Oct 27, 2010

Time For Markets To Take a Break?

Current market rally stand to be really strong. However markets direction is not north only and investors should looking for signs when market will take corrective breath.
Many parallels can be found between current bullish market move and the one from beginning of the year (from February till mid May). Previous rally started before earnings season, as this did, previous rally was strong, almost 20% gain for S&P500 from through to peak, current gain is 12.3%. As seen on the chart, technical indicators are showing similarities as well. Relative strength index is gravitating around 70, moving averages of the MACD indicator are crossed at higher value and the histogram is fading before turning negative. The clearest signal is market breadth measured by % of companies above 50-day moving average. Current value is showing 85% of the companies in the broad index S&P500 over its 50-day MA. Values above +1SD (standard deviation), which is 85, are signal for overbought market. Another interesting similarity is crossing between % of companies above 50-day MA and the index (lower chart). Fortunately this is prior corrective signal. One month after it occurred market dropped. On the other side is very strong bullish signal called the golden cross – 50-day MA crossing 200 day MA from downside and both rising. This is expected to give markets another positive wave but still they are overbought. If markets grow further then the fall will be bigger as it happened previous time with correction lasting two months from May to July. However fundamental situation now is different and scenario like this is less likely.
Charts source: stockcharts.com, indexindicators.com

Oct 20, 2010

October Breadth Indicators

This month review of the market breadth indicators is showing some interesting signs. The number of stocks closed above 50-day moving average reached the overbought area of +1SD. This extreme value is suggesting only one thing – expensive market. The tricky in this situation is the point that stocks could stay in this levels for considerable time. If we turn back to previous top in mid April stalling period in the indicator could last up to month. In the same time S&P500 could continue climbing.
VIX indicator also is supporting current suggestion. Despite that fear gauge (now 20.63) is at lowest level since May it is higher than April values (17). There is no doubt that current trend of the market is bullish and it is expected to continue, but investing now should be cautious considering indicators values.
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Oct 15, 2010

Basic Tips For Picking Your Company

There are many analysts sending free alerts or analysis telling you the big secret or the next shining star on exchange universe. It is the best if you control your choice by doing your own simple research at the beginning. You better know your need and at the end of the day you gain useful experience and knowledge. Picking stock is just like buying car. When you buy car you carefully select the best offer, choose performance characteristics - fast sport car for highways or heavy truck for bumpy roads. If you buy your car only because it has four wheels than you better don’t invest. You only waste time and worst - your money. So the car buying strategy is pretty much the same with picking stocks. You should pick sport fast growing stocks during expansion when economy is on highway but when it enters the rocky road of the recession than you have to switch.
Selecting socks
For selecting the most appropriate stock you have to use certain tools. Those tools are free and you can find them in the net. There are many sites giving you investing tools for selecting stocks but most of them are complicated so you have to spend hours to simply understand how it works. The most important thing is to create your own simple methodology for picking up and testing the stock. Something like black box in which you input the stock and output your decision based on this method. Following is descried  such. You have the freedom to select whatever source of information you like. Mentioned are just for example.
First step of this methodology is choosing the risk profile of the investment. If you want high gains than you should tolerate higher risk. Then you have to focus on the prospective sectors and industries for the current economic conditions. Briefly said during expansion you invest in stocks of cyclical sectors and during recession in noncyclical. Next step is to check latest news and developments about the company. Don’t be afraid from bad news. This is perfect possibility for making profit. Of course if the problem is structural and persistent than go away. After that check financial performance. You don’t need complicated financial models and valuations to see historical trend of earnings and to determine potential of growth considering current economic conditions. Take a look at ratios of the company, at least basic ones like PE (price per earnings) – showing how expensive is the stock comparing price to net income; debt to equity – showing debt burden for the company, lower the ratio better for the company; check also profitability ratios of the company – margins. You can find the ratios here.
Next step is to review institutional investors. This is important, because if you own stock with small share of institutional investors the stock moves could be unpredictable to some extent. Institutional investors are professionals and perceived to be taking their decisions based on complicated valuation models and thus more accurate (although not always true).
Insiders and insider trades in particular are signal for upcoming important event but sometimes they just exercise their expiring options.
Technical analysis is important for timing your investment. Financial analysis is giving you the right stock but technical is showing you when to buy. Entering the position at the right time is giving you advantage, especially in flat markets. If you have some technical skills – good, if not check others opinion. You should consider that is is better if you learn doing it by yourself, because this way you follow both share and market closer and that is what is giving you the comprehensive experience.
This is simple methodology for selecting stock. Stick to it and you will precise your choice. However this is just beginning. To be in time with the market you should do some in depth analysis and follow your choice. People change and stocks do. Don’t miss your profits by thinking your current choice will last forever.

Oct 11, 2010

Using Money Flow Index For Predicting Market Corrections

There are numerous indicators for measuring market strength. One of them has real predicting power. The Money Flow Index (MFI) is a momentum indicator showing overbought or oversold areas of underlying and strength or weakness of the trend. It is precise measurement because it is volume-weighted of the strength of money flowing in and out of security. It is calculated dividing positive money flow to negative money flow. Readings are from 1 to 100, over 80 showing overbought area, under 20 – oversold.

 The chart shows movement of the broad US index S&P500 compared to MFI. Money flow index had values above 80 just before every major correction for last year. We’ve seen two significant corrections – one in mid January, second – April and now we are in the hot spot as MFI forming same pattern just like previous two times. It is no coincidence that market sell offs occurred just 2-3 weeks after the beginning of the earnings season. At the moment we are entering Q3 report period. Usually investor mood is positive before companies post results and everybody is buying in the wings of hope for better earnings. After the picture is clear some are cashing profits. Pattern is known as “buy the rumor sell the fact” trading. In this situation MFI index is inflated to 90’s before declining, despite of continuing market growth. Such a divergence is seen in the moment. After reaching 94.4 on Sept 21 MFI has dropped while S&P500 was still climbing. One should expect market correction 2-3 weeks from now considering mentioned above and previous two patterns. Of course there is exception as seen in April market fall as MFI entered overbought area almost 2 months before market dropped. This could be explained with over optimistic view of the market and expectations for V-shaped recovery at that time. It is not the case right now. How big correction might be depends on earnings report surprises but positive scenario could be seen here.

 Source: StockCharts.com

Oct 4, 2010

Market Consolidating

October is starting with consolidation formed by last five indecisive sessions. S&P500 is tunneling levels around 1130 and 1160 - clear signal for exhausted power after wild September rally. Divergence between index and moving average histogram is suggesting correction but we have to consider October fundamental factors. The earnings season is to come, elections pending. If we see positive signs from either reports or elections, rally will be continued otherwise there is time for corrective move with first support 1118 (200 MA) and bottom line 1060.
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