Wednesday, January 9, 2013

3 Stocks to Protect Your Portfolio From a Looming Fiscal Crisis

Wall Street just breathed a huge sigh of relief.

With a deal averting the fiscal cliff in hand, the bulls have been out in force, sending the S&P 500 to its biggest two-day rally since 1973. Although resolution of the fiscal cliff has given the market a very nice boost, the reality is that it's merely a warm up for the main event. A much bigger and more important battle looms just on the horizon.

I'm talk about the debt ceiling.

The United States hit its statutory debt limit on Dec. 31, requiring the federal government to take special measures announced last week in order to avoid a technical default, according to U.S.
Treasury Secretary Tim Geithner. Those "extraordinary measures" will provide about $200 billion in short-term liquidity to keep funding government spending, while putting Congress back on the clock to find another round of solutions to the country's growing financial problems.

Uncertainty over the debt ceiling makes the fiscal cliff look like child's play. When Congress last battled issues with the debt ceiling in August 2011, it sent shockwaves through the market, with the S&P 500 falling 19%, just short of bear-market territory. Take a look below.

The debt ceiling is incredibly important because of its impact on the credit of the United States. In spite of the country's growing financial problems, the United States is still considered the safest borrower in the world. A credit downgrade for the safest borrower forces all other assets to be repriced as the "risk-free" rate is compromised. And that can have a devastating effect on stocks, as we saw in August 2011.  (more)

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Micron Technology, Inc. (NASDAQ: MU)

Micron Technology, Inc., together with its subsidiaries, engages in manufacturing and marketing semiconductor devices worldwide. Its products for data storage and retrieval comprise dynamic random access memory products, including DDR2 and DDR3 for use as main system memory in computers and servers; and other specialty DRAM memory products, such as DDR and DDR2 mobile low power DRAM, DDR, SDRAM, reduced latency DRAM, and pseudo-static RAM used in laptop computers, tablets, and other consumer devices. The company also offers NAND flash memory products, including RealSSD solid-state drives, flash memory cards, CompactFlash and memory stick products, SD memory cards, and JumpDrive products used in mobile phones, MP3/4 players, computers, solid-state drives, tablets, digital still cameras, and other personal and consumer applications. In addition, it resells flash memory products that are purchased from other NAND flash suppliers. Further, Micron Technology, Inc. provides NOR flash memory products that are electrically re-writeable, non-volatile semiconductor memory devices used in consumer electronics, industrial, wired and wireless communications, computing, and automotive applications.

Please take a look at the 1-year chart of MU (Micron Technology, Inc.) below with my added notations:
1-year chart of MU (Micron Technology, Inc.)
After selling off from February until June, MU has formed what appears to be a double bottom (blue) price pattern. The pattern is as simple as it sounds: Bottoming, rallying up to a point, selling back off to a similar bottom, and then rallying back up again. As with any price pattern, a confirmation of the pattern is needed. MU would confirm the pattern by breaking up through the $7 resistance (red) that has been created by the double bottom pattern.

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This Indicator Points to an Incredible Income Opportunity Just Ahead

Bond yields are at record lows, which has caused many income-seeking investors to turn to high-yield stocks, while others have supplemented dividend payments with income from covered calls.
Income investors can write (i.e., sell) call options on stocks that they currently own to increase portfolio income. Writing covered calls takes advantage of the fact that most options expire worthless. When that happens, the options seller profits at the expense of the options buyer.

Options prices are determined by several factors, including the stock's price, the exercise price of the option, and the amount of time until the options contract expires. These can all be easily determined, but one factor that is more difficult to assess is volatility.

Volatility refers to how much a stock price moves. A stock that gains or loses an average of 2% a week is considered to be more volatile than one that moves only 0.5% a week, on average. More volatile stocks have a greater chance of moving to the option's exercise price, and this makes options on more volatile stocks higher priced than options on low-volatility stocks.

Different formulas are used to calculate the volatility of options and these calculations are updated frequently. While these formulas are very complex, we can get a general idea of whether volatility is high or low by looking at the CBOE Volatility Index (VIX).

The VIX is commonly called the "fear index" because it tends to rise as the market falls and traders become more anxious. On the other hand, when market prices rise, the VIX tends to decline. For example, In the first week of January, when the S&P 500 gained about 4.5%, VIX lost almost 40%. We can see this inverse relationship in the chart below that compares VIX with the S&P 500 index.

VIX vs SPX Chart
Unfortunately, there is no way to forecast turning points in stocks based solely on whether VIX is high or low, as the index tends to remain low for extended periods, just as it can remain elevated for great lengths of time.

Rather than trying to time the market with VIX, income investors can use it to time their actions in the options market. As a general rule, when VIX is low, options prices will be low and there is less benefit to writing options. When VIX is high, traders should take advantage of increased options prices by selling contracts.

