public opinion’ with sufficient accuracy to feel reasonably confident of the contrary conclusion. It takes time to form the habit of thinking contrarily?I grant you that you will have to peruse a pile of news and comments.”
Regular Schaeffer’s readers are well aware that we use “hard” data such as put/call ratios and short interest to gauge the sentiment of stocks, sectors, and the market as a whole. Graphs and numbers are easy to quantify and show. What is not so easy to convey is the sentiment that is gathered from poring over numerous publications and scanning various news outlets. This information is embedded in our approach and used to make trading decisions.
At Schaeffer’s, we have a team of analysts who track this “anecdotal sentiment” and pull it all together for our in-house research. The amount of information available is overwhelming and it would be impossible for one individual to stay on top of it all. Noting that Neill himself acknowledged the complexity of tracking numerous publications and the need for experience, we have launched a new column, “Schaeffer’s Weekly Contrarian.”
This weekly column will post summaries of current articles and provide a short take on how we view the article in a contrarian light. Some entries will give you insight into how we read media articles and how to merge small morsels into a tasty contrarian meal. Our goal is to constantly scan various media and news outlets every trading day and present some of what we feel provides a good contrarian read. We should note that not all articles will lend themselves to a contrarian interpretation. In fact, most will not.
What This is Not
First and foremost, “Schaeffer’s Weekly Contrarian” is not meant as a trade recommendation. These articles and our contrarian interpretation are but a small piece of a much larger analytical puzzle. Gathering anecdotal sentiment from a variety of sources and merging this with hard data is the hallmark of contrarian analysis. Here you get a first-hand account of how to go about this in real time.
It’s also important to understand that getting a contrarian read from an article is by no means a poor reflection on the publication or its writers. A negative article on a high-flying stock may site accurate facts and be extremely logical. And more importantly, it could ultimately prove to be correct. However, experience has taught us that uptrends do not end until the final capitulation where it seems that everyone has finally given up their concerns. The market has shown time and again that short-term moves are often driven purely on emotions. By monitoring the comments made by analysts in the media, we can add this to our contrarian arsenal to gauge whether the capitulation stage has finally been reached.
At Schaeffer’s, we have the years of experience and the ability to “peruse the piles of news.” More importantly, we are willing to share it with you every day. It’s almost like having your own personal team of contrarian analysts gathering and summarizing anecdotal information. We hope “Schaeffer’s Weekly Contrarian” becomes a resource you value as much as we do.
Why Contrarians Shouldn’t Consider Bank of America
Are you a contrarian? According to this MarketWatch article, if you hesitate to bet bullishly on Dow underperformer Bank of America Corporation (BAC), you probably shouldn’t call yourself a contrarian. The article cites a bona fide contrarian analyst who believes BAC is on track to outpace outperforming Apple Inc. (AAPL) — the latter of which recently exceeded Exxon Mobil (XOM) as the most valuable company in the world.
The article argues that BAC is an example of a company so hated that its market-cap rank has fallen below its fundamental rank. This set-up essentially means that BAC can’t help but outperform. By contrast, a recent study found that the stock with the largest market cap tended to actually underperform the broader S&P 500 Index (SPX). However, given the recent market turmoil, the article concludes, contrarians may not want to bet for or against either of these stocks.
Contrarian Takeaway:
As a contrarian, my radar went up after seeing the title of this article — but not because I think BAC is a good bet. The stock has been a broad-market laggard in 2011 — even before talk of “debt ceilings” and “downgrades” swept the Street. BAC has shed an astounding 43% of its value year-to-date, and is staring up at notable resistance from its 10-week trendline, which has pressured the stock lower since February. Moreover, as a result of the recent market turmoil, BAC is now trading below the psychologically significant $10 level, a round number which has previously provided a floor for the banking behemoth.
Meanwhile, of particular note to contrarians is how much optimism currently surrounds downtrending BAC. During the past two weeks, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.5 calls for every put purchased. Meanwhile, Zacks reports more than half of the analysts following BAC call it a “buy” or better. Meanwhile, BAC’s 12-month consensus price target is pegged at $13.58 — a premium of over 78% to the stock’s Tuesday close at $7.60.
