Wednesday, January 11, 2012
The movement in gold stocks is underscoring a nagging, persistent hunch we’ve had for the past week — the “gold lag” uncovered by our research team toward the end of last year is already closing.
The lag is the gap between the gold price and another index of precious metals mining firms, the Barron’s Gold Mining Index. Most of the time, the index trades at a level higher than the gold price. But four times in the last 33 years, the stocks fell behind.
Each time has yielded a significant profit opportunity — an average of 158%, in fact.
It turns out the Barron’s index fell below the gold price at the end of last April. Check out this chart, which runs from early April through mid-December, when our folks uncovered this developing opportunity.
There’s no telling when this gap will close and the profit opportunity evaporates. The gap existed for only a week in 1980. Other times, it’s taken up to seven months to close.
As you can tell from the charts, we’re already at eight months and counting... so in a sense, this gap is already living on borrowed time.
Investing 101: How To Trade High Volume Breakouts: AHL, ARLP, CBRL, CMC, DFG, FSIN, GBX, PHII, SFSF, ZUMZ
When a stock price rallies investors, may get drawn in without taking a good look at the rally's underlying causes. One way to investigate if the price trend is legitimate is to check the stock's trading volume.
Trading volume is the number of shares or contracts that have exchanged hands in a given period, usually over a day's trading. When more activity is surrounding a stock it means more people are essentially voting on the stock's value.
When a large trading volume forms a trend, meaning if it starts to move price upwards or downwards, the trend is considered stronger and more credible than if only a few investors (weak trading volumes) are determining the change.
Using high trading volume to confirm the validity of trends is an important starting point, but these stocks can look even more attractive when paired with the "Golden Cross." This is a technical indicator that signals a stock's 50-day moving average has moved above its 200-day moving average, indicating recent upside momentum may persist.
When a golden cross is paired with strong trading volume investors can be assured that many investors feel strongly bullish sentiment towards the company. If you believe in crowd mentality, this may be an interesting set of indicators to track.
Interactive Chart: Click on the image to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
Business Section: Investing Ideas
As a final note on high volume trading with momentum stocks: If prices are moving upwards, and volume is increasing simultaneously, it indicates investors feel the stock has more to price in. When a stock is in an uptrend but trading volume is declining, it's a sign the trend is losing its momentum.
For that reason, in creating the list below we searched for golden cross stocks that, on Friday, experienced a daily trading volume was more than 2 times the average daily trading volume over the last two months.
Investors are collectively weighing in as bullish on these momentum stocks. Do you agree with them? (Click here to access free, interactive tools to analyze these ideas.)
1. Greenbrier Companies (NYSE: GBX): Engages in the design, manufacture, and marketing of railroad freight car equipment in North America and Europe. SMA50 at 21.67 vs. SMA200 at 20.53 (current price at 25.83). Today's trading volume is equivalent to 4.97 days of average volume.
2. Alliance Resource Partners LP (Nasdaq: ARLP): Produces and markets coal to utilities and industrial users. SMA50 at 73.44 vs. SMA200 at 71.97 (current price at 82.69). Today's trading volume is equivalent to 3.98 days of average volume.
3. PHI Inc. (Nasdaq: PHII): Provides helicopter transportation services to the integrated energy, and independent exploration and production companies primarily in the Gulf of Mexico. SMA50 at 21.53 vs. SMA200 at 21.37 (current price at 22.45). Today's trading volume is equivalent to 3.45 days of average volume.
4. Commercial Metals Company (NYSE: CMC): Engages in recycling, manufacturing, fabricating, and distributing steel and metal products, and related materials and services in the United States and internationally. SMA50 at 13.40 vs. SMA200 at 13.35 (current price at 15.27). Today's trading volume is equivalent to 2.45 days of average volume.
5. Zumiez, Inc. (Nasdaq: ZUMZ): Zumiez Inc., founded in 1978, is a mall-based specialty retailer providing sports-related apparel, footwear, equipment, and accessories. SMA50 at 25.38 vs. SMA200 at 24.30 (current price at 31.62). Today's trading volume is equivalent to 2.38 days of average volume.