Of course, with sufficient work, there will almost always be options that move against the general trend, just as there are always some stocks that go up in a bear market and some losers even in the strongest bull market. But traders can monitor the VIX to identify the best times to sell options, using the 26-week moving average as a guide.

The chart below shows that VIX is itself a volatile indicator.

VIX Chart
This VIX is currently trading at 13.6, within 2.3% of its 52-week low and well below its five-year average of 23.7. At this level, VIX is extremely oversold, and could be due for a move higher, therefore making selling options more attractive.

In fact, It has actually fallen to a value near its current level four times in the past two years. Each time, it bounced at least 10% higher within three weeks. Even when VIX remains low for several months, it makes frequent moves up. Traders should prepare for a potential increase in VIX by finding stocks they would like to write options on. This opportunity could occur before the end of January.
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Jay Taylor: Turning Hard Times Into Good Times

click here for Part 2
 1/8/2013: David Stockman: Congress & the FED are Killing Capitalism

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Chart of the Day - Amazon.Com (AMZN)

 The "Chart of the Day" is Amazon.Com (AMZN), which showed up on Monday's Barchart "All-Time High" and ""Gap Up" lists. Amazon on Monday posted a new all-time high of $269.73 and closed +3.59%. TrendSpotter turned long last Thursday at $257.31. Amazon on Monday rallied on Morgan Stanley's upgrade in Amazon to Overweight from Equal Weight due to Morgan Stanley's belief that Amazon's fulfillment network is underappreciated and will allow the stock price to rally and to drive international opportunities., with a market cap of $117 billion, is the world's largest online retailer.


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NVS, CVS: 2 Stocks That Could Deliver Double-Digit Gains in 2 Months

The flu is back, and this year, it could be worse than ever. According to health officials at the Centers for Disease Control and Prevention (CDC), this year's flu season appears to be one of the more severe in recent years. The CDC reported that during the last week of December, cases of the flu were found in 41 states. Moreover, flu-related child and infant deaths climbed to 18, while outpatient visits for flu symptoms had jumped to 5.6% over the prior year.

In a somewhat conservative statement accompanying the recent report, the CDC's Chief of the Epidemiology and Prevention Branch, Dr. Joe Bresee, said, "While we can't say for certain how severe this season will be, we can say that a lot of people are getting sick with influenza and we are getting reports of severe illness and hospitalizations."

Last week, the CDC said 29 states, along with population centers such as New York City, are reporting high levels of influenza-like-illness. The report said nine other states are reporting moderate levels of flu cases. Ten states, including my home state of California, Connecticut, Hawaii, Kentucky, Maine, Montana, Nevada, New Hampshire, South Dakota and Wisconsin, have thus far reported relatively low levels of influenza-like-illness.

 Typically, flu season peaks in late January/early February, so over the next couple of months, we're likely to hear a lot more news about the potential severity of the flu and its impact on the nation's health.

For traders, the need to combat a severe flu season actually could lead to some profitable opportunities in stocks of companies in the business of flu care.

Novartis AG (NYSE: NVS)
Novartis is the leading name in the flu vaccine space. The company makes a plethora of flu-fighting prevention products, including Agrippal, Fluad, Fluvirin and Flucelvax.

In late October and early November, Novartis shares fell sharply after the sale of both Agrippal and Fluad were halted in several European countries and Canada. Small particles found in some of the company's vaccine vials forced removal from the market.

After the situation was quickly rectified by Novartis, the shares returned to their former glory. They are making new 52-week highs this week, and are well above both the 50-day and 200-day moving averages.

The chart here shows the big gains in the stock since June, with the exception of the late October/early November selling.
NVS Chart
I suspect that as flu fears increase, we could see more gains for this leading flu vaccine stock -- at least through the end of flu season.

Recommended Trade Setup:
-- Buy NVS at the market price
-- Set stop-loss at $59.05
-- Set initial price target at $70.60 for a potential 10% gain in two months

CVS Caremark (NYSE: CVS)
Another stock I suspect will benefit from a severe flu season is CVS Caremark (NYSE: CVS). The retail drug seller's shares are trading just below their 52-week high, and above both the 50-day and 200-day moving averages.
CVS Chart
CVS Caremark is one of those "best in breed" stocks, meaning that it is a leading company in the industry. The company is a fundamental powerhouse, consistently delivering strong earnings that beat the competition. And earnings this quarter could be boosted by the sale of flu symptom medications.
In December, CVS said that it expects strong 2013 earnings growth somewhere between 13% and 17%. That is well above Wall Street estimates, and the result was a nice surge higher in the shares to current levels. I suspect that earnings will be well on their way to the high end of those estimates, particularly on any increase in flu-symptom medication sales.

