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After more than 40 years on Wall Street, Marc Chaikin founded Chaikin Analytics LLC in 2009 to deliver proven stock analytics to financial service professionals and individual investors. With the Chaikin Power Gauge, an alpha-generating quantitative model as its centerpiece, Chaikin Analytics... More
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  • Chaikin Market Insights - April 13, 2014

    Chaikin Market Insights - April 13, 2014

    Bubble in Tech … or Not, Weakness Spells Trouble Ahead for Stock Market

    The S&P 500 Index closed at 1,815.69, down 2.65% on the week. The stock market was weak in the face of favorable economic reports…never an encouraging sign. After an initially positive response to Thursday's jobless claims report, the market headed sharply lower led by continuing weakness in the biotech, internet and high momentum software stocks. Thursday closed below the closely watched 50 day average price and under the bottom of the trading range between 1,840 and 1,800. Friday saw more selling in the S&P 500 Index, the Nasdaq and the Russell 2000 small cap Index.

    It has been our mantra over the past 2 ½ years that to know how you should position your portfolio you need to do two things: Listen to the Fed and watch the market. The Federal Reserve Board has been telling us for months that they will taper the bond purchases, which is the market's equivalent of a B-12 shot, and should wind down to zero by year end.

    The market has been telling us for the past 3 weeks to be careful. How do we know that? There are a number of signs in the market's action which signal caution:

    Fewer stocks participating as the market made new highs at 1,900 A significant breakdown in the market leaders; Biotech and Internet Software and Services Strength in the defensive Utility, Energy and Beverage groups

    The fact that the market has declined 4% without an apparent reason other than profit taking is disturbing. The relative strength of the European and emerging markets, the retreat to defensive stocks and the market's break below support levels suggest that a larger decline lies ahead.

    Where are we headed and how will earnings reports impact the market?

    The stock market is now trading below support with a likely bounce early this week from the 1,800 level; which would be a 5% pullback on the S&P 500 Index from its recent peak of 1,898. However, the damage to stock prices has been far more severe with the average stock in the S&P down 10.9% from its high and the average small cap stock down 17.2% from its 52 week high.

    We should see a rally attempt off the 1,800 level which will quickly run into resistance at 1,835 - 1,850. The impact of 1st quarter earnings reports and more significantly the forward guidance which accompanies them will impact stock prices in a major way. If a rally fails at resistance near 1,840 or even worse fails to rally and breaks below 1,800, then the downside risk is to the 200 day average at 1,760 or a test of the February lows at 1,735. A 10% decline, which is long overdue, would take us to 1,700.

    We view any rallies from here, whether to 1,840 or a breakout above that level to 1,900, as selling opportunities. Stocks with bearish Chaikin Power Gauge ratings are to be avoided at all costs. Last week we highlighted 13 stocks to avoid in the high flying social media, internet and software space. These stocks were down an average of 5.28% vs. the S&P 500 off 2.65%.

    Eight Stocks to Avoid

    The following 8 stocks should be avoided based on a bearish Power Gauge rating and poor technical performance:

    Amazon (AMZN)
    3D Systems (DDD)
    LinkedIn (LNKD)
    Rackspace (RAX)
    Stratasys (SSYS)
    Trulia (TRLA)
    Yelp (YELP)
    Zillow (Z)

    If you own any of these stocks use short-term rallies to sell these vulnerable high fliers and stay in cash or look for bargains in stocks with bullish Chaikin Power Gauge ratings and solid earnings and valuation metrics.

    Weekly Sector and Select SPDR ETF Update

    Strength continued last week in the Utility ETF, (XLU), and in the Select SPDR Energy ETF, (XLE). However, as one of our favorite market observers, Bespoke Investment Group points out, strength in the Utility group when juxtaposed against the type of liquidation we are seeing in high momentum stocks is not a good omen for the stock market as a whole.

    In our view a defensive posture is warranted with bargain hunting appropriate only on extreme market weakness (we have been oversold for weeks now in Biotech and Internet stocks) in sectors and groups with strong Power Gauge stocks. As there are only 59 stocks in the S&P 500 Index with bullish Power Gauge ratings, many of them Utility stocks, there is a strong likelihood of lower prices ahead after a short-term bounce.

    For speculative buyers, the better quality Biotech stocks such as Amgen (AMGN), Biogen Idec (BIIB) and Celgene (CELG) are good candidates on the next spike down.

    2014 Model Portfolio Update

    Better earnings and slightly better guidance, as suggested last week, did indeed lift shares of iGate (IGTE), the Indian software and consulting company which guided lower in January. The stock was up 16% on Thursday after reporting better than expected earnings while the Nasdaq was down over 3%. iGate finished the week at 36.40 - up 14.75%.

    There may be buying opportunities in many of the stocks in our 2014 Model Portfolio if the market absorbs additional selling - even though the Power Gauge ratings read Neutral+. This rating means bullish underlying factors but a stock in a well defined downtrend. We will identify these deep oversold buy points as they occur.

    To read more of Marc's Weekly Insights, visit https://www.chaikinpowertools.com/market-insights.shtml.