6. Aspen Insurance Holdings Ltd. (NYSE: AHL): Provides insurance and reinsurance products and services worldwide. SMA50 at 25.98 vs. SMA200 at 25.58 (current price at 27.03). Today's trading volume is equivalent to 2.17 days of average volume.
7. Fushi Copperweld, Inc. (Nasdaq: FSIN): Develops, designs, manufactures, markets, and distributes bimetallic wire products, principally copper-clad aluminum (CCA) and copper-clad steel (CCS). SMA50 at 7.13 vs. SMA200 at 6.84 (current price at 7.95). Today's trading volume is equivalent to 2.03 days of average volume.
8. Cracker Barrel Old Country Store, Inc. (Nasdaq: CBRL): Engages in the operation and development of the Cracker Barrel Old Country Store restaurant and retail concept in the United States. SMA50 at 46.91 vs. SMA200 at 45.62 (current price at 50.80). Today's trading volume is equivalent to 1.99 days of average volume.
9. Delphi Financial Group, Inc. (NYSE: DFG): Provides integrated employee benefit services. SMA50 at 30.01 vs. SMA200 at 27.45 (current price at 44.20). Today's trading volume is equivalent to 1.72 days of average volume.
10. SuccessFactors, Inc. (Nasdaq: SFSF): Provides cloud-based business execution software solutions that enable organizations to bridge the gap between business strategy and results worldwide. SMA50 at 32.12 vs. SMA200 at 30.04 (current price at 39.81). Today's trading volume is equivalent to 1.72 days of average volume.
Yamana Gold (NYSE:AUY) — This large-cap gold miner made a high at just over $17 in early September, but fell back as gold retrenched. AUY has been our favorite gold miner since early last year, and it has been a winner. And AUY is a favorite of Wall Street analysts with 10 of 15 having a “buy” or a “buy/hold” on the stock.
AUY was recommended on our Top Stocks for November buy list: “Our objective for the year is $18, and with a new interest in gold it could have another run at its high before the end of this year. Buy AUY at $15 or lower.”
The deep correction in gold may have run its course with the “smart money” beginning to buy. AUY is currently under $15 — buy between $14 and $15 for a price objective of $18.
One of the by-products of the government sponsored Troubled Asset Relief Program (TARP) was the issuance of warrant securities to Uncle Sam in exchange for an infusion of capital. What many investors don't know is that over the past couple of years, the United States Treasury has sold off the warrants it received via a public offering. Those sales proved successful for the U.S. Treasury and actually turned TARP into a successful endeavor for the U.S. taxpayer. Now those same warrants may turn out to be a successful endeavor the average investor.
Warrants are essentially options to buy an underlying share of stock at a specified price. Where they differ from traditional call options is with respect to time. While the longest options have a two year life, warrants can be much longer in duration. In the case of bank warrants created from TARP, the time is as long as 10 years. Financials took a beating in 2011 as a result and so did the underlying warrants. With such a wide time horizon, these warrants could reap substantial gains if bank stocks recover nicely between now and then.
Bank of America (NYSE:BAC) today trades for $6.30 against tangible book of nearly $21. While today's share price reflects the market's concern with the accuracy of the tangible book value, Bank of America shares look very undervalued today compared with where shares could be over the next few years. CEO Moynihan has plans to reduce expenses by $5 billion over the next 3 years. Against a market cap of about $65 billion, that's a significant boost to the bottom line. Bank of America Class A Warrants (NYSE:BAC-WTA) currently trade for $2.75. Each warrant conveys the right to buy one share of BAC at $13.30 a share. The warrants expire in 2019. It is not unreasonable to assume BAC could be trading for $20 or more in 2014. If so, the warrants would be worth the amount they are in the money, $6.70 plus a time premium for the remaining life of the warrant. The warrants could easily trade for $10, or more than 300% today's levels. (For related reading, see A User's Guide To Warrants.)
