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  • Market Update 3/28 -- "No Man's Land"

    This week I'll start off with a quick look at the S & P technicals.

    On a technical basis, the S&P 500 is in somewhat of a no-mans land, neither oversold nor overbought, unable to make a new high on its most recent rally since March 11, the S & P was down 2.5% this past week and the volatility that we have seen since Jan. 1 continued.

    I will say that a break below the 2070 - 2075 level by the S&P 500 which has now happened, would activate a downside target of 2040. I pointed out in the last 2 weeks of commentary how the 2040 level has held and a break below that pivot point would make things look a little sketchy on a short term basis. The SPX's action over the next few days may be critical in determining the next move. On the downside, the 1980 - 1990 area may then come into play .

    As noted in earlier missives, the Dow transports have continued to be weak, not only have they not confirmed the recent Dow 30 highs, they in fact have fallen all the way back to their major support level, the 200 Day MA. With that they have put more distance between the close on Friday and the target (9,217) needed to achieve a new high. This scenario bears watching as I now note a series of lower highs and lower lows have been put in recently. Not a favorable trend at all.

    I read an interesting data point this week from the Stock Traders Almanac regarding market reaction on past FOMC announcement days and subsequent S & P results. They looked at this pattern over a long time period and concluded that the stronger the gains on an FOMC day, the weaker the performance of SPX in the next 60 days. That weakness begins within two weeks of the FOMC announcement, and seemingly last for about 2 months. Very interesting, since we witnessed a big UP move in the S&P the day of he fed meeting. I now wonder if this bit of history will repeat. If this past week is any indication, the equity market very well might just do that.

    The Economy :

    While there were a couple of bright spots, taking all of the 20 economic reports last week, weaker than expected reports (10) outnumbered stronger than expected reports (6), which has been the trend for several weeks.

    Some good news :


    Just when we thought the weather related issue would continue to have a negative impact on everything Finally! An upside beat in economic data.

    "Today's New Home Sales print was the largest beat of expectations (75k) since October of 2005 (136k). At right we show New Home Sales, seasonally adjusted and at an annual rate. This report was extremely strong. especially given the weather !, with the largest beat versus expectations since the peak of the housing market in the mid-2000s. Inventories also fell back towards post recession lows .

    Overall, you have to like the picture of the housing market that this report painted: accelerating volumes, declining inventories, and a more sustainable mix of selling prices that points toward more confidence in the middle and bottom of the income distribution. All of that said, it's also important to note that the new home sales report is extremely volatile; the standard deviation of month-over-month changes is 47,000 homes, meaning a range of anywhere from 492,000 to 586,000 headline next month isn't just possible, but likely. There are positive structural tailwinds ahead for housing, but I don't think one report is sufficient to call for a breakout in the sector.


    The other big data release this past week was the CPI report. Overall headline (0.2% MoM/0.0% YoY versus 0.2% MoM/-0.1% YoY expected and - 0.7% MoM and -0.1% YoY in January) and Core (0.2% MoM/1.7% YoY versus 0.1% MoM/1.7% YoY expected and 0.2% MoM/1.6% YoY previous) were slightly stronger than expected, but the Cleveland Fed's Median CPI soared, hitting 3.0% YoY for the first time since 2012.

    Many have been espousing the "deflation theme" in their ever present mindset of contemplating every which way to ramp up the "negativity ". Now it seems along with those pundits every blogger out there has picked up on this theme as they trip over themselves to be the first one on the block to alert all to this situation.

    Newsflash; Overall, this report was one that was indicative of anything but a deflationary environment, and with core and median inflation so elevated relative to headline, those looking rationally at this topic expect that reading to spring upwards in the coming months as oil stabilizes and bases from its current low level.

    Although much of the manufacturing data we have seen lately has been weak, PMI indices for the Manufacturing and Services sectors for March both came in ahead of expectations.

    The Markit U.S. Manufacturing Purchasing Managers Index

    Edged a bit higher in the flash estimate for March, with "a steep expansion" in production and "a robust and accelerated pace" of new orders. The report cited anecdotal evidence of

    improving domestic demand, with some catch-up following bad

    weather. There was some reference to softer demand from

    abroad and weak demand in the energy sector.

    Durable Goods - Not so Good

    The February Durable Goods report missed badly, with headline month-over month figures coming in well below expectations. But taking a longer, more patient view of the extremely volatile data series - and using Non Seasonally Adjusted Data - it should be noted that growth in shipments picked up versus January. Shipments are included in GDP; orders are not. Therefore, while this report was disappointing, there's no reason to panic.

