Wednesday, February 22, 2012
When should traders be in or out of the market?
There are times when traders should NOT be in the market. There are other times when the market is rocking and traders should get aggressive. How can you tell the difference? Here are 5 helpful tips.
Note: I’m a trader, not an investor. I am looking for superior out-performance by being in the best stocks I can find during healthy times.
1) Accumulation and Distribution Days: When should traders go to cash? Follow the big boys! The big institutions control the market, so pay attention to their actions by tracking accumulation and distribution days. When institutional selling builds up over a short period of time (2-4 weeks) AND leading stocks start to break down, that is a great sign to start raising cash. Why? Because 4 out of 5 stocks move in the general direction of the market. I don’t care how good the company is, when the market’s in a downtrend, you don’t want to fight it.
2) Uptrends and Downtrends: Don’t get caught up with the terms Bull and Bear market. Just recognize if we are in an uptrend or a downtrend. For example, use the 50-day moving average on the NASDAQ Composite as a general indicator to be in or out of the market. Above the line usually means we’re in an uptrend and it’s a green light to be in stocks…below the line, downtrend and red light.
3) Scale In: When conditions start to improve, SLOWLY scale back in. There’s no reason to rush. Take a few positions and test the waters. If the rally is for real, there will be PLENTY OF TIME to make money. If you are wrong, at least you can get out quick with minimal damage and protect your portfolio. Think Defense First!
4) Buy the Strongest Earnings & Sales Growth: When markets are in a confirmed uptrend, what stocks should you buy? Be in the best! Don’t settle for low rate stocks. Look for companies that have strong earnings and sales growth. Why be in dead-money stocks with little growth potential? We’re in this to make money, right? So be in stocks that have a higher probability of moving up!
5) Fundamentals AND Technicals: Why does it only have to be one or the other? Why not USE BOTH! We want as many factors as possible in our favor when trading the market. Therefore, start with strong fundamental companies AND combine the proper technical timing to identify ideal entry points to effect your best risk vs reward trades.
These are my 5 measures for when to be in or out of the market. Note I do not rely on a single factor, but instead use multiple disciplines to facilitate trading, protect my capital and maximize returns.
Using every weapon available significantly improves your chances of surviving — and thiving — as a trader.
Worthington Industries (NYSE:WOR) – This is the largest U.S. processor of close-tolerance steel and a manufacturer of metal framing, pressure cylinders, automotive stampings, metal ceiling grid systems and laser-welded blanks.
Analysts look for a continued upturn in durable goods demand and increased sales of pressure cylinders. S&P rates WOR a “four-star buy” with a target of $23 based on earnings of $1.53 in 2011 versus 57 cents in 2010, and an increase to $1.64 in 2012 and a like increase in 2013.
Technically WOR is attacking the resistance at $18.80 to $19.40 with a pending golden cross — a pattern that favors a breakout. The initial target is the resistance zone at $20 to $22, but a breakthrough of that zone could result in a major move with a longer-term target of $30.
Long-term investors in McDonald's (NYSE: MCD) have much to celebrate. The stock delivered returns of 20% a year for the past five years, 15.3% for the past 10 years and 11.4% for the past 15 years.
But the Golden Arches could finally be ready to downshift, perhaps just for a while or maybe even permanently. For a firm the size of McDonald's, which now has a market capitalization of more than $100 billion, further growth can be increasingly hard to achieve. While analysts say sales should be alright for now, rising about 8% a year for the next three to five years (just like they did for the prior 10 years), the bottom line could become an issue.
This is because McDonald's has some hefty spending in store. In 2012 alone, for example, the company is planning capital expenditures of $2.9 billion, a 35% increase from 2011. The money will go for projects like technology upgrades, remodeling at 2,400 restaurants, 1,300 new restaurants and marketing for the Summer Olympics.
Having to spend more to achieve the same level of sales growth is often an obstacle for huge companies. In the case of McDonald's, analysts expect the coming surge in spending to slow drastically yearly earnings per share (EPS) growth drastically from 18% during the past five years to 9% for the next three to five years. Annual dividend growth may decelerate even faster, from nearly 30% for the past five years to 9.5% for the next three to five years, analysts say.
Investors who buy McDonald's now could be disappointed. The stock may continue to do OK, but nothing like the performance of the past 15 years.
The trouble is, stocks such as McDonald's, which perform well through all sorts of economic conditions for many years, are rare. So what's an investor to do?
The only thing they can: Buy the "next McDonald's."
I believe the Mexican fast-food chain Chipotle Mexican Grill Inc. (NYSE: CMG), could be it -- in its own way, of course.
Surely, there are never any guarantees, but I can imagine Chipotle becoming the next McDonald's. No other fast-food chain is better positioned to capitalize on the growing demand for healthier, more wholesome fast foods. Past sales and estimates of future revenue suggest consumers will be willing to pay a bit more for this.
Shares of Chipotle have performed more than twice as well as McDonald's, returning 43.5% a year since the IPO five years ago, compared with 20% per year for McDonald's during the same period. In that time, the combined value of all outstanding shares of Chipotle more than doubled, from $4.8 billion to nearly $11.5 billion. The number of restaurants in the chain more than doubled, too, from about 560 to 1,230.
This is fast expansion, to be sure, and Chipotle is already pretty big. But the company is still only a ninth of McDonald's size and more of a mid-cap company by Wall Street standards. Plus, it has a formula for success that's especially relevant today, so future growth potential is vast and, well, McDonald's-like.