All things considered, I’m not too optimistic about BAC’s prospects — and I do consider myself a contrarian. In addition to the technical problems plaguing BAC, the larger macroeconomic issues weighing on sentiment should give contrarian bulls plenty of reasons to avoid the financial bigwig.
Can Coinstar Capitalize on Netflix’s PR Problems?
Rival Netflix (NFLX) has made a few high-profile PR blunders in recent weeks, but this article cautions that “investors still need to watch where they are going” with Redbox kiosk operator Coinstar (CSTR). Speculation on Wall Street suggests that CSTR could snag a healthy share of NFLX’s defecting DVD customers, but it’s worth noting that the DVD-rental industry isn’t necessarily a growth industry. Netflix’s own strategic shift reveals that the company thinks streaming content is the wave of the future, and that field is crowded with competition from cable providers, websites such as Hulu — and, of course, Netflix itself. Redbox has yet to create a streaming service of its own, suggesting the company is already behind the competitive curve. As a result, warns the author, “investors should pause before putting pennies into Coinstar.”
Contrarian Takeaway:
In addition to the concerns about Redbox’s relatively narrow business model, CSTR’s technical performance has been less than impressive. The stock is down 22.5% year-to-date, and CSTR has been pressured by unflagging resistance at its 10-week and 20-week moving averages since late July. Going forward, these trendlines could continue to create technical trouble for the shares.
Despite the weak price action, though, analysts remain generally upbeat toward CSTR. Zacks indicates that nine analysts maintain a “strong buy” recommendation on the struggling stock, along with six “holds” and zero “sells.” As CSTR continues to trend lower on the charts, the equity’s woes could be exacerbated by downgrades. As it stands now, it seems that any investor enthusiasm related to Netflix’s controversial changes may be premature.
Bought some Gold
With the market in freefall and stocks/commodities oversold, I decided to take the plunge and bought a small position in GLD for long term. GLD is nearing its 2 year trendline support which is around $150.
Should I have waited till it got to $150 ? Probably but again like most people, I dont have time to sit and watch the market.
Can Apple’s New Chief Keep the Bears at Bay?
View Most Recent Contrarian Takeaways
Posted on 8/31/2011 2:21 PMPublication: “Fortune”
Publication title: “5 warning signs that Apple has lost its magic”
Publication Date: 8/31/2011
KeyWords: AAPL
Brief Summary:
Many analysts have rushed to weigh in on the prospects for Apple Inc. (AAPL) following the recently announced departure of co-founder Steve Jobs from the CEO role. This cautionary article notes that it may take time for Jobs’ absence to be felt in the company’s product pipeline, but warns that changes in Apple’s advertising strategy could be early indicators of a broader shift in the corporate culture. A few potential red flags are listed — including “social media pandering,” to name one example. In particular, though, the analyst seems concerned that Apple may muddy the marketing waters by trying to sell its own corporate brand, rather than its industry-leading line of products.
Contrarian Takeaway:
It’s easy to understand why news of Jobs’ departure may have sparked a bit of knee-jerk panic among investors. However, replacement CEO Tim Cook has plenty of experience leading the company in Jobs’ absence, suggesting a sea change in Apple’s corporate strategy is relatively unlikely during the short term.
While AAPL’s fundamental outlook may remain more or less unchanged for now, the heavy-handed optimism surrounding the company remains a valid point of concern, from a contrarian perspective. Zacks reports no fewer than 40 “buy” or better ratings from brokerage firms, compared to only three “holds” and zero “sells.” In fact, AAPL’s average 12-month price target stands at a lofty $493.22, more than 100 points north of the equity’s current perch — suggesting that brokerage firms expect the stock to blaze a path deep into all-time high territory over the next year.
Traders are similarly upbeat. Short interest accounts for just 1.4% of the shares’ float, and peak call open interest for September lies at the out-of-the-money 400 strike, with approximately 29,000 contracts in residence. This key century level has already proven its mettle as round-number resistance, having thwarted AAPL’s late-July rally.
