Chart Art by Richard Chappell (Springheel Jack)
We have a trend-less market at the moment - a stock picker's market. But I'm still leaning bullish into 2013. On US equities, the P/E ratios are reasonable by historical standards and asset prices are being actively supported by the Fed. According to Barron's, the market isn't expensive and there's room to expand, particularly if investor confidence improves. Profit margins are high by historical standards.
The Russell 2000 illustrates the technical backdrop. On the seven-year chart below, there is strong resistance not far above in the 868 area. There are two double-tops on the chart, the first indicating back to the 600 area on a break below the June low at 730, and the second pointing back to the 2009 lows on a conviction break below the 2011 low at 602. The upside looks limited, unless RUT breaks above the resistance zones of the 2007, 2011 and 2012 highs.
(Click on charts to enlarge)
An old market truism is that there is always a bull market somewhere. A prime candidate for a new one is China's Shanghai Composite Index (SSEC). There are signs that the brutal bear market of the last few years may be over. The declining channel from the 2011 high broke up on Friday, and there's a double or W bottom target in the 2330 area. The daily chart below shows the channel break on Friday. If this break higher holds, my target is in the 2650 area:
Ceramics Co., Ltd. (CCCL, $2.25) is an interesting "gambling-money" play that might find some love if China's upturn continues. Based in China, CCCL is a manufacturer of ceramic tiles. It trades on the Nasdaq Capital Market for small caps, having gained US listing via a reverse merger - i.e., the company bought a publicly traded shell corporation. It has just broken up from a falling wedge, and has retested the broken wedge trend-line. Its fundamentals look good too (too good - that has me worried).
According to Yahoo finance, there are 20.43m shares of CCCL outstanding and 50% of those are owned by insiders. The P/E ratio is 1.0. The dividend at 0.20 per share is currently yielding 8.9%. The market capitalization is $46m and net income was $46.7m in 2011. Non-GAAP net profit (excluding employee compensation expenses) has been $34.7m for the first three quarters of 2012. According to the company, it has maintained profits in a very difficult property market. CCCL looks undervalued, and if equities in China have bottomed, these shares may be an attractive way to play a bounce in the Chinese markets. On the other hand, Chinese reverse mergers are suspect when it comes to fundamentals, and the "greater fool" theory of investing comes to mind.
The trade setup is to buy a small position in CCCL under $2.50. I would sell half at $4.7, just under the resistance zone between $4.75 and $5.5, and set a stop on the remainder at the entry level. Here is the CCCL daily five year chart:
While the fundamentals on this stock look too good to be true, Chinese equities have beaten down, and if they parallel the course of US equities after the 2008-9 meltdown, they could do well over the course of the next few years.
Read the entire Market Shadows Newsletter (12/17) here >
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