Recommended Trade Setup:
-- Buy CVS at the market price
-- Set stop-loss at $45.72
-- Set initial price target at $54.67 for a potential 10% gain in two months

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7 Rules for Picking the Ultimate "Secret Wealth" Investment

It's over.

Gov. Mitt Romney did not win the presidential election. A majority of Americans, in the final accounting, chose to support another political vision.

Time will tell how that turns out.

I don't do political commentary. But... Whatever Romney's politics, it's accepted as fact that Mitt's business acumen is almost unfailingly spot-on. The methods he used at Bain Capital to build his fortune are indisputable, and he has 250 million ways to support that argument.

Your ticket to a hidden world
Now, to get in on private equity like Bain Capital, you either need to have a liquid net worth of more than $2 million, excluding your house, and a very cushy salary. That's what federal law says. In practice, most "relationships" with private equity are in the $5 million range, though there are plenty of larger funds that aren't likely to return your call if that's all you have to invest. If you're not super-rich -- a movie star, sports star or captain of industry -- the rarified world is altogether off-limits.

The reality is, publicly-traded private equity firms and a special class of securities called business development companies (BDCs) are the only way most of us are going to get in on these deals. They lend to and buy pieces of small "middle market" private companies. The gains they can realize are stratospheric -- ten-baggers are commonplace in the private equity and BDC world.(more)

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First 'Buy' Signal in a Year Shows Major Trend Might Be Ready to Reverse

Conventional investment wisdom is that stocks beat bonds in the long run. Like all of the other rules that everyone "knows" are true, this one depends on a variety of factors. Sometimes, bonds actually beat stocks in the long run, like they did in the 30-year period that ended in October 2011.

According to Bianco Research, long-term government bonds delivered an average gain of 11.5% a year while stocks gained 10.8% over that time. This was the first time that happened since 1861, according to Dr. Jeremy Siegel, an expert on long-term performance, although bonds have beaten stocks in shorter time periods.

Interest rates move in the opposite direction of bond prices, so as prices rose in the past 31 years, rates fell. This period actually marked a historic collapse in interest rates. In September 1981, 10-year Treasury notes offered annual yields of more than 15.8%. That rate fell as low as 1.4% in July 2012. Federal Reserve data shows that the trend has been steadily lower since 1990.

10-Year Treasurys
Eventually, this downtrend in rates should reverse, but of course no one knows exactly when. The next chart shows that the long-term trend could change soon. Interest rates have generally been a few percentage points higher than the rate of inflation (shown as the red line).

Since the financial crisis hit in 2008, this relationship has become less noticeable, which might be a consequence of recent Fed policy. In time, interest rates will probably move back above the inflation rate, and with the Fed targeting inflation of about 2% a year, that would indicate interest rates could double from current levels in time.

Treasurys vs Inflation
While rates may be moving higher in the years ahead, trading is about timing when that move could begin. Stocks attracted a great deal of attention last week, but interest rates also moved sharply higher as bonds fell.

An ETF that tracks long-term bonds, iShares Barclays 20+ Year Treasury Bond (NYSE: TLT), lost 3.98% last week. An inverse ETF that allows traders to benefit from a drop in bond prices, ProShares UltraShort 20+ Year Treasury (NYSE: TBT), gained 8.28%. According to the chart, TBT is now a buy for the long term.

TBT Chart
The chart above shows that the stochastics indicator is bullish on the monthly and weekly time frames. After being oversold for more than a year on the monthly chart, this indicator has broken out of oversold territory. This is usually considered to be the trigger for a buy signal.

The weekly chart shows that TBT has developed a short-term uptrend and broken above resistance. A double-bottom price pattern shows a price target of more than $73.80 is reasonable in the next three to six months. If this is a reversal in the long-term trend, TBT could be held much longer and deliver even bigger gains.

The long-term trend in interest rates is likely to reverse when the Fed decides to change its policy. Over the weekend, two Federal Reserve regional bank presidents said they thought the Fed might stop its latest easing program later this year. Additional support for that idea came out of the minutes from the latest Fed meeting, which showed that several members of the Federal Open Market Committee (FOMC) thought it would "probably be appropriate to slow or stop purchases [of long-term bonds] well before the end of 2013." Many analysts expect interest rates to rise when the Fed stops easing. This would be a fundamental reason to buy TBT.

While it seems likely that TBT will go up in the near term, interest rates can be volatile and a stop-loss is important to manage the risk of this trade. If TBT closes below $63.14, or the 20-day moving average, this would indicate that rates are probably going to remain low for some time and the trade should be closed at a loss.

Recommended Trade Setup:
-- Buy TBT at the market price
-- Set initial stop-loss at $63.14 and then use the 20-day moving average as a trailing stop
-- Set initial price target at $72.80 for a potential 10% gain in 3-6 months

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