With such high hopes surrounding the tech stock, contrarians should be very wary of Apple going forward. Any signs of weakness following the firm’s historic changing of the guard could spook the bulls, potentially prompting a fresh wave of selling pressure on the shares.
Elizabeth Harrow (eharrow@sir-inc.com)
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“When everyone thinks alike, everyone is likely to be wrong.”
~ Humphrey Neill, The Art of Contrary Thinking
The above quote has been reiterated numerous times in our publications because of its ability to succinctly capture the essence of contrarian thinking. While simple in theory, the task of capturing the prevailing sentiment can be as elusive as defining the boundaries of a cloud. The closer you get to it, the harder it is to see.
Even Humphrey Neill admitted the difficulties inherent in gauging sentiment:
“I found in my own case that it took several years, as a matter of fact, before I was able to weigh ‘public opinion’ with sufficient accuracy to feel reasonably confident of the contrary conclusion. It takes time to form the habit of thinking contrarily?I grant you that you will have to peruse a pile of news and comments.”
Regular Schaeffer’s readers are well aware that we use “hard” data such as put/call ratios and short interest to gauge the sentiment of stocks, sectors, and the market as a whole. Graphs and numbers are easy to quantify and show. What is not so easy to convey is the sentiment that is gathered from poring over numerous publications and scanning various news outlets. This information is embedded in our approach and used to make trading decisions.
At Schaeffer’s, we have a team of analysts who track this “anecdotal sentiment” and pull it all together for our in-house research. The amount of information available is overwhelming and it would be impossible for one individual to stay on top of it all. Noting that Neill himself acknowledged the complexity of tracking numerous publications and the need for experience, we have launched a new column, “Schaeffer’s Weekly Contrarian.”
This weekly column will post summaries of current articles and provide a short take on how we view the article in a contrarian light. Some entries will give you insight into how we read media articles and how to merge small morsels into a tasty contrarian meal. Our goal is to constantly scan various media and news outlets every trading day and present some of what we feel provides a good contrarian read. We should note that not all articles will lend themselves to a contrarian interpretation. In fact, most will not.
What This is Not
First and foremost, “Schaeffer’s Weekly Contrarian” is not meant as a trade recommendation. These articles and our contrarian interpretation are but a small piece of a much larger analytical puzzle. Gathering anecdotal sentiment from a variety of sources and merging this with hard data is the hallmark of contrarian analysis. Here you get a first-hand account of how to go about this in real time.
It’s also important to understand that getting a contrarian read from an article is by no means a poor reflection on the publication or its writers. A negative article on a high-flying stock may site accurate facts and be extremely logical. And more importantly, it could ultimately prove to be correct. However, experience has taught us that uptrends do not end until the final capitulation where it seems that everyone has finally given up their concerns. The market has shown time and again that short-term moves are often driven purely on emotions. By monitoring the comments made by analysts in the media, we can add this to our contrarian arsenal to gauge whether the capitulation stage has finally been reached.
At Schaeffer’s, we have the years of experience and the ability to “peruse the piles of news.” More importantly, we are willing to share it with you every day. It’s almost like having your own personal team of contrarian analysts gathering and summarizing anecdotal information. We hope “Schaeffer’s Weekly Contrarian” becomes a resource you value as much as we do.
Will September Be the Month of the 1,000-Point Drop? – Voice of the People
Would it surprise you? It won’t surprise me.
This bear market rolls into its fourth month since the highs hit in early May.
It’s failed at least three times in attempts to hit a newer high.
We’ve had a number of up and down days with big drops this month. Is the 1,000 point drop going to happen with the next big ‘bad news’ or ‘bad disappointment’ day?
What catalyst could turn the markets upward? I see three things that could cause a turn in market direction, an upward trend in Jobs, an upward trend in Housing, and/or a new round of quantitive easing by the FED (although even that may not help). I don’t see any upwards trends in Jobs or Housing.
What if?
There’s still opportunity to make money in this market but you need to go to the ‘dark side’.
My advice. Stay protected (i.e put options, inverse ETF’s) and listen to the market and disregard personal bias, do not be in denial (keep your head out of the sand).
