Three Stocks Positioned for a Downtrend

Last week I wrote an article entitled, “Where Are The Markets Going? All Indicators Show Down.” In that article I suggested that the GM bankruptcy filing might be the trigger to actually start the new downtrend (retracement). GM is now slated to file for bankruptcy today, according to the White House.

Some people believe this news may be factored into the markets already. I am not so sure. I was one of those people who had believed we were in a recession since Jan. 2008. Most people in the financial world knew this to be the case. When they officially announced that it was so in Sept. 2008, credit dried up. The markets fell off a cliff.

I am not saying the GM news will necessarily engender this result. Still a retracement does seem likely for this and other reasons (see my last article). In addition Barron’s estimates the S&P500 PE after Q1 earnings to be approx. 123x. Ockham Research estimates the S&P500 PE to be 46x. A PE of approx. 50 to 125 is much too high for an economy which is still shrinking (GDP = -5.7% at last estimate).

The Fed says the unemployment rate will likely stay above 9% through 2010. The unemployment rate is supposed to reach 10+% by the end of this year. The economic recovery in the US is supposed to be slow. Japan and Europe are in bad shape also. We can’t look to them to pull us out of the recession. The recovery is not likely to be V-shaped.

The above mentioned PE is not likely to be sustainable for long. Emotion may often drive the markets up, but sanity eventually prevails. Given this I have selected a few companies that may move downward rapidly, if the markets do.

I did two screens to check for possibilities. The first screen looked for:

1. margins of less than 15%

2. institutional holding of greater than 50%

3. daily volume of greater than 1,000,000 shares

4. a 12-day momentum cross from positive to negative

The stock I liked best from this screen was DV – Devry (a for profit education firm). One might posit that the average person might cut back on education expense during a recession. The chart is below:

As you can see, the 200-day moving average of this stock is still trending firmly in the down direction. The 50-day moving average seems to be trending downward also. The 20-day moving average may have just turned for another good movement downward. DV looks to be under distribution. The accumulation/distribution chart also seems to be heading in the correct direction for a down movement. The setup for a downtrend seems to be good.

The second screen was BID (Sotheby’s). The chart is below:

This chart looks like a good set up for a downtrend. The 200-day moving average is firmly headed downward. The 50-day moving average still seems to be up trending, but the 20-day sma is downtrending in agreement with the 200-day sma. Both the Accumulation/Distribution chart and the Money Flow Index chart seem to be trending downward. The Williams %R indicates that BID is already oversold in a relatively good market. It is set up to become even more oversold if the market moves downward.

A third stock I like for a downtrend is FLSR (a solar manufacturer). This stock has gapped up on great earnings recently. Since then, it has traded in a channel. It has also profited from the recent rise in oil (and other energy). It and energy in general are poised for a down turn. FSLR is likely more apt to fall rapidly than basic oil and oil services stocks though.

For a long time this stock has been the leader in low priced solar. However, polysilicon prices have dropped dramatically since last summer. They are expected to drop another 30% by year end (Barron’s). Polysilicon constitutes half the price of goods for the polysilicon solar manufacturers. The polysilicon manufacturers may be able to make significant inroads on FSLR’s business in the near future. Add to this the growing presence of the CIGS solar players such as Nanosolar. FSLR could face some very stiff competition as this year continues, and 2009 is a recession year to start with. Whatever, the long term future holds for FSLR, it seems likely to move downward strongly in a downtrending market. The chart is below:

The chart shows the 200-day SMA is still strongly in a downtrend. The stock has been trading sideways for about a month. If there is a downtrend, FSLR is poised to move strongly downward with it. As a quick comparison among solar manufacturers, FSLR was downgraded by FBR Capital. In contrast, JASO, CSIQ, and SOLF were all upgraded. I note that I didn’t check all solar companies.

Good luck investing. The above ideas are only meant to work for a new overall market downtrend. Please do your own research to ensure that you are aware of all the possibilities. I hope I have been helpful. Keep in mind that emotion can often carry the markets upward for some time. Consumer confidence figures have been good lately.

Still the markets will eventually react to fundamentals. Aside from the now virtually certain GM bankruptcy filing, the ADP jobs figures on Wed. could be very important to determining a trend. I am waiting and watching. The charts indicate either a downtrend or possibly a sharp up trend (a possible cup with a handle formation for the SPY). It may be best to wait to see which develops. The fundamentals and technicals are overwhelmingly indicating a downtrend should be coming.

Disclosure: I am not currently invested in any of these three stocks. I am considering the above three stocks for shorts or put options. I will be very interested in the market behavior this week.

Comments

[David White:]

So far, the market is going up, not down. In fact it may be breaking out to the high side today? Still FSLR is down. This seems to be more news driven than anything else. Apparently the U.S. Dept. of the Interiror's inspector general is investigating FSLR's acquistion of OptiSolar and its "strategic land rights" to 136,000 acres of public land in California's desert (LA Times). Apparently the Dept. of the Interior is trying to weed out speculators who are filing applications, then waiting for someone to buy them at the highest price.