    Crude OIL - USD

    Speaking of stabilizing crude oil, I believe we may now see a pause in the relentless parabolic move the USD has made this year. A pause for sure if not a brief correction would bolster commodities - oil being a primary beneficiary. And so the calls for "panic" selling to hit the oils stocks for the moment is put on hold. Oil had its best gain since the first week of February, with WTI up 3.99%. Crude oil hit a low of $42 and change then reversed to close the week @ $48.87 including that sell off on Friday.

    While inventories continue to climb, WTI has traded sideways for the last 4 months. On a closing basis, WTI crude was up 17% from the close on Thursday (3/19) through the close on 3/26. Those last 2 data points indicate the possibility that a bottoming process may just be in play.

    It seems to me the worries about the strong dollar having a big negative effect on the U.S. are overblown. Even though the next two quarters' earnings are going to be sketchy at best.

    And consider that small cap U.S. companies are not likely to be affected much, and the big companies have large finance departments that work to minimize taxes, and are surely also hedging against currency risks.

    Having said that, there are plenty of reasons to be aware of a continuation of a pullback/correction here: earnings are expected to be just terrible in Q1 thanks to a strong dollar and weak oil, economic data for the quarter is looking much worse than we've become accustomed to over the past 9 months, and the global economy remains uncertain. That said, we have been reminded over and over that there have always been good reasons to sell in this bull market. In summary, nothing new today other than "raw price action" suggests any reason to be more bullish or bearish than yesterday.

    The Markit U.S. Manufacturing Purchasing Managers Index

    edged a bit higher in the flash estimate for March, with "a steep

    expansion" in production and "a robust and accelerated pace"

    of new orders. The report cited anecdotal evidence of

    improving domestic demand, with some catch-up following bad

    weather. There was some reference to softer demand from

    abroad and weak demand in the energy sector.

    Biotechs - Not all are created equal

    The Nasdaq Biotech Index (NBI) has gotten out of the gate fast for the second year in a row. As 2015 enters the first turn, though, investors are increasingly concerned that biotech will suffer a similar fate to what it saw last year around this time.

    Just like last year, biotech stocks have been hot to start the year, gaining more than 20% as of last week. The concern for investors now is that the sector has gotten ahead of itself and is due for a fall. That has shown up in biotech stocks over the last few trading days as the index has pulled back more than 5% from the March 20th close to Friday's close.

    Last year the Biotech (NBI) index saw a correction that was a lot worse than 5%. In fact, from late February through mid April of '14, the NBI gave up all of its gains from the first two months and was even down on the year for a brief period, falling a total of 21%. Although the NBI quickly recovered and finished the year well above its early year highs.

    So now many are predicting the same, and maybe so , but with those predictions come the same "noise" that was presented this time last year. The Biotech 'roll over " will take down the entire market. I didn't buy that then and I'm having a hard time buying that now. Perhaps all one needs to look at is the chart of the SPX during that same weak period in the Biotech sector (Feb 25 to April 15th 2014), it indicates the SPX was absolutely FLAT during that time frame.

    One of the arguments used against biotechs in the last several days has concerned valuation. On a trailing basis, the NBI is trading at more than 500 times earnings. Additionally, of the 87 companies in the index with a market cap in excess of $1 billion, more than half (54) are not expected to have positive earnings in 2015. Valuation is certainly not something biotech bulls have in their corner, but at the same time, has it ever been?

    According to Bloomberg data, since October 2009 the index has never traded at less than 60 times trailing earnings, and the average P/E ratio over that time is 191! In other words, the index has always been expensive relative to earnings. That being said, the valuations of the NBI's largest components are a lot more reasonable , hence my thoughts that not all biotech companies are created equal, that certainly is the case when it comes to earnings.

    The table below lists the five largest companies in the NBI along with their P/E ratios based on estimated earnings for 2015. The combined market cap of these five companies is actually greater than the combined market cap of the 145 remaining companies in the index, and their average P/E ratio based on 2015 earnings is a much more reasonable 25x - still not cheap, but not as outrageous either considering how these companies grow.

    (click to enlarge)

    So when I think of the Biotech sector, I take my thoughts to companies that are listed in that table and the like. Not those that are void of earnings that everyone seems to associate the industry with and therefore conjures up an immediate overvaluation scenario.

    As with any sector of the market, there are plenty of reasons to either be long or short biotech stocks at these levels. Even if the sector has never exactly traded 'cheap' relative to the market, valuations for the sector have become stretched in the recent rally. Breadth for the sector remains strong, but has admittedly not been a reliable indicator in the last few years. Perhaps the most convincing case regarding the sector now is the seasonal bias of weak returns from late Q1 through mid Spring. That would suggest that investors and traders should be aware there could be more weakness ahead.