Wells Fargo (NYSE:WFC), a bank more people are comfortable with also has warrants outstanding as another option. Wells Fargo, unlike many of its peers today, trades at a slight premium to book value with shares trading at a little over $29. It has warrants outstanding (NYSE:WFC-WT) that allow holders the right to buy one share of Wells Fargo for $34.01 up until Oct. 28, 2018. Today the warrants trade for $9.10. If Well Fargo boosts its dividend payout at anytime during the warrant life, the exercise price of the warrant will be reduced by the dividend amount. Wells Fargo is a large and favorite holding of Warren Buffett. Shares could be worth over $40 in two to three years, and the warrants could be worth twice what they trade for today. Insurance giant AIG (NYSE:AIG) has warrants outstanding (NYSE:AIG-WT) that don't expire until 2021 allowing owners to buy a share of AIG for $45. Currently, AIG shares trade for about $24 and the warrants trade for $5.77, respectively.
The Bottom Line
Bank warrants are a lucrative way to make a bet that U.S. financials will once again be respected by the investing public. The warrants pay off if the underlying share prices appreciate strongly over the next several years. Just the same, the warrants can decline precipitously if the underlying stock price trades lower. A warrant's return is magnified both ways in relation to the move of the underlying stock. But in seven to 10 years' time, financial warrants could be a jackpot investment.
from King World News:
Four decade veteran John Hathaway, told King World News that we are seeing the beginnings of a massive short squeeze in the gold market. The prolific manager of the Tocqueville Gold Fund said the gold market will turn dramatically against the shorts. Here are the critical observations by one of the most extraordinary 5-star rated Morningstar fund managers: “We had extreme readings in terms of sentiment, measured any number of different ways. Usually that means you are into the dry heave stage where there is nobody left to sell. What I think we are seeing here is a terrific short squeeze. I think this is going to get the shorts concerned and there are plenty of shorts that are naked here and have to cover at some point.”
John Hathaway continues: Read More @ KingWorldNews.com
Bank Lending, M2 Money Supply Soar in China; Premier Wen Jiabao calls for "Measures to Boost Confidence in Stock Market"; US vs. China Money Supply -
Chinese stock have been on a 2-day tear as Premier Wen Jiabao has come flat out in support of the stock market.
Moreover, money supply in China is up the most since last April and new Chinese loans exceeded the estimates of all 18 Bloomberg economists. M2 rose 13.6 percent, the fastest pace since July.
Bloomberg reports China Stocks Rise Most in 3 Months on Loan, Money Data
China’s stocks rose the most in three months after new lending and money supply exceeded estimates in December, boosting speculation the government is relaxing monetary policies to bolster economic growth.$SSEC Shanghai Stock Index Daily Chart
Chinese new loans totaled 640.5 billion yuan ($101 billion) last month, the highest amount since April, the People’s Bank of China said yesterday. That exceeded the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, the fastest pace since July, it said. That compared with the 12.9 percent median of 18 estimates.
Premier Wen Jiabao called for measures to boost confidence in the nation’s stock market, the Shanghai Securities News reported today, citing his comments at the National Financial Work meeting. He urged reforming initial public offerings and improving companies’ dividend payouts, according to the report.
The premier’s comments signal the government may take more measures to boost stocks, including allowing social security funds to buy equities, David Li, UBS’s chairman and country head for China, said in an interview in Shanghai. Funds may flow out of the property market and into stocks as the government isn’t showing any inclination to ease curbs in the real-estate industry because prices “are still high,” he said.
Central bank governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europe’s debt crisis and an uncertain U.S. economic outlook. China cut the reserve requirement for the first time since 2008 on Nov. 30 as Europe’s debt crisis eroded demand for its exports.
The Shanghai stock index has been on a big two-day advance, but let's put some perspective on the story.
$SSEC Shanghai Stock Index Monthly Chart
US vs. China M2 - Who is Printing More?
For all the hype talk about US hyperinflation and soaring money supply from the Bernanke Fed, let's add some perspective on money supply growth as well.
US vs. China M2 Absolute Amounts
US vs. China M2 Year-Over-Year Percentage Change
Charts courtesy of Chris Puplava at Financial Sense. I asked for them yesterday in expectation of writing this post today. Chart annotations and comments are mine.
The above chart provides a nice visual explanation for the "reverse decoupling" and outperformance of the US stock market in 2011. Money supply plunged in the Eurozone as well.
