Advisor Jerry Slusiewicz of Pacific Financial Planners urges investors and traders to use caution in the current market, and to set stops on their trades. He shares his view of the market's technicals in light of macro events, and discusses some stocks that are outperforming.
Kate Stalter: Today, I'm happy to have a repeat guest joining us, Jerry Slusiewicz. Jerry, you and I were talking before I began the recording here, about some of this whipsaw action that's back in the market, that's just been making it really difficult for retail investors to feel confident about coming back in. Tell us what you're seeing out there these days.
Jerry Slusiewicz: Yeah, Kate thanks for having me. It's not tough only on the retail investors. It's tough on the professional investors, as well, to really formulate a solid opinion about which direction to go, because of the whipsaws that we've been seeing.
Coming into the year, I was very bullish. I know that a lot of people weren't, because of what happened in the fall and the debt downgrade for the US, and things like that. But it did seem like things were getting better, and then the LTRO in Europe, that long-term refinance operation of their bonds, kind of band-aided their banks for a while.
And I knew we'd have a nice run, and when that kind of wore off, we started getting very defensive before the pullback and through the pullback. But now it's a matter of: Are we going to have a recovery, or is there another leg down?
So, Kate, the only thing I see is to kind of set parameters in terms of when you would sell or when you would add more. And I do think that the markets are giving us some pretty clear levels of where that would be.
Kate Stalter: In terms of some support and resistance levels that we're seeing lately?
Jerry Slusiewicz: Correct. If you use the S&P 500, the low went right below the 200-day moving average on June 4. We hit a low of 1,266 and we have what looks to be forming an inverted head and shoulders on that, with the left bottom shoulder of 1,291, and we closed Friday at 1,314.
So, I think we could go down to around the 200-day moving average, which is around 1,290, 1,291, right where that left shoulder is, and form a right shoulder. And then, if we could break above 1,336, that's going to be good, and I think that we'd have a good fall.
That was originally my premise coming into the year, that we'd have a good start, then we'd hit that May, June, July period, and it would be a little bit more difficult. But heading into the election, those who want to get reelected are going to do all they can to make things look good, heading into the election.
But don't let people tell you that, "Hey, because it's an election year, things always look good." I got to tell you: 2008 and the year 2000, two of the last three elections, the market didn't look good at all, heading into the election. So while, historically over 100 years, it might be true, two of the last three haven't been that good.
But those are kind of the parameters I'm using. If we drop below 1,265 or 1,260, I would, sincerely, move into a cash position or certainly more defensive than I even am. And above 1,336, we'll get more invested than we are today on the S&P, because those are the parameters we're in. Anything other than that, you can get chopped up in a sideways trading range.
If we do go on for just a few more weeks, there have been, historically, a couple of bottoms in early July, over the last couple, three years. In fact, the timing is about right, and I'm obviously hopeful that this does actually break to the upside versus the downside. That's what I really want to see happen.
Kate Stalter: Putting it into historical perspective, August 2011 is obviously very fresh in people's minds. Are you still seeing some concern about what might play out this summer in that regard?
Jerry Slusiewicz: There is a tremendous amount of risk out there. I think even more so than last year, because of not only the US debt downgrade that eventually happened-you know there is talk here in the US that what they saw August 1, 2011, with the extension of the debt ceiling, was that we might run out of money before the election.
You know, it was supposed to be January 2013, but I've heard a couple different things that come October, that might have to revisit that debt-ceiling issue one more time. If that happens before the election, all bets are off, Kate, and we'd have problems.
But looking at Europe, what we see going on over there in places like Greece, with the election coming this weekend, and Spain and Italy with their high interest rates to finance their debt, that is a microcosm of what I think is heading in our direction, and how long it takes to get here is just a matter of debate.
There are a high number of risks: the tax cuts that end the beginning of 2013. The markets supposedly look forward. It will see that coming, so you're right, there's a lot of things that can happen in the fall. So, it's very important to have an exit strategy on every single position, and have those points figured out in advance, where you would sell, even if it means taking a small loss.
Kate Stalter: I obviously agree with you-we've talked many times about the importance of the exit strategy. But I know that you also maintain a pretty active watch list, and you're constantly tracking stocks with some good technicals that could be some of the winners in a next market rally. Can you say a little bit about that today, Jerry?
Jerry Slusiewicz: Sure, I've got a few different stocks. You know, again, sticking with more the defensive names, at least with this theme: Things could change very quickly if we can break to the upside.
But right now, REITs have been performing well. Sticking with health care, specifically, more on the biotech/pharma side, and utilities have done well, in addition. So, those are the defensive areas that I'm seeing the opportunities in this choppy environment.
One stock is a company called Questcor Pharmaceuticals (QCOR), which makes central nervous system drugs. They broke out Thursday; it looked really attractive Thursday, and then Friday, it kind of gave some back.
But it gave it back on lower volume. $46.29 is where they closed, but it's still above, kind of, in my opinion, the left side of the cup-sloppy cup with a handle, little bit looser on the stop; $37.75 on the stop.
But, if you look at the earnings, it's been double- and triple-digit growth over the last five quarters on double- and triple-digit growth on sales. Institutions have been buying it. It's almost 150% more institutions in the last year, 93% owned by funds.
It does not pay a dividend; 49% return on equity. It is kind of in its fifth base, which you know, it could be extended, but the market, in my opinion, has been rewarding the winners and really taking everybody else to the woodshed. This is one of those longer-term winners.