    Gilead Update

    Last week I presented what I believed to be a positive set-up for a potential breakout for the shares of GILD

    There were two "key" takeaways from this week's trading ,

    First - although there was a negative start to the week with the "label warning' issue, it did not take the shares below the supporting trendline.. Conversely positive price action during a 12 point decline in the S & P on Tuesday showed showed support is present in the price action. Yet with the downward pressure on the entire NIB index, down 5% for the week, GILD dipped briefly under the support line then quickly recovered showing less than a 0.5% loss on the week.

    I suspected last week that GILD being fairly, if not undervalued, would fare somewhat better if Biotech does indeed go into correction territory. Now it remains to be seen what will develop as we wait for a confirmation of a break either way in the current chart pattern.

    Later in the week a positive development

    From a Company Press release

    Gilead Sovaldi approved in Japan :

    Gilead Sciences announced that the Japanese Ministry of Health, Labour and Welfare, or MHLW, has approved Sovaldi, a once-daily nucleotide analog polymerase inhibitor, for the suppression of viremia in patients with genotype 2 chronic hepatitis C virus, or HCV, infection with or without compensated cirrhosis. Sovaldi is indicated for use in combination with ribavirin, or RBV, for 12 weeks. Sovaldi is the first all-oral, interferon-free treatment regimen for genotype 2 HCV infection. Sovaldi is also the first product to be marketed by Gilead in Japan.

    Advance Auto Parts - Research note

    Sharp decline in gasoline prices is beginning to significantly increase driving activity. Recent reports that monitor changes in vehicle miles driven can be a leading indicator for failure rates for automotive parts. The most recent data in January 2015 suggests vehicle miles driven surged 4.9% y/y following a 5.0% increase in December - which was the largest increase since March 2004. There is an inverse relationship between vehicle miles driven and gasoline prices. Gasoline prices declined 36% y/y in January, following a 22% drop in December and a 10% decline in November. Less severe winter weather in January also benefited vehicle miles driven. Data for miles driven for the month of February has not yet been released. However, with gasoline prices declining 34% in the month of February we might expect another solid increase in vehicle miles driven for the month. Then again will the weather factor take its toll. Miles driven is a positive read-thru for automotive aftermarket retailers. The automotive aftermarket retailers like AAP have been achieving improved same-store sales results, and it appears we will see favorable growth continuing through FY15. Increased driving activity benefits the aftermarket retailers several ways. First, increased miles on older vehicles increases the necessary expenditures on maintenance. Second, parts failure rate obviously increases with increased vehicle miles driven, particularly for important categories such as brakes. These data points are only ONE reason I continue to favor AAP at these levels ($150).

    Stock selection - Updates

    The end of quarter results for the "January Effect" and my "Dogs of the Dow selections are shown below:

    The link to those missives are here :

    The "January Effect"

    (click to enlarge)

    Dogs of the Dow

    The "Dogs" being more low beta are meandering around here in the First Q. Its a long year, lets see if they do indeed beat the S & P in 2015 as I believed they would when I selected them in December '14. I'll add that this group of 5 stocks yields 3.84% . The stock I favor from this gorup now is MRK.

    If we look at all of the Dow 30, I note that 19 are trading at or below the market average PE. Given the 2% yield on the 10 year treasury, it tells me the Dow as just one proxy for the market is hardly wildly overvalued. Its one viewpoint the naysayers fail to bring up in the valuation discussion.

    Look back at history and see what the average PE ratio was when the 10 year was as 5-6%. Might this market deserve to trade at the current valuation, given the current interest rate environment. Keep this in mind when many will be running around talking "tops" "the market is old and this run is over" and such, if we do indeed get a "correction". It's already started with the S & P 3% off of its all time high !

    I will close with this ---- If you are in this business long enough you are going to make many mistakes. Success does not consist of never making mistakes but, in never making the same one a second time. Trust me in my career I have made my share of mistakes, and do my best to avoid repeating the same mistake.

    I have a plaque on my desk which reads

    "Its no mistake to "guess " wrong, its a mistake to stay wrong."

    That last comment is one that the detractors of the bull case have been guilty of during this entire secular bull market run.

    I note these axioms now as I have seen a rash of recent articles calling for a "TOP" with many emphatically stating that March 2nd was THE top. And there is more "recession" talk now because of what many see as a debacle in the coming quarters corporate earnings.

    A soft patch, a pause in the bull market as I outlined in past bull market history is a possibility that all investors need to be aware of.

    However, I maintain that the secular bull run is not complete and other than the Short Term trading volatility that we are witnessing, the Long Term trend is still decidedly UP.