Customer loyalty will obviously be a key catalyst, and Chipotle's got plenty. Current sales of about $2.3 billion a year have grown nicely despite rising commodity costs that have brought the typical customer bill up to $10-$12 from around $8.50 in 2007. Indeed, sales rose 19.5% annually during that five-year period, and analysts expect them to keep growing at a 15.5% rate for the next three to five years.
A crucial intangible is the formula for success I mentioned earlier, and I think analyst R.J. Hottovy of Morningstar describes it best: "Chipotle is at the forefront of a restaurant industry movement toward naturally raised proteins, pasture-raised dairy products and organic produce." Although fresh ingredients such as these are more costly, they're a key source of differentiation from other restaurant chains, he adds. The company aims to apply this formula to new ventures such as ShopHouse Southeast Asian Kitchen -- the Asian version of Chipotle -- the first of which opened Sept. 15, 2011, and has so far received positive reviews.
Earnings per share (EPS), which climbed 22.5% a year for the past five years, are projected to rise at a 20% rate for the next three to five years. This would bring EPS to about $11.80 by 2015 from $6.85 now. Lower costs should help in achieving this sort of EPS growth. Avocado prices in particular soared in 2011 due to a shortage in California, however, analysts expect prices to decrease significantly as more avocados are imported from Chile and Mexico.
Risks to Consider: Competition will be intense as fast-food rivals upgrade their menus and decor to better mimic Chipotle's formula for success. Higher commodity prices could hinder results in any given quarter.
Action to Take --> While I think Chipotle could very well become the "next McDonald's," I don't suggest investing in Chipotle right now, though. The stock has run up a lot recently and, at almost $380 a share, is trading at 55 times 2011 earnings and 47 times the $8.10 a share in earnings analysts have forecasted for 2012. A share price in the $285 range would be a much more reasonable entry point. At that price, the price-to-earnings (P/E) ratio would be in line with the five-year average P/E ratio of about 42. So keep an eye on the stock, wait for this sort of correction, and then consider jumping in.
Some gold miners even link their dividends to the price of gold. Familiar names using this strategy include Eldorado Gold (NYSE: EGO) and Newmont Mining (NYSE: NEM). Regardless of what dividend strategy a gold miner is using, it's good news for investors that these companies are deploying more cash toward shareholder rewards because, until recently, the mining group was a not dividend hunter's stomping ground.
King World News
February 21, 2012
On the heels of a Greek bailout, which has gold trading more than $20 higher and silver back above $34, today King World News interviewed Rick Rule, CEO of Sprott USA. Rick spoke with KWN about what has just taken place with Greece and what it means for gold. Here is what Rule had to say: “I don’t think Greece was bailed out, I think the banks that were stupid enough to lend Greece money were just bailed out. They have talked about an injection of fresh cash to maintain Greek living standards. Simultaneously, they have announced fairly aggressive cuts.”
Sell Into the Rally Before the Correction Good news from Greece could take markets to new highs before sharp correction
Progress toward an agreement to bail out Greece led to a higher close for the Dow industrials on Friday, pushing them to another 52-week high, while the S&P 500 only missed its best close in four years by a fraction.
All eyes were on Brussels, while Greece is again the subject of a “final” bailout agreement. But whether or not Greece gets what it needs, it is unlikely to change the picture of the markets from the view of technical analysis since an agreement of some sort appears already discounted. However, technical analysis can tell us the probable future direction of U.S. markets.
On Friday, the Dow Jones Industrial Average rose 46 points to 12,950, the S&P 500 gained 9 points at 1,361, and the Nasdaq fell 8 points to 2,952. The NYSE traded 897 million shares and the Nasdaq crossed 553 million. On the Big Board advancers led decliners by 1.4-to-1, while on the Nasdaq advancers and decliners broke even.
As analyst Michael Murphy points out, it is important to note that “we have not had a 1% drop in the S&P 500 in a single of the 32 trading days this year.”
And according to the SentimenTrader, only 12 other years since 1928 have been able to last 30 days or more into a new year without a 1%-down day. Murphy also points out that all but one of those years ended with a positive return. Thus, the chances are very high that we will have a positive return this year.
The “Greek tragedy” has been dragging on so long that it is likely that the markets have already absorbed an agreement. Thus, look for a one-day or less rally following an agreement followed by a sudden pullback to the S&P 500 1,322 to 1,333 support zone.
On Friday, the Dow made a new 52-week high. But before that, the Dow had nine days of consolidating, which resulted in the Dow’s RSI to fall from an overbought reading at over 70 to a more neutral 65.76 — a positive development that could eventually lead to higher levels.
Despite all of the positives, and there are many, there is one major technical problem — the failure of the Dow Jones Transportation Average to “confirm” the breakout of the industrial average.
Thus, Dow Theory purists will say that a bull market has yet to be confirmed. As for the transports chart, pullbacks have thus far been turned back at the 50-day moving average now at 5,168. The index is in an uptrend but must break through the resistance at 5,425 to 5,550 in order to confirm that a Dow bull market is in force.
Conclusion: The market is in a powerful uptrend but still very overbought. However, a settlement of the Greek issue could trigger a rally that would take the Dow industrials, the S&P 500 and the Nasdaq to new highs followed by a sharp correction. Traders should sell into the rally and wait for a pullback before initiating new positions.