Daily Gains Letter

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Stock Market: Institutions Moving in Opposite Direction of Investors

By for Daily Gains Letter | Jul 30, 2014

Institutions Telling Investors to Ease OffAs we move towards the end of July, trading in the stock market continues to be murky and filled with obstacles and uncertainties. The S&P 500 is holding on to a small gain this year, but there’s still a sense of nervousness among investors in the stock market.

While the small-cap stocks segment of the stock market continues to be apprehensive, and with a slightly bearish bias with the Russell 2000 being negative on the year so far, I’m also seeing some warning signs emerging from the broader stock market and blue chip stocks.

The S&P 500 continues to fall short on numerous occasions as it approaches 2,000. The Dow Jones Industrial Average has failed to hold above 17,000 on four occasions. The failure in both of these situations is a red flag, in my view, which could be foreshadowing a potential stock market adjustment. Look, we may only see a correction of five percent or so, but it’s coming.

This is a time to be prudent and take some money off the table, just as institutional investors have been. In an article I read on Yahoo!, institutions divested $7.97 billion in exchange-traded funds (ETFs) in the last week, while retail investors rushed in, buying up about $379 million of equity mutual funds. (Source: Lewitinn, L., “Why is the big money dumping stocks?” Yahoo! Finance web site, July 27, 2014.) This move indicates that the professional money is taking some cash off the table, given the five-year bull market run and current hesitancy in the stock market.

In fact, over the past year, retail investors have been rushing into the … Read More


The Red Flag I’m Seeing in Stocks Right Now

By for Daily Gains Letter | Jul 16, 2014

Why Massive Capital Infusion from Retail Investors Is a Red FlagIn my previous article, I talked about the vulnerability of stocks at this time, a disappointing economy, and what will likely be disappointing earnings.

On the weekend, I was thinking back to 2000, when the stock market came crashing down after a sizzling but unwarranted run-up in technology stocks and initial public offerings (IPOs). It wasn’t pretty, and while I don’t believe the stock market is priming for another major sell-off right now, I’m still nervous.

The DOW recovered to 17,000 on Monday, but if it fails to hold again, I would be wary. The failure of the S&P 500 to test 2,000 despite coming so close is also a red flag, based on my technical analysis.

Yet unlike 14 years ago, the current bull stock market, which is in its fifth year and looking weary, has largely been driven by the easy money the Federal Reserve has been pumping into the economy. The reality is that this third round of quantitative easing (QE3) will likely be dissolved by October and interest rates will be heading higher by mid-2015. As I said the other day, this will have a negative impact on the stock market.

In addition, the rising flow of capital into the stock market by retail investors is also a red flag that has generally been followed by selling in the past.

What you have are investors who have sat on the sidelines, waiting for a major stock market correction that really hasn’t materialized in five years. This group sees people making money in the stock market and decides they need to jump in with little regard as … Read More


What the World Cup and the Stock Market Have in Common This Year

By for Daily Gains Letter | Jul 14, 2014

How to Make Some Premium Income This SummerLast Wednesday, I had fun watching the World Cup game between Argentina and the Netherlands. As strange as it may sound, I actually found that the tension and apprehension throughout the match reminded me of the stock market.

Despite the Dow Jones Industrial Average recently trading above 17,000 and the S&P 500 at another record-high, I still sense the stock market is vulnerable to selling. I think this will be especially true if the second-quarter earnings season pans out as expected, devoid of any major growth in earnings or revenues.

Alcoa Inc. (NYSE/AA) offered up a nice report, but I’m not sure how much it counts, as the company really is not a major bellwether as to the health of the global economy.

The reality is that consumer spending drives the economy and the stock market. I would rather look at what’s happening at bellwether global retailer Wal-Mart Stores Inc. (NYSE/WMT) than Alcoa. The “Death Star” of the retail sector is struggling for growth around the world—and that cannot be good news. Even discount stores, which tend to be more immune to slowing, are showing signs of weakness.

In other words, while the stock market has edged higher, I still wouldn’t get too comfortable at this time. I think we could see another minor stock market correction should earnings tank. Of course, this would provide us with an investment opportunity to buy shares on weakness in the stock market.

