Monday, March 5, 2012
Many of the market's biggest winners shared basic characteristics when they started their bull runs: Market caps under $100 million, a record of sales and earnings growth over the past several years and a strong performance in the market.
That's exactly the kind of company I've found this week... It's also one of the most interesting I've ever researched.
The company is a world leader in microalgae technology. It specializes in marketing algae-based nutritional products. But that's just the beginning. It's also an expert in cultivating and harvesting algae on a commercial scale. The crop could easily be adapted for energy use. That's why shares jumped almost 13% in the week after President Obama announced that algae based fuels could replace up to 17% of the oil we import for transportation.
It has a market cap is about $45 million and it has been increasing sales and earnings for the past three years. In fact, earnings grew more than 11,000% over the past twelve months. That's just one of the reasons why shares have outperformed 94% of stocks over the past six months. Despite delivering big gains to investors, it is still priced attractively at a price-to-earnings (P/E) ratio under 14 and a price-to-sales (P/S) ratio under 2.
My trading system is also telling me that Cyanotech (CYAN) is in "buy mode" right now.
I use a 26-week rate of change (ROC) indicator to spot the strongest stocks and ETFs. A number of studies have shown that the biggest winners of the past six months are very likely to continue their winning ways in the future. Looking at charts of the biggest winners of all time confirms that this strategy works.
CYAN is up nearly 500% since bottoming in July 2010. It's been on the market leaders list since December of that year, and it looks like it still has some big gains to offer traders.Market moves tend to have some degree of symmetry and this symmetry allows traders to find price targets from patterns. From peak to trough in the bear market, CYAN fell by $4.35 (from $5.75 in January 2010 to $1.40 in July 2010). The amount of that fall can be added to the peak to find targets. Traders often use multiples of Fibonacci numbers to find additional targets. Fibonacci numbers are widely followed by traders and are defined by a series of numbers that has been widely studied by mathematicians. To find price targets, a price move can be multiplied by 1.618, the most commonly used Fibonacci numbers.
For CYAN, the price target using 1.618 times the 2010 move is equal to $12.79. A smaller pattern CYAN formed in the first weeks of 2012 offers a price target of $12.80. The clustering of price targets is usually a better signal than any individual target.
The pattern formed earlier this year also offers a potential stop level of about $7.50, limiting the risk on the trade. This is a short-term support level that marked the retracement low which followed the 13% jump after the President's energy policy speech. That means this trade has less than 6% downside (using the stop-loss) and 60% upside potential.
The ROC indicator for CYAN is strong, but far from oversold. Previous price moves in this stock have stalled when ROC reached the upper Bollinger Band, shown as a red line in the chart above. Bollinger Bands can be added to any indicator to highlight overbought and oversold extremes. This indicator shows that CYAN's price could move significantly higher without becoming overbought.
The portfolio for my 26-week ROC strategy is unchanged this week and we will continue holding Vanguard REIT (VNQ), SPDR S&P 500 ETF (SPY) and Vanguard Small-Cap ETF (VB).
Bob Chapman highly recommends Pretium Resources Inc., PVG Stock Quote (PVG) - (TOR) PVG besides the usual Agnico Eagle . Pretium Resources Inc. is a Vancouver-based Canadian Gold and Silver Miner led by Chief Executive Officer Bob Quartermain, The company has started planning its 2011 exploration program “to follow up on the high-grade gold intercepts encountered in 2009 and 2010 in the Brucejack area,” Investors who bought into Pretium Resource’s initial public offering must be grinning from ear to ear. In just over a year, the stock has skyrocketed from $6 to just shy of $17, almost a three-fold gain. This return is especially surprising because so many large cap gold producers have seen their stocks lag behind the surging gold price, and some smaller development plays like Osisko (the globe and mail reported )
Over the past 5 months we have seen volatility steadily decline as stocks and commodities rise in value. The 65% drop in the volatility index is now trading at a level which has triggered many selloffs in the stock market over the years as investors become more and more comfortable and greedy with rising stock prices.
Looking at the market from a HERD mentality and seeing everyone run to buy more stocks for their portfolio has me on edge. We could see a strong wave of fear/selling hit the S&P 500 Index over the next two weeks catching the masses with their hand in the cookie jar . . . again.
If you don’t know what the volatility index (VIX) is, then think of it as the fear index. It tells us how fearful/uncertain investors are or how complacent they are with rising stock prices. Additionally a rising VIX also demonstrates how certain the herd is that higher prices should continue.