In the utility area, there's a company called Northwestern Corp. (NWE). And again, that's in a seven-month base. Not that this is a very exciting company. It's really not. You're trading between $36.60 and $33.70 over the last seven months.
They sell natural gas electricity in South Dakota. That location kind of turns me on with all the fracking and all the things that they're doing in the Dakotas, and the economy-they're talking about getting rid of their property taxes up there, the economies are doing so well in those states up there-so I think it's a great location for growth. There's a high number of people moving to that area.
It's paying a 4.1% dividend, so about $1.40, and has cash flow of $4.75 and earnings around $2.50. That dividend seems very, very solid, and actually has a potential for maybe an increase. And, again, it's trading kind of in the midpoint of its trading range.
Another name is Athenahealth (ATHN). They're in the medical field, but they actually provide medical record management. Another one that looked like it broke out Thursday, Friday, and kind of gave some of it back Friday morning on this kind of crazy market. We're in a tug-of-war market, one day up, next day down. Who's winning the tug of war? We don't know. But I'm hopeful that we break to the upside and this still looks pretty good.
Unfortunately the volume was a little bit higher Friday, but you could get a $69.25 stop on here, you know, it's about $10. But this company, again, their sales have been growing. Earnings not as good but great cash flow, great ROE. Return on equity's about 16% and, again, right sector of the market.
Then, another name that I mentioned the last time you had me on the show, and I still like, is a company calledAmerican Campus Communities (ACC). It's a REIT out of Austin, Texas, and they manage and develop student housing on college and university campuses.
Another pretty good dividend, 3.1%, pays $1.35, you got cash flow of $1.80, you've got earnings of $1.88. It looks to me that you could get a nice total return.
This is one I've owned since the last time on the show and, again, one of these things trying to break to the upside. But you've got a defined downside risk to the 200-day moving average, which is around $41.35. That's where I put my stop. It closed, I think, at $43.19 Friday. It's a total return play. It was a little disappointing Friday, but this is one that we currently hold. I like the REIT sector.
I've got one more if you've got time. It's a special situation, and this is maybe going to be a little bit more attractive to your yield-hound folks, and I like yield. It's Capstead Mortgage (CMO), a very popular name. You've got to be able, again, to have an exit strategy, because this is paying an 11.6% dividend.
This is one of those leveraged REITs and so, when you're talking leveraged REITs, as long as we're in this low-to-potentially-even-lower interest rate environment-hard to believe that as low as the ten-year is, we are at a 200-year low on interest rates. I've heard people talking about a 1% ten-year at some point in time, which would be bad for the stock market.
As long as they're staying really low, and they're borrowing short and lending long on mortgages, the cash flow is $2.59 and the earnings are $1.78, it's only paying $1.60 on that 11.6% dividend. Technically, it still looks strong. The stop I'd put at $12.75 and it's $13.80, so we're right around that price. So, there's a way to collect yield. It's been a nice total return play.
It's a very special situation, but of the names I mentioned, that's the one that's probably, you know, the most toxic in terms of, "watch what happens." If we can recover, we might see interest rates spike, and this thing would have to be sold pretty quickly.
Kate Stalter: Well, you bring up a good point here, one that I think does not get discussed enough in the trading and investing world. And that is the exit strategy on these. And on a number of these, Jerry, you brought up where you are setting the stops. Can you talk a little bit about how you do that, and how you would advise traders at home to set their stops?
Jerry Slusiewicz: Well, again, there's four ways to do it. The simplest is to just use a percentage, and if you're doing it at home, a lot of people think that's all you need to do. But a lot of people-if you see something that's trading between, let's see, $20 and $22 a share; let's say it's $22.50, and they say, "I want to set a 10% stop," so they set it at $20.25.
OK, and it's trading between $20 and $22.60...well they're going to get stopped out. Not only that, they're going to get stopped out at the low end of the range, and if it holds that $20 support, you know, they're just losing money. They're just giving money away.
So, the percentage really isn't the best way to do it. It's almost like taking crayons out. You know there's all kinds of computer programs out there, many of them for free, that you can use that, charting services, and you want to draw a line, either the trend line, if it's going up, the old channel, if you will, if it's in an uptrend.
Now we're hoping to be more in a sideways trend of support/resistance, kind of like the floor and the ceiling. And stocks tend to trade between that floor and ceiling until they find a hole. And when they do, they bounce up or down, and then what used to be the ceiling becomes the floor.
And you'll see a stock like that one I mentioned that's been trading over seven months, Northwestern Energy. It keeps hitting in that range. It hit $33.38, $34.36, $34.25, $34.22, $33.72, you know it keeps hitting between the high $33 and the low $34 range for seven months.
Well, you know, pick the lowest point, go like about a dime or a quarter below that, and then make sure that you're still within, hopefully around a 10% range. And that's where you set your stop, where you can look at the moving averages.
So with a lot of these stocks now, are trading just above-or the market-just above the 200-day moving average. Well, the 200-day average is like the average price for the last year. There's about, you know, 246 trading days a year so, 200 days of last year.
Well, nobody likes to be below average, everyone wants to be above average, so if your stock falls to below average, or below that 200-day, many times that's a point that you can say, "OK, I will sell it if it goes to below the average price of the last year, because that was below average."
So, those are a couple of quick tips on that. There's a lot of good books on the subject. But two ways is just draw a trendline along the bottoms or along the trend up or look at the moving averages, Kate. That's the best way.