Now there’s some optimism following the Federal Reserve’s dovish remarks from its June meeting, as there’s a sense that interest rates will not ratchet higher until after mid-2015, depending on the … Read More


How Godzilla’s Box Office Success Could Offer Your Portfolio the Same

By for Daily Gains Letter | May 28, 2014

Portfolio Popping Capital Gains It Could Be with This StockGodzilla (2014) is running wild at the box office, as this classic B-movie remake has delivered a record opening weekend for specialized movie theater operator IMAX Corporation (NYSE/IMAX).

If you have ever had the IMAX experience, you likely agree that Godzilla was probably as life-like as possible through the big-screen format of an IMAX theater, surrounded by about 12,000 watts of mind-blowing sound via a network of more than 40 speakers.

The screening of major Hollywood blockbusters on IMAX screens has been a big winner for the company and an excellent investment opportunity. IMAX has shown such major movies as The Hunger Games series, The Avengers, the newest Batman series, and The Hobbit: An Unexpected Journey.

Yet the appeal of IMAX has not only been its expansion in North America, but its ability to grow rapidly worldwide in places such as Western Europe, Japan, China, and Russia, which makes the stock a good investment opportunity. As of March 31, 2014, there were 840 IMAX theater systems installed in 57 countries worldwide.

The expansion into China is especially intriguing as an investment opportunity. With more than 1.3 billion people and the ongoing debut of Hollywood films in China, the investment opportunity is tremendous. At this time, there are about 150 IMAX theater systems in the country with contracts to open another 400 or so. In fact, if IMAX catches on, we could easily see hundreds more theater systems installed.

Fundamentally, the company reported higher annual revenue growth in 2009, 2010, 2012, and 2013. Revenues are estimated to grow 5.7% to $304.46 million in 2014, followed by 15.2% to $350.64 million in … Read More


This Single Stock as Lucrative as a Tech ETF?

By for Daily Gains Letter | May 23, 2014

This Stock a Better Buy Than a Tech ETFIf you hold Google Inc. (NASDAQ/GOOG) in your portfolio, you own one of the best companies in the world and a top investment opportunity.

The company just surpassed Apple Inc. (NASDAQ/AAPL) to become the most valuable brand worldwide with an overall value of $158.84 billion, compared to the $147.9 billion assigned to Apple in the Millward Brown’s 2014 BrandZ rankings. (Source: “BrandZ Top 100 Most Valuable Global Brands,” Millward Brown web site, last accessed May 22, 2014.)

Apple’s decline in brand perception was attributed to the lack of new products by the “iPhone” and “iPad” maker, something that has previously hurt Microsoft Corporation (NASDAQ/MSFT) over the past decade. Apple has been modifying its products, but there has not been an earth-shattering new product for quite some time. If Apple wants to avoid the same fate that trumped Microsoft when it only had its MS operating system, then it needs to act.

Meanwhile, Google continues to show investors and Wall Street why it deserves to be the top technology play and investment opportunity in the stock market, bar none.

Google recently split its shares on a two-for-one basis to make the stock more available as a mass market investment opportunity. The stock still trades for more than $530.00 a share, but trust me when I say that Google has excellent long-term potential as an above-average investment opportunity.

Unlike Apple at this time, Google is highly innovative and is thinking outside the box. No longer simply looking at itself as a search engine, Google has been working on numerous advanced technologies in both hardware and software, which makes it a better investment … Read More


How to Generate Premium Income in a Stalling Stock Market

By for Daily Gains Letter | Mar 6, 2014

Premium Income in a Stalling Stock MarketThe S&P 500 recently traded at a record-high, just before tensions in the Ukraine erupted and the global stock market declined as fear of an escalation and war intensified.

While the charts continue to show the stock market wanting to move higher after excellent gains in February, I still sense the upside moves will be more difficult to come by compared to what we saw in 2013. Even at this point, the Dow Jones Industrial Average and the S&P 500 are still negative this year.

If the stand-off between the Ukraine and Russia doesn’t escalate, I would expect the stock market to advance higher by year-end. If tensions erupt in the Eastern European region, we would likely see major selling across stocks worldwide; commodities such as gold, oil, and grains would edge higher.

If the stock market fails to find its footing—and especially a fresh catalyst—we could see mixed and volatile trading in the months ahead as the market looks for direction.

And if the stock market fails to get any positive leverage heading into the summer months, we could see some stalling in the stock market.

