Monday, August 4, 2014

Three Market Warning Signs Predict 20% Stock Tumble

Insight: When these indicators flash together, it’s time to sell
by Mark Hulbert
Market Watch

Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously.
After a selloff this past week dragged the Dow Jones Industrial Average into negative territory for the year, it’s worth noting that all three are flashing today.
The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.
They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes , an investment consulting firm in New York whose research focus is major market turning points.
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InterMune Inc (NASDAQ: ITMN)

InterMune, Inc. focuses on the research, development, and commercialization of therapies for pulmonology and orphan fibrotic diseases in North America and Europe. The company develops therapies for the treatment of idiopathic pulmonary fibrosis (IPF), a progressive, irreversible, and fatal lung disease. It markets and sells pirfenidone, an orally active, anti-fibrotic agent that inhibits the synthesis of TGF-beta and TNF-alpha under the Esbriet name for the treatment of adults with mild to moderate IPF in the European Union and Canada. The company’s pirfenidone has also completed three Phase III clinical trials for the treatment of IPF in the United States. The company provides pirfenidone under the Pirespa trade name for the treatment of IPF in Japan and South Korea; and is also approved for the treatment of IPF in China, India, Argentina, and Mexico. Its research programs are focused on the discovery of targeted, small-molecule therapeutics and biomarkers to treat and monitor serious pulmonary and fibrotic diseases.
Review the 1-year chart of InterMune (Nasdaq: ITMN) with the added notations:
1-year chart of InterMune (Nasdaq: ITMN)
ITMN has been trading sideways since the beginning of June while. During that period of time, the stock has formed a $47.50 resistance (red) and a $40 support (blue). A break above $47.50 would also be a new 52-week high.

The Tale of the Tape: ITMN has formed a clear 52-week high resistance at $47.50. The possible long positions on the stock would be either on a pullback to $40, or on a breakout above $47.50. The ideal short opportunity would be on a break below the $40 level.
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What did the years 1987, 2000, and 2007 have in common with 2014?

Click on chart to enlarge
It usually takes an extended bull market to push “monthly momentum” to lofty levels.
The above 2-pack looks at the S&P 500 and the Dow Jones Transports on a monthly basis, back to the early 1980′s. The upper lines represent monthly momentum.
As you can see momentum reached lofty levels back in 1987, 2000, and 2007, before turning lower in the months to come. The rally off the 2009 lows in price and momentum now has reached levels not seen too many times on a monthly basis over the past 30-years!
At the same time momentum is high, both indexes are near some resistance that could become influential to buyers and sellers.
In my humble opinion, monthly momentum is NOT a very good “timing” tool, as momentum can stay high for a period of time… but it can give you an idea of when investments are getting a little “long in the tooth” on a long-term basis.
Knowing this can be very beneficial when it comes to portfolio positioning for long-term monies.
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Why so many lose in a winning game

Despite the long-term outperformance of equities compared to other asset categories, many stock and mutual-fund investors still manage to lose money. Why is this the case, and how can you avoid the same trap?
Stocks, in aggregate, not only provide positive returns over most periods of at least 10 years, but they outperform the other investment categories. Despite this, it seems that many investors still manage to lose money in equities. How can this be?
When share prices increase in value, they attract attention. And the longer and more pronounced a bull market, the greater the attention. What’s more, the longer the bull market, the more money investors are willing to invest in stocks. The opposite is also true, though probably to a lesser extent. As share prices decline, investors tend to stop investing. And some actually sell during periods of falling values.

Performance attracts money
Suppose an equity fund has $100 million in assets. And this fund doubles in value over three years. That’s a compound annual growth rate of 26 per cent. And any fund that does so will attract considerable attention.
Now, suppose investors add a further $200 million to the fund at the increased valuation. Further suppose the fund then loses 3.0 per cent over the next year. Voila! Twice as many losers as winners. Even in a fund that, over four years, produces a compound annual growth rate of 18 per cent.
This may seem hypothetical. But in fact, it’s an understatement of what happens to many funds. It rests on the accurate assumption that investors will continue to put money into a winning fund until it stops winning. And the further accurate assumption that sooner or later, all funds run into at least temporary periods of poor performance — if only poor in relation to other funds in the same category.
We cannot think of a single stock fund that has performed in the top half of its category 10 years in succession. What’s more, few manage this seemingly modest feat as often as seven times in 10 years.
So, it’s likely even the best performing stock funds have suffered at least one poor year in the last 10 — probably leading to a slowdown of investment in the fund if not outright net redemptions. And if the preceding years saw a sharp inflow of investment, the fund may have more unhappy unit holders than happy ones.
Better to follow the advice of legendary mutual-fund manager Peter Lynch. If you’re happy with the management of the funds in your portfolio, add new money to those with the worst short-term record.
This advice can also apply to individual stocks. If you’re confident of a stock’s basic fundamentals, use episodes of share-price weakness as buying opportunities. Often these episodes occur when a company has had a weak quarter or two—or perhaps even a weak year or two. But if, over a five-year period or so, prospects for the company look positive, then it’s a time to buy while its stock is down.
And remember, you can cope better with stock-market volatility if you have ensured that your cash needs will be met in timely fashion. This way, if markets do correct sometime soon, you have the flexibility to buy when stocks are down with less fear.

Should I invest now?
Investing is an activity that requires decisions. But decisions mean risk. And risk may lead you to waffle, or postpone your decisions.
How many times have you heard an investment counselor or media commentator suggest inaction during “these uncertain times?” Or how often has someone suggested that “in the short run, wait and see which way the economic dice actually roll?”
Problem is, all times are uncertain. Of course they are. If they weren’t, all investments would be just like guaranteed investment certificates. And the returns would be the same too.
But we know that, on average, equities provide better returns, over time, than do GICs. The challenge, of course, is in trying to buy an ‘average’ stock or mutual fund. The best way we know to do this is to sidestep low-quality stocks or funds and build a portfolio of equities that fits your needs. Also, follow another bit of investment wisdom—buy gradually and sell abruptly.
Dollar-cost averaging is one way to buy gradually, letting you purchase more equities when they’re cheap and less when they’re expensive. In these uncertain times, we recommend making the decision to invest, getting started with an organized program and sticking with it.
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US Weekly Economic Calendar

time (et) report period Actual forecast previous
2 pm Senior loan officer survey July      
\\ Markit services PMI July
-- 61.0
10 am ISM nonmanufacturing July   56.5% 56.0%
10 am Factory orders June   0.6% -0.5%
8:30 am Trade deficit June   -$45.0 bln -$44.4 bln
8:30 am Weekly jobless claims Aug. 2
305,000 302,000 
3 pm Consumer credit June   -- $19.6 bln
8:30 am Productivity Q2   1.7% -3.2%
8:30 am Unit labor costs Q2   -- 5.7%
10 am Wholesale inventories June   -- 0.5%
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