    Best of Luck to all .

    Mar 28 10:41 AM | Link | 2 Comments
  • Call Writing Strategy Part 47 - NVDA Called Away - Adding FEYE

    The March expiration saw the NVDA position called away, while the FCX calls expired worthless

    I took the cash from our NVDA position and bought 700 shares of FEYE @ $39.28 and sold the Weekly May 1 calls for $2.70 today.

    If called, a nice 8.67% for the 36 day holding period , if not then we added $1,880 today in call premiums or 6.8% on that investment.

    In addition, I put the FCX position back to work and sold the May 22 calls for $0.42 , as I attempt to dig out of one of the bad situations in the portfolio.

    This is an actual portfolio, all trades have been documented here since inception, June 5 2013.

    (click to enlarge)

    Total income on the $100,000 starting investment now stands @ $51,517. The same $100K investment in the SPY for the similar time period would have yielded a gain of $127,985 with the S & P valued @ 2058.

    Best of Luck to all !!

    Mar 26 3:40 PM | Link | 4 Comments
  • Market Update 3/21, RUT & Nasdaq At New Bull Market Highs, S & P Next ? .

    The stock market remained volatile this past week, and investors/ traders turned decidedly bullish to close out the week's trading as the S & P finished with a 2.7% gain for the week.

    Investors keyed most, if not all of their interest to this week's Fed policy announcement. I don't know how everyone else feels but I have heard the word "patient" far too much lately. It's totally overdone. With or without the word "patient " the market apparently liked what Fed Chair Yellen said, as the market turned on a dime after the FED announcement on Wednesday. The S & P going from a negative 10 points to a positive 23 in the final 2 hours of trading. It was also apparent that anyone lining up on the "Short " side was surely squeezed, adding a little more fuel to the late afternoon rally.

    I am fascinated with this obsession about the next rate increase. At the end of the day whether the Fed raises rates in June, September or early next year, we are looking at a .25% increase. In my view not worthy of discussion and certainly not a reason to change my market strategy. Then again maybe I shouldn't be so surprised as those that have positioned themselves incorrectly by listening to the noise surrounding the FED have paid the price for doing so and this time is no different.

    The real fascination comes from listening to the pundits that complain about Yellen, "the FED this, the FED that" , they said this, but they do that ", and on and on. These are the same folks that have voiced their complaints about Fed policy since S & P 1550. There is one simple reason for their complaints - they have not taken advantage of the situation by positioning themselves properly, and now instead of looking in the mirror, they blame the FED for their mistakes. The FED has stated the same message over and over, the rate hike decision is data dependent. Have these folks looked at the data lately ?

    If the current extreme soft patch is truly driven by weather and the shifts within the oil industry, then from the perspective of the statement, June is "in-play". While June is still possible, I suspect that hikes will not come until September. I am of the opinion that we will see a bounce in the US data, the folks I go to for my economy lessons believe that but they also don't foresee a recovery back to trend entirely by June, especially with respect to inflation data. A trend which they have stressed to me has no been broken; the current movement in data is very much one within a trend. While the FOMC will absolutely have the option to move three months from now, I don't currently expect them to do so.

    I'm not sure why I went on and wrote three paragraphs on this topic after stating that all of this is meaningless noise in the face of a .25% move. I guess it's the venting of my frustrations for hearing the word "patient" all week.

    The Crude Oil Trade

    Some of the rate hike rally euphoria spilled over to the Oil trade as WTI reversed form earlier lows and finished up on Wednesday to $44.66. Then traders played tug of war but by the end of the week WTI finished the week @ $45.72 about $3 off of the low print.

    So just as shorts are being ramped up in the energy names as I highlighted in my blog post of March 7th, I'll just throw out the idea once again, that maybe they have the story wrong.

    A thought on what is taking place - the bottoming process is just continuing on its path, rather than following the strong opinions and warnings that a breakdown and ensuing 'panic" is about to engulf the energy sector. Time will tell, but for the moment the Oil "majors" are holding up relatively well. I believe that "price action" is meaningful, so while others scurry around making decisions to "short" energy names or sell their positions based on "headlines", I think it best to stick with the "price action" approach as a guide to decision making when it comes to your energy holdings.

    Instead of being concerned about the wording in the FED minutes, Investors need to keep their eyes on the earnings picture.