If the stock market does stall, an investment strategy to consider would be to write and sell some covered call options on your stocks in order to generate some premium income. This would also help to lower the average cost base of your positions, while also setting a selling price you would be willing to sell your stocks at. Of course, your goal would be to generate premium income and not look to sell stock, as I believe the stock market will head … Read More


Think BlackBerry Is a Takeover Target? Read This Before Buying

By for Daily Gains Letter | Feb 24, 2014

Think BlackBerry Is a Takeover Target“I am going to buy BlackBerry Limited [NASDAQ/BBRY] and leverage heavily. Maybe buy options rather than the stock. I believe the company’s stock prices are going to go much higher than where they stand now. They look like a takeover target soon. I’m going all in.” These were the first few words my friend Mr. Speculator blurted out when I received a call from him the other day.

“Why would you do something like this?” I asked. His response is something that long-term investors can learn from—and should avoid.

He wants to buy Blackberry stock because Facebook, Inc.’s (NYSE/FB) purchase of “WhatsApp”—an instant messaging app for smartphones—will make “Blackberry Messenger” (BBM)—Blackberry’s instant messaging software—a good potential target for buyers.

This is what I will give to Mr. Speculator: he may have a point. The value for BBM may be higher now, but going into a trade without anything having materialized—be it in the news, if the company has offered to sell a part of the business, etc.—is just unhealthy for your portfolio.

An investor who is looking to build a portfolio for the long run should avoid what Mr. Speculator is doing—betting heavily on a trade that has no sign of materializing.

Here’s my take on the issue: if an investor has suspicions that a company will be taken over by another firm, instead of allocating a major portion of their portfolio to that stock, like Mr. Speculator is doing with Blackberry, they should only risk a certain amount, like two percent of their portfolio per trade, for example.

First of all, when an investor only risks a certain portion … Read More


Risk-Free Daily Income on Your Existing Stock Holdings?

By for Daily Gains Letter | Jan 16, 2014

Risk-Free Daily IncomeWe saw some decent buying on Tuesday but overall, stocks have been languishing early on in 2014, which has some traders concerned that a correction may be brewing.

However, I’m not sure that’s the case. The stock market may just be taking a breather following its superlative gains in 2013. I’m not surprised; in fact, I expected this would happen.

This year will likely be a more difficult year to make money, as the market is looking for reasons to buy. I still feel the direction of the stock market will be up, but it will be at a slower rate.

Now, if the stock market should continue to stall or gyrate in a sideways channel around record highs, you could take advantage of this without adding stocks.

You can earn daily income on your existing stock market holdings without having to pick up dividend stocks or shift capital into low-paying bonds. And my strategy is pretty easy and straightforward.

I’m referring to the use of writing covered call options on some of your key long-term core holdings to generate premium income and reduce the average cost base of your positions. By writing covered call options on your existing holdings, the premium income added could allow you to earn some daily income. But you need to be comfortable with possibly losing a holding.

For those who are not familiar with covered call options, the execution is simple: all you do is sell or write call options on one of your stock holdings, and in return, you’ll receive a premium for assuming the risk. You select the month of expiry and … Read More


Bears Becoming Bulls En Masse as Optimism Rises

By for Daily Gains Letter | Jan 15, 2014

Bears Becoming BullsIncreasing optimism is dangerous for key stock indices. Sadly, this is exactly what we’re seeing in the markets right now. It is very evident wherever you look. Stock advisors are saying, “Just buy stocks, and you will do alright.” Investors feel good about stocks. Those who were bearish on the key stock indices since the crash in 2008 and 2009 are also turning bullish—the bears are declining in numbers each week; it’s becoming especially difficult for them to keep their pessimistic stance these days.

One of the key economic indicators that I follow when looking at the optimism in key stock indices is called the Chicago Board Options Exchange (CBOE) total options put/call ratio.

This indicator, at the very core, shows the ratio of volume of puts and call options. When there are more call options, this ratio stands below one. When there are more put options than call options, the ratio stays above one. Currently, this ratio stands at 0.6—a level last seen in 2011. Since at least 2007, this ratio of call options to put options has reached this level only a handful of times, as you can see in the chart below.

CBOE Options Put-Call Ratio Chart

Chart courtesy of www.StockCharts.com

When call options increase, it means investors are bullish towards the key stock indices. When the put options increase, it means investors believe the key stock indices will experience pressures ahead. The current put/call ratio suggests investors are not worried.

Another indicator I look at to assess the optimism on key stock indices is margin debt—the amount of stock purchased on borrowed money. When margin debt is high, this shows that … Read More