    Tags: AMZN, DDD, LNKD, RAX, SSYS, TRLA, YELP, Z, XLU, XLE, AMGN, BIIB, CELG, IGTE
    Apr 14 4:20 PM | Link | Comment!
  • Chaikin Market Insights - April 5, 2014

    Chaikin Market Insights - April 5, 2014

    What a Difference a Day Makes

    The S&P 500 Index closed at 1,865.09, up 0.4 % on the week. The stock market finally broke out above 1,876 on Tuesday's close and then banged up against our long-standing target of 1,900 on Friday. The initial response to the non-farm payroll report was positive but the market broke down at 10:45 led by weakness in the Biotech and Technology sectors. This weakness gathered momentum as the day wore on, spilling over to the broad market.

    The S&P 500 finished down 1.25% on the day and the Nasdaq finished off 2.5%, its worst day in almost 3 years. As we pointed out last week, "There has been a rapid shift away from growth stocks in general and Biotech and Internet related stocks specifically. This has put pressure on the Nasdaq 100 Index as well as the Russell 2000 small cap Index. The S&P 500 Index and the Dow Jones Industrial Average have held up rather well."

    Market declines which are triggered by bad news or headline events are relatively easy to deal with, as the impact is usually short-lived. I am always leery, however, of market declines which come without any visible impetus. This is the case with the current waterfall declines we are seeing in the high growth/high momentum stocks which have been taken to the cleaners in the past 2 weeks.

    Group rotation in the stock market is usually more subtle than what we have just witnessed. As the market has moved abruptly away from the growth stocks which led us to new highs, and taken refuge in the stodgier names like Microsoft, Intel and Merck, there has been a shift in character which makes me uneasy.

    It is too early to tell whether this is a sector rotation which the market will gracefully absorb and then move on to new highs, or whether it will indeed lead to the long talked about correction of 10%. The economic statistics don't suggest an economy which is slowing down and Europe is on the upswing, both in its economy and its stock markets.

    Much will depend on the company guidance which accompanies the 1st quarter earnings reports which start to trickle in this week. It seems from the non-farm payroll numbers that the economy has started to pick up after the harsh winter related slowdown. There has been widespread speculation that earnings may be soft in these 1st quarter reports, with companies using the weather as an excuse. This also leaves them the latitude to guide higher for the 2nd quarter and the full year 2014.

    So company guidance, in my opinion, is the key to the market's ability to withstand any spillover from the cascade of selling in high momentum stocks. Take a more cautious view of rallies from here, particularly if the market regroups and tests the 1,900 level 1 or 2 more times.

    Where Are We Headed And How Will We Get There?

    The stock market is bifurcated right now … growth stocks have been breaking down under intense selling pressure while stocks sensitive to the state of economic conditions have led the charge to new highs. We were very vocal about avoiding the high P/E, high price to sales stocks which have taken it on the chin in recent weeks (although we did not see the weakness in Biotech coming). Continue to avoid high or no P/E stocks with bearish Power gauge ratings like Amazon (AMZN), Facebook (FB), LinkedIn (LNKD), Pandora (P), Rackspace (RAX), Trulia (TRLA), Yelp (YELP) and Zillow (Z). These stocks plus new issues in the software area like FireEye (FEYE), Splunk (SPLK), Workday (WDAY), ServiceNow (NOW), and Tableau Software (DATA) are still vulnerable, have terrible chart patterns and should be sold on rallies.

    The market is a tug of war right now between fundamentalists who see an improving economy both here and abroad as a positive, which will cushion any further declines, and the alarmists who see parallels between the 2000 tech bubble, the 2008 financial bubble and today's collapse in momentum stocks.

    It is well to note that in the decline of 2000-2002 the value stocks were actually up while tech stocks were dropping 90%. I think it is too early to tell who will be right, but a few observations about timing and technical may help.

    We expected a top around 1,900 in mid-April and a correction of between 5-10%. That fit historical patterns and the choppy, volatile 1st quarter market action. We have no reason to change that view. The market closed Friday right at support on the S&P 500 Index at 1,865. If this holds early next week then another attempt to breakthrough 1,900 will develop. Use this rally to lighten up positions.

    If on the other hand support breaks next week, to head down to 1,820 and possibly 1,728 - 1,768, this would be a worst case correction scenario … but one that should not be ignored.

    Defensive stocks like Electric Utilities and large Drug stocks will perform better in this type of decline. Telecoms and stocks like Caterpillar (CAT) will also do relatively well in a market decline. We also see strength in specialty Semiconductors like Freescale (FSL), Nvidia (NVDA) and ON Semiconductor (ONNN) as indicators of an improving economy worldwide.

    Weekly Sector and Select SPDR ETF Update

    Strength continued last week in the Utility ETF, (XLU), until weakness on Friday in the 5 year treasury pushed those yields up versus 30 year treasury bonds, and in the Select SPDR Energy ETF, (XLE).

