Wednesday, February 22, 2012

Bulls Beware: This Is the First Sign of a Correction

The stock market is playing "whack-a-mole" with the Volatility Index (the "VIX").
The VIX – which acts as the market's "fear gauge" – surged 20% higher last week... well on its way to the expanding volatility I've been calling for. But as we've seen lately, just as the VIX appeared ready to break out to the upside, the market smacked it back down.
Here's an updated chart...
As you'll notice, volatility has been falling since last October. This makes sense, since the VIX tends to soar when the market drops, and vice versa. Since stocks have been moving higher, it's no surprise volatility has moved lower.

But notice that the VIX has drawn out a falling-wedge pattern. This occurs when a stock makes a series of lower highs and lower lows, but the distance between each high and low gets narrower. When this pattern occurs, the stock usually breaks out to the upside. And that is exactly what the VIX did last week.
But yesterday, the VIX gave up a good portion of last week's gains. Folks might now be tempted to ignore the breakout and look for stocks to renew their uptrends.
Not so fast...
Most of the time, when a chart breaks out to the upside of a falling-wedge pattern, the initial move is sudden and violent. That's what we saw with the VIX and its 20% rise last week. But then the chart comes back down to retest the breakout level of the wedge, before reversing course and heading even higher.
I suspect that's what the VIX is starting to do right now. It's in the process of retesting the former resistance line of the wedge around 17.50. That gives the chart a little more room to move on the downside, which means the market may have a little more room left to go on the upside.
But if the VIX can bounce off its former resistance – which is now support – and rally back above last week's high around 21, we'll have our first series of higher highs and higher lows. That'll be the start of a new uptrend for the VIX... And it'll be an indication that the stock market has started the correction I've been waiting for.

When Should Traders Be In or Out of Markets?

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.

Jay Taylor: Turning Hard Times Into Good Times

2/21/2012: Wake Up Christians! You Are Supporting American Fascism!

Pending Golden Cross Makes WOR a Buy

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.

Trade of the Day – Worthington Industries (NYSE:WOR)

Could This Stock be the Next McDonald's?

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.

Finding Golden Yields With Gold Miners

Most income investors know the standby sectors to head to in the hunt for strong yields and tidy payouts. Consumer staples, integrated oil companies, utilities, mater limited partnerships and royalty trusts are all homes to robust yields and dependable, rising dividends. But did you know gold miners offer more than just exposure to the precious metal? That's right. Some gold miners are becoming dividend plays in their own right.

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.

Even today, Eldorado Gold and Barrick Gold (NYSE: ABX) yield just 1.3% each. However, in the case of Barrick, some analysts think the company could afford to double its payout. Newmont's annual payout increases at a rate of 20 cents per share for each $100-per-ounce rise in the average realized gold price, MarketWatch reported. Both companies increased their dividends in October 2011.

Speaking of increased dividends, earlier this month, Canada-based Agnico-Eagle Mines (NYSE: AEM) said it's raising its dividend 25%. Dahlman Rose analyst Adam Graf thinks Barrick could double its dividend this year and top that increase, should it so choose, in 2013, Minyanville reported.

Overall, the dividend picture for large-cap gold miners is improving, but there are still issues to consider. First, gold miners are starting or boosting their dividend programs from relatively low stating points. Said differently, a quarterly dividend of five cents a share isn't great, but it looks compared to no dividend at all. Second, there are still plenty of gold miners that prefer to reinvest excess cash in production and to keep with higher costs. Third, there is the issue of those higher costs. As fuel and equipment costs rise, miners may think twice about starting or upping dividends.

Then there is the matter of volatility. A dividend linked to the price of gold is a great idea...when the yellow metal is rising. No Newmont investor is going to complain about the dividend if the price of gold goes to $5,000 (just a hypothetical scenario). But if the price gold suddenly plunged, miners' dividends could be a thing of the past. At the very least, the sector would probably be home to a lot of dividend cuts and suspensions. Again, that's a hypothetical scenario, but not an impossible one.

The bottom line when it comes to mining dividends is that investors will be best served sticking with companies with the best balance sheets that have the capacity to grow payouts and whether volatility in gold prices.

Chart of the Day - FMC Corp (FMC)

The "Chart of the Day" is FMC Corp (FMC), which showed up on Friday's Barchart "All Time High" and "Gap Up" lists. FMC on Friday posted a new all-time high of $96.74 and closed +1.50%. TrendSpotter last Monday took a profit on a long trade, briefly turned neutral, and then issued a new Buy signal last Wednesday. In recent news on the stock, FMC last Friday announced a hike in its quarterly dividend by 20% to 18 cents per share from 15 cents and also announced a $250 million share repurchase plan. FMC on Feb 8 reported Q4 adjusted EPS of $1.58 versus the consensus of $1.37. FMC, with a market cap of $6.7 billion, is one of the world's leading producers of machinery and chemicals for industry and agriculture.


Rule – Greek Bailout & What it Means for Gold

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.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

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.

Dow Chart
Click to Enlarge

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.

DJT Chart
Click to Enlarge

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.