It would be a blow to FSLR if it were to lose the rights to that California desert land.

This is another reason FSLR may go down in the near term. However, this may be a one day phenomenon (with possibly another day to the good or bad side coming depending on the decision of the Dept. of the Interior).

If oil (energy) continues to go up, I would expect FSLR would follow it for the short term. When the market starts to go down, FSLR's vulnerabilities may come more strongly into focus. Oil should eventually start to go down (I hope).

Jun 01 02:57 PM

[David White:]

Apparently Devry has just been chosen to replace GM in the S&P500 index. This news would tend to buoy the Devry stock price. A number of funds will now have to invest in it because it is now in the S&P500. This will likely lead to net buying of DV in the short term. This would tend to scotch it as a possible short play for the near term. I am crossing it off my list for the next month or two at least.

Jun 01 09:17 PM

[jmmx:]

I may be simplistic in my analysis (and overly optimistic to boot), but it seems to me that the Obama administration, along with most of the developed nations, will be moving ahead very aggressively on solar energy. In this case, the overall world wide demand will be so great that all major players - including FSLR - will have a piece of the pie. While they may loose some of their cost advantage, there are a few factors to keep in mind:

1- If demand picks up, then shortages will drive up all prices.
2- If demand picks up, then silicon prices will rise somewhat. (Yes, I know that capacity has increased, but still...)
3- As an American firm they will have some preference in the U.S.
4- FSLR is not run by dummies. I am sure that they are not standing still while others are advancing.

So - I would not count them out of the long term picture.

Jun 01 10:42 PM

[jmmx:]

You say:
"Emotion may often drive the markets up, but sanity eventually prevails"

I like this. It is certainly a statement that we should all keep in mind. For the astute investor it is the key to making money if one can only accurately gauge when a stock is over- bought/sold.

There is one potential little fly in the ointment of your argument. What if instead of the current rise being emotional and irrational, it is in fact a correction of the emotional over-reaction of the market and its previous state as grossly oversold. This would actually be an understandable - almost inevitable state - given (1) the emotional impact of the financial collapse, and (2) the need for so many institutional investors to unwind over-leveraged positions.

Just a thought.

(Of course there are always individual stocks that do not reflect the current market state so this does not apply to any particular picks.)

Jun 01 10:53 PM

[BuffettMaster:]

Ouch. Another technical analysts biites the dust. Does anyone ever consider market and company fundamentals anymore?

Jun 02 08:39 AM

[David Tsao:]

I agree with you BuffetMaster ... DeVry's fundamentals are good, and the S&P inclusion will only help

Jun 02 11:01 AM

[David White:]

To push the number of choices back to 3, I have decided to replace DeVry with HOT (Starwood Hotels). This stock has gone up about 150% from its bottom. It is over extended currently. It's price, $25.30, is considerably above the analysts' mean 1 year target price of $20.85. It is still seeing about 20% lower occupancy rates this year over last. Plus the room rates are expected to decline this year by about 10%. There is some expectation that the occupancy rates will improve toward year end. However, the room rate decline is supposed to more than compensate for this. Basically the hotel industry outlook for the near future is bleak. HOT PE is 15.44. HOT's FPE is 35.51. HOT's mean analyst rating is 2.9.

If the markets turn down, this stock should move down strongly. First it is over extended. Second a significant downward movement in the markets would make the market sentiment outlook on hotel stocks very negative. HOT is likely to outperform the markets to the downside. HOT is still well below its 100-day and 200-day moving averages, which are both still moving downward. Technically HOT is very susceptible to a good retracement of its current move upward (or even a new low).

I am still waiting for the overall market's down movement to commence though. There is the possibility that the cup with the handle formation on the SPY will come to fruition. This would mean a sharp short term move upward. I would not like to be short, if that were to occur. The overall fundamental and technicals for a substantial retracement are still very strong. The ADP jobs number tomorrow could be a trigger. More and more analysts are starting to call for a retracement. This also tends to change market sentiment.

Jun 02 11:28 AM

[David White:]

New info on HOT from Zacks:
Sunstone Hotel Investors (SHO) announced that the company would turn over its W San Diego hotel property to its lenders, as opposed to making its June 1st debt service payment on the property’s mortgage.

The W hotel brand is owned by Starwood Hotels & Resorts (HOT), which also manages the W San Diego property. There are currently only 29 W hotels worldwide, although the company has an additional 22 W hotels in its pipeline.

As the hotel operating environment remains weak, we expect that more hotel owners will come to the conclusion that they would be better off walking away from properties that are now worth less than their outstanding debt balances. This would in turn put additional pressure on hotel values, just as a residential foreclosure or short sale negatively impacts all the houses in the vicinity.

We continue to believe that hotel stocks are due for a correction. We maintain our Sell rating on shares of Starwood and Marriott (MAR), and maintain our negative outlook on the sector.

Jun 08 05:49 PM