The chart below shows this fear index on top with the SP500 index below and the correlation between the two underlying assets. Just remember the phrase “When the VIX is low it’s time to GO, When the VIX is high it’s time to BUY”.
Additionally the Volatility Index prices in fear for the next 30 days so do not be looking at this for big picture analysis. Fear happens very quickly and turns on a dime so it should only be used for short term trading, generally 3-15 days.
Volatility Index and SP500 Correlation & Forecast Daily Chart:
Global Issues Continue To Grow But What Will Spark Global Fear?
Everyone has to admit the stock market has been on fire since the October lows of last year with the S&P 500 Index trading up over 26%. It has been a great run, but is it about to end? Where should investors focus on putting their money? Dividend stocks, bonds, gold, or just sit in cash for the time being??
I may be able to help you figure that out.
Below is a chart of the Volatility index and the gold exchange traded fund which tracks the price of gold bullion. Notice how when fear is just starting to ramp up gold tends to be a neutral or a little weak but not long after investors start selling their shares of securities we see money flow into the shiny yellow safe haven.
Gold & Fear Go Hand-In-Hand: Daily Chart
Looking at the relationship between investor fear/uncertainty and gold you will notice scared money has a tendency to move out of stocks and into safe havens.
Trading Conclusion Looking Forward 3 months…
In short, I feel the financial markets overall (stocks, commodities, and currencies) are going to start seeing a rise in volatility meaning larger daily swings which inherently increased overall downside risk to portfolios and all open positions.
To give you a really basic example of how risk increases, look at the daily potential risk the SP500 can have during different VIX price levels:
Volatility index under 20.00 Low Risk: Expect up to 1% price gaps at 9:30am ET, and up to 5% corrections from a previous high.
Volatility index between 20 – 30 Medium Risk: Expect up to 2% price gaps at 9:30am ET, and up to 15% corrections from recent market tops or bottoms.
Volatility index over 30 High Risk: Expect 3+% price gaps at 9:30am ET, and possibly another 5-15% correction from the previous VIX reading at Medium Risk
Note on price gaps: If you don’t know what I am talking about a price gap is simply the difference between the previous day’s close at 4:00pm ET and the opening price at 9:30am ET.
To continue on my market outlook, I feel the stock market will trade sideways or possibly grind higher for the next 1-2 weeks, during this time volatility should trade flat or slightly higher because it is already trading at a historically low level. It is just a matter of time before some bad news hits the market or sellers start to apply pressure and either of these will send the fear index higher.
Ned Naylor-Leyland from Cheviot Asset Management talks about the new Pan Asia Gold Exchange , the latest on precious metals market, why physical gold is the only safe heaven and how the new Pan Asia Gold Exchange (PAGE) will change the price discovery mechanism for gold. Ned explains that the futures market currently takes the lead in price discovery over the much larger spot market and how this may change once PAGE starts to operate. PAGE will provide a valuable alternative because its fully backed, allocated gold contract will provide a better title, closer to physical, than unsecured unallocated contracts. Ned graduated with a BA (Hons) degree from the University of Bristol in 1998. He began his career in 2001 at Neilson Management, later moving to Smith & Williamson (formerly NCL Investments) in 2003 where he was an Investment Manager. Ned joined Cheviot in July 2008 and is advising a specialist Precious Metals fund.
|MONDAY, MARCH 5|
|10 am||ISM nonmanufacturing||Feb.||55.5%||56.8%|
|10 am||Factory orders||Jan.||-1.5%||1.1%|
|Tuesday, MARCH 6|
|Wednesday, MARCH 7|
|8:15 am||ADP employment||Feb.||--||170,000|
|8:30 am||Unit labor costs||4Q||1.7%||1.2%|
|3 pm||Consumer credit||Jan.||--||$19.3 bln|
|Thursday, MARCH 8|
|8:30 a.m.||Jobless claims||3/3||354,000||351,000|
|FRIDAY, MARCH 9|
|8:30 am||Nonfarm payrolls||Feb.||213,000||243,000|
|8:30 am||Unemployment rate||Feb.||8.3%||8.3%|
|8:30 am||Average hourly earnings||Feb.||0.2%||0.2%|
|8:30 am||Trade deficit||Jan.||-$49.0 bln||-$48.8 bln|
|10 am||Wholesale inventories||Jan.||--||1.0%|