Bernanke flooded the markets with liquidity, yet all if did was hold stocks flat. Compared to China and Europe, that was a huge "accomplishment" but it fueled a rise in gasoline and food prices and brutally punished those on fixed incomes with excessively low interest rates on savings accounts.
Note that Money supply in China in mid-to-late 2009 was soaring at 30% annual growth. The recent stock market plunge in China came with growth "collapsed" to 13.60%. Meanwhile M2 growth in the US peaked at 10%.
All things considered, it is amusing to hear all the US hyperinflation rants, especially those accompanied with a virtual love affair for China such as Peter Schiff and Jim Rogers.
Those looking for malinvestment can find no bigger place than China.
Mike "Mish" Shedlock
Here's the example of a head and shoulders formation from Forex charts:
And the example of a flag formation from Investopedia:
And a bullish pennant:
Silver's 1 year chart above shows even more clearly that silver's price action does not look anything like a head and shoulders, rather it appears to be completing either a flag formation or a falling bullish pennant.
Silver's 2 year price pattern that Clive Maund incorrectly labels a head and shoulders, predicts a silver move to $70-$75 if and when the price breaks out of the flag/ pennant.
If silver breaks down further from current levels it will be because the cartel needs to continue to suppress silver, and JPM needs to further extricate itself from its remaining 75 million ounce naked short position, rather than some inaccurate TA.
Although the average directional movement index (ADX) isn't used as frequently as some of the popular technical indicators, the ADX line has definite advantages because it filters out a lot of the false oscillator signals which are frequently given early in a move.
A longer-term trader can stay with trending positions longer by following the simple guidelines for the ADX line. According to research by computer trading expert Bruce Babcock, a climb by the ADX line above 40 followed by a downturn signals an imminent end to the current trend (whether up or down). When this signal is given, traders should take profits on existing positions. More aggressive traders can use this signal to consider taking positions for a possible move in the opposite direction.
The charts on this page show how the ADX works. The ADX line on the feeder cattle chart gave two signals during the year. The first downturn accurately marked the top in February, and the second downturn above the 40 level signaled a bottom in late summer. Note that the signal in late July was actually more than a month ahead of the actual bottom in September. The ADX warns you of an end to the trend. In this case, it gave you more than a month's warning.
Like the feeder cattle signals, crude oil's ADX gave two signals during the year, one at the summer low and the second at the winter high. Both signals were given by climbing above 40 and turning down.
The ADX signals by feeder cattle and crude oil signaled the end of one trend and the beginning of a new trend. But the ADX is not designed to signal a trend reversal. It only signals the end of the existing trend. A good example of not signaling a trend reversal is T-Bonds. The end of the strong spring rally was accurately marked by the ADX signal in June. Then T-Bonds consolidated in a coil until the upside breakout in the fall. An ADX climb above 40 and downturn in November signaled another consolidation.
Usually, a commodity gives no more than a couple ADX signals during a year, unless the market has particularly volatile price action. The ADX is less helpful during sideways markets. During extended consolidation periods, the ADX line will slip toward 10. When ADX approaches 10, a major move is usually about to take place. But the ADX line doesn't tell you which direction it will go. You have to rely on other indicators for the probable direction of the next move.
In summary, if the market is trending (whether up or down), the ADX line should be rising. During an extended consolidation period, the ADX line will slip toward a low number.
Time to give it a try - can you spot the potential trend change as indicated by the ADX at the bottom of this chart:
The "Chart of the Day" is Kansas City Southern (KSU), which showed up on Monday's Barchart "All Time High" list. KSU on Monday posted a new all-time high of $71.40 and closed up 2.30%. TrendSpotter has been Long since Dec 23 at $67.38. In recent news on the stock, Morgan Stanley on Jan 9 named KSU at a long Research Tactical Idea. Pragmatic Capitalism on Dec 23 reported that railroad traffic during the week ending Dec 17 jumped to +11.7% y/y. Kansas City Southern, with a market cap of $7.7 billion, is a transportation holding company with two primary subsidiaries. The Kansas City Southern Railway Company, is one of seven Class I railroads operating in the United States. Kansas City Southern de M'xico, SA. de C.V. is one of three large regional railroads in Mexico. KCS also owns 50% of the Panama Canal Railway Company in Panama.