    Per Thomson Reuters :

    Forward 4-quarter estimate: $119.78, down slightly from the prior week's $119.87

    P.E ratio: 17(x)

    PEG ratio: 20.8(x)

    Earnings Yield: 5.83%

    Brian Gilmartin's blog post this week notes the following :

    The Fed Model, which tracks the SP 500 Earnings Yield (see above) versus the 10-year Treasury still leaves stocks as a screaming buy versus the 10-year Treasury, given the 5.83% versus 2.10% spread. What the Fed Model is telling us, whether you believe it or not, is that interest rates could rise substantially, and not put too much of a dent in the SP 500 from a valuation perspective.

    It clearly shows again that a .25% increase is of no consequence.

    He then goes on to note :

    In 1997, when Greenspan first referenced the model in his speech, the 10-year Treasury was yielding about what the earnings yield is on the SP 500 today (5.7%, 5.8%) and the SP 500 earnings yield was near 2%, about where the 10-year Treasury is trading today.

    Things that make you go HMMMM - that comment is something to ponder.

    The Technical picture of the S & P

    Last week I was working on the premise that as long as S & P 2040 held, nothing in the short term picture had changed. That is the case now that we have seen a move above the first resistance level 2063 (50 day MA- blue line). The next challenge will be an attempt to set a new high. The RUT has already broken to a new high this week. I can't help but recall last year when the "bearish" case that was presented kept citing all during 2014 that the "small caps are weak" , they "are not leading" and will "take the entire market lower".

    I disagreed with all of that and suggested that the RUT was merely in a trading range consolidating the large upside move during 2013 . It appears that was the case as this breakout to new highs here in '15 confirms my thoughts. It's now deafening silence on this topic from the bear camps as the small & mid caps may now indeed lead the overall market to new highs.

    The Nasdaq followed suit as it set a new bull market high on Friday and is within striking distance of it's all time high. The laggard is still the Dow transports as I watch intently to see if we can get that Dow theory confirmation. The Transport average stands @ 9,148, and needs to eclipse 9,217 to achieve that.

    And while the S & P is approximately .5% from its all time high bullish sentiment has dropped to a 2 year low. The wall of worry ?

    And then there is this "Many now seem to be in search of greener pastures."

    Readers can connect the dots from these two articles. There is no euphoria out there while we set new highs, no one is partying like its 1999, instead the general tone seen here on SA and elsewhere is a big yawn. As far as I am concerned that is a good thing ----- if you are bullish.

    Back to reality.

    Individual Stock Ideas

    I've put together a quick way for readers to track the stock ideas that I present here on the blog.

    The table below shows the stocks I have presented here with the date and a link to the blog post for easy reference.

    (click to enlarge) Links to the Blog Posts

    March 14

    Feb 28

    Feb 7

    "2 Stocks added for 2015 "

    The underlying "theme" here is small - mid caps that derive the bulk of their revenues from the U.S., so they avoid the forex /USD noise. The new high in the RUT this week is a sign that these types of situations will be sought after as many shy away from the mulit-nationals that have problems given the Forex issue "overhang". In my view this trade will get stronger as long as everyone is piling into the USD. I married strong and improving fundamentals on these stocks to that "theme" to arrive at my favorites.

    I'll be updating this spreadsheet from time to time with additions and or sales. I suggest anyone entertaining purchasing any of the ideas presented here complete their own due diligence. While I do own the stocks presented, I also wish to mention in full disclosure that I have no business relationship with any company whose stock is mentioned in this article.

    The results of my "January Effect' selections along with the 2015 "Dow Dogs" portfolio will be presented at the end of each Quarter, since they are more long term oriented ideas.

    A quick update on BABA. This past week much was made of the first lockup expiration by the media and the folks that wish to spin a negative story. Most of the rhetoric centered around how this event had to surely push the stock lower. With the stock closing UP for the week, I suggest as I have in the past to beware of the agendas of the self ordained experts and what they are selling Long Term Investors.

    I'm searching to find a company the size and scope of BABA that is growing 35%, with a PEG ratio of 1.2. If anyone has found that combination other than BABA, please leave a comment. Alibaba is a long term story that in my view will play out positively over time, the short term noise is just that.

    Finally, in reviewing the charts on individual stocks this past week I noticed a potential positive set-up on GILD.

    This triangle pattern will often lead to a break one way or another as the stock moves to the end of the pattern. Given the bull market backdrop, the fundamentals of the stock, including the newly announced dividend, in my view the odds favor a move to the upside. So unless there is a significant negative news announcement investors may want to look at adding or initiating GILD right here, or wait for that breakout as confirmation in the direction of the next move.

    Avoid the noise, look at those U.S. based companies - the market is telling us there is money to be made in these stocks during 2015 , despite the thoughts of a number of folks who seem not interested and looking elsewhere.

    Best of Luck to All !!

    Mar 21 9:52 AM | Link | 14 Comments
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