    2014 Model Portfolio Quarterly Update

    The Chaikin 2014 Model Portfolio finished the 1st quarter up 0.59% vs. a gain of 1.3% for the S&P 500 Index. Its orientation away from high momentum growth stocks and toward companies giving cash back to shareholders in the form of dividend increases and buybacks has enabled the portfolio to track the market rather closely. The biggest loser has been iGATE (IGTE) the Indian software and consulting company which guided lower in January. They report later this week and the hope is slightly better guidance will lift this stock.

    The biggest winners have been Avnet (AVT), Brocade (BRCD), Legg Mason (LM), Phillips 66 (PSX), Reinsurance Group (RGA), Olin Corp (OLN) and Ryder Systems (R). All of these stocks made new highs with the market this past week and are candidates for purchase on pullbacks of 3 - 8 days.

    Tags: AMZN, FB, LNKD, RAX, P, TRLA, YELP, Z, FEYE, SPLK, WDAY, NOW, DATA, CAT, FSL, NVDA, ONNN, XLU, XLE, IGTE, AVT, BRCD, LM, PSX, RGA, OLN, R
    Apr 07 4:47 PM | Link | Comment!
  • Chaikin Market Insights - March 29, 2014

    High Fliers Take Flack but Stock Market Holds Up

    Well Under the Pressure The S&P 500 Index closed at 1,857.62, down 0.5 % on the week. The stock market has spent the last 4 weeks in a trading range between 1,830 and 1,880. The failure, after many attempts, to close above 1,876 has led to declines toward the lower end of the trading range. Strong support still exists in the 1,835 - 1,855 area.

    There has been a rapid shift away from growth stocks in general and Biotech and Internet related stocks specifically. This has put pressure on the Nasdaq 100 Index as well as the Russell 2000 small cap Index. The S&P 500 Index and the Dow Jones Industrial Average (which has been genetically engineered to irrelevant) have held up rather well.

    The big question on investor's minds is whether this shift away from the growth stocks which led the market to new highs is a harbinger of a general downturn. In normal times when the Federal Reserve Board is not keeping short-term rates artificially low, there would be signposts to help us but that is not the case now.

    The answer to whether the market has more to go on the upside lies in the economic statistics which will be reported over the next 3 weeks and the 1st quarter earnings reports and corporate guidance which accompanies them. As these earnings reports begin to give us a picture of the strength or weakness of the U.S. economy for the balance of 2014, the market will tell us what lies ahead for stock prices.

    Where are we headed and what sectors will lead the stock market?

    Support in the 1,835 - 1,855 area held last week and we are now entering the very favorable April time period. It is still my expectation that we will see higher stock prices ahead of the 1st quarter earnings reports due out in mid - April. However, these new highs if we see them will be short-lived if the company guidance which accompanies the earnings reports is not encouraging. The EPS reports themselves may reflect weather-related diminished economic activity but guidance from corporations will be fresh data for the markets.

    In line with our January advice to stay nimble in 2014, we view these moves within this trading range as short-term opportunities. The bigger picture should become clear shortly. If in fact the shift away from growth-oriented internet and biotech stocks is merely part of a sector rotation towards economically sensitive stocks which would benefit from a pickup in the global economy, then we will recommend staying the course. If instead the market reacts badly to the reports due out in the next 3 - 5 weeks, the sharp sell-offs in these high fliers is a warning of the type of volatile declines which would follow.

    Our advice last week to buy the biotech stocks on pullbacks was clearly premature as they continued lower this past week. However, as we point out below, they have gotten so oversold that a retracement bounce is now likely.

    Weekly Sector and Select SPDR ETF Update

    Strength continued last week in the Utility ETF (XLU) which was joined as by the Select SPDR Energy ETF (XLE) as the 2 best performing sectors. Longer term the Financial (XLF), Technology (XLK) and Healthcare (XLV) SPDR ETFs continue to lead the pack.

    There was a report on Bloomberg News of major outflows from Healthcare ETFs which is not surprising considering the extreme weakness in the biotech stocks. This extreme weakness was reflected by the SPDR Biotech ETF (XBI) retracing 50% of its gains from the June lows. In the past such extreme weakness has led to a sharp rally over the next 2-4 weeks of as much as 10-15%. Based on that historic precedent I would be a buyer of both leading biotech stocks such as Amgen (AMGN) and Biogen Idec (BIIB) as well as the XBI and the IBB ETFs. This may only be a trading bounce which retraces 50% of the decline but it should be quick and sharp if it comes.

    This Week's Earnings Reports

    It is another very light week for earnings reports which means the markets will focus more on a spate of economic reports due out in the coming week. Tuesday's ISM manufacturing index report will be a market mover as will the non-farm payroll report due out on Friday. On Thursday morning, the European Central Bank (ECB) will release its monthly policy decision. There is some speculation that they may step in and buy government bonds. This would be a positive move for the stock market and the European economic growth picture as well.

    Get this week's full Market Insights at here.

    Tags: XLU, XLE, XLF, XLK, XLV, XBI, AMGN, BIIB
    Apr 03 9:51 AM